Saving for retirement is essential if you want to live the comfortable lifestyle you dream of. But for many Americans, it’s not as simple as you might think. In fact, nearly 17% of American adults have nothing set aside to fund their retirement.

The sooner you can start building savings, the better. But traditional retirement accounts aren’t the only way to give you access to money when you leave the workforce.

Annuities offer a great and simple way to increase your income during retirement. But buying an annuity isn’t as simple as choosing the first option you find.

Consider these key things before you make your purchase.

1. Understand the Type of Annuity You Need

There are three main types of annuities available, and they offer distinct benefits. These are fixed annuities, variable annuities, and indexed annuities.

A fixed annuity gives you a guaranteed minimum interest earned on your money each year. Variable annuities allow you to invest your money in different funds, increasing your earning potential while also increasing your risk of loss. Indexed annuities follow the performance of larger stock markets—if the stock markets go up, your annuity’s value goes up, too.

Ultimately, choosing the right annuity for your needs means looking at your risk tolerance. Considering how safe or aggressive you want to be with your investments.

2. Consider What Your Accountant Thinks

Annuities offer many benefits that can help lower your total taxable income each year. But you need to make sure it’s in your best interest before you buy an annuity of any type.

Talk to your accountant or tax professional and see what they think.

If you’re just buying an annuity for tax savings, they may be able to suggest better and cheaper alternatives. But if you’re looking to diversify your investment strategy, they can explain how the annuity will impact your overall tax liability.

3. Pay Attention to the Penalties

Most annuities allow you to withdraw a set amount of money each year. You’re able to use this money to cover living expenses when you retire or to make additional investments to grow your savings.

But some annuities have lower withdrawal limits than others. If you exceed the limit, you may end up paying a hefty penalty. And that penalty amount varies from annuity to annuity.

Take your time and read up on the penalties each issuer charges. Choose the annuity that allows you to withdraw enough money to meet your needs without charging you a high penalty.

It’s a good idea to read reviews like those found on this website to see what others have to say about the company and the penalty structure.

Buying an Annuity Can Be a Great Investment

Buying an annuity is a great way to diversify your investment portfolio and set yourself up for a comfortable retirement. As long as you take your time and consider these key factors before you buy, you’ll be able to choose the perfect option for your needs.

Remember, annuities are just one part of a great investment portfolio. You still want to invest in other options that offer larger returns.

Not sure where to start? Check out our latest posts for more tips to help you invest your money wisely.