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A retirement annuity can be classified by how payments are made to the annuity holder. Fixed annuities and variable annuities, for example, are defined by guaranteed returns regardless of market conditions and potentially higher return rates based on the market, respectively.

Fixed retirement annuities guarantee the annuity holder payments at amounts based on the guaranteed rates of return as specified in the annuity contract, although the stated amounts may be exclusive of any taxes or fees. Due to the guaranteed payments, fixed annuities are best for investors who are averse to considerable risk or wish to indirectly strengthen their nest eggs through the extra security this type of insurance product affords them.

While fixed annuities generate income for the holder at fixed rates, variable annuities may come with higher return rates on the initial investment. These kinds of annuities were designed to attract investors with more money and higher risk tolerance into purchasing annuities, and give them alternatives to buying into mutual funds or similar investments. Although these annuities specifically come with lower return rates, their investment in other securities such as mutual funds permit them to yield bigger returns when market conditions are positive. In a booming market, these investments can considerably augment the retirement funds of an investor while still affording him or her the relative safety and guaranteed returns of the traditional annuity.

Tax Benefits

Annuities also come with advantageous tax benefits, making them good investments for cash-strapped retirees who want to preserve more of their money and channel little of it towards tax payments. For instance, money placed into an annuity allows for tax-deferred growth until the point that the investor starts his or her withdrawals.

Once payments are started, only annuity gains are taxed. The tax-savvy investor can use this tax structure to his or her benefit if he or she expects to be included in a lower tax bracket in retirement or when he or she expects to start receiving payments. Also, there are no contribution or investment limits to these annuities compared to 401K plans or IRAs.

Another apparent benefit of annuities is the guaranteed payments these come with. At a time of economic uncertainty and heightened investment risk, this benefit is welcome to investors who want to buffer their nest eggs against investment risk and recover from any losses due to unfavorable market conditions.

If you are nearing retirement and want to protect your retirement funds by offsetting the investment risk that comes the growth-oriented contents of your portfolio, consider the different types of retirement annuities. To maximize the safety of this kind of investment, study the terms of your annuity contract well, and purchase a retirement annuity from a reputable insurer with a good track record.

About the Author:

Katherine Smith is an author who specializes in financial topics concerning seniors. Puritan Financial Group provides seniors with retirement annuity information. For more information on how Puritan Financial Group can help you, please visit our website at http://www.puritanlife.com/products/annuities.

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