Americans are always looking for new ways to fund their retirement, be it through crypto or real estate.
One financial tool that has gained popularity among retirees is retirement annuities. In 2023, total U.S. annuity sales reached a record-high $385.4 billion in 2023. This was a 23% jump year over year, according to final results from LIMRA’s U.S. Individual Annuity Sales Survey.
There are many reasons why Americans are looking to annuities as a suitable alternative retirement plan. Keep reading to learn more about this interesting investment choice.
Understanding Annuities
An annuity is a financial product where you pay an upfront sum — either as a lump sum or through periodic contributions — and receive income payments in return. These payments can be structured in several ways:
- Immediate Annuities: Payments start shortly after the initial investment
- Deferred Annuities: Payments begin at a future date, allowing your investment to grow over time
Annuities are often classified into three main types based on how the funds grow and the risk involved:
1. Fixed Annuities
Fixed annuities provide a guaranteed interest rate during the accumulation phase (when funds grow) and predictable income payments during retirement. These are ideal for risk-averse individuals seeking stable returns.
2. Variable Annuities
Variable annuities allow your funds to be invested in a selection of underlying assets, such as stocks or mutual funds. The income payments depend on the performance of these investments, offering the potential for higher returns but with greater risk.
3. Indexed Annuities
Indexed annuities combine features of both fixed and variable annuities. Returns are tied to a specific market index, such as the S&P 500, offering growth potential with some level of protection against market downturns.
Benefits of Annuities for Retirement Income
The primary benefit of retirement annuities is the promise of a steady income stream, often for life. This makes them an effective way to cover essential expenses, such as housing, healthcare, and daily living costs, even if other investments fluctuate or run out.
Knowing you have a guaranteed income source can reduce the stress and uncertainty of financial planning for retirement.
Protection Against Longevity Risk
One of the biggest concerns for retirees is outliving their retirement savings. Annuities address this by offering lifetime income options, ensuring you continue to receive payments regardless of how long you live.
Tax-Deferred Growth
During the accumulation phase of a deferred annuity, your investment grows on a tax-deferred basis. This means you won’t pay taxes on the earnings until you start receiving payments, which can be advantageous for long-term growth.
Customizable Options
Annuities can be tailored to fit your specific needs. For instance, you can opt for the following kinds of options.
- Single-Life Payouts: Income lasts as long as you live
- Joint-and-Survivor Payouts: Income continues for the lifetime of both you and a designated beneficiary, such as a spouse
- Period Certain Options: Payments are guaranteed for a specific number of years, regardless of lifespan
Drawbacks to Consider
Annuities often come with high fees, such as administrative charges, mortality and expense risk fees, and investment management costs for variable annuities. These can significantly reduce your returns.
Lack of Liquidity
Annuities are long-term investments, and accessing funds early can result in penalties and surrender charges. This makes them less suitable for individuals who may need immediate access to their money.
Complexity
Annuities can be complex financial products with varying terms and conditions. Understanding the fine print is essential to avoid surprises.
Inflation Risk
Fixed annuities provide predictable payments, but they don’t account for inflation. Over time, the purchasing power of your income may decline unless you opt for inflation-adjusted payments, which often come at a higher cost.
Dependence on the Insurer’s Financial Strength
The ability to receive payments depends on the financial stability of the insurance company providing the annuity. It’s crucial to choose a reputable insurer with strong credit ratings.
How to Decide if Annuities Are Right for You
Determining whether an annuity fits your retirement plan depends on your financial goals, risk tolerance, and other income sources. Here are some factors to consider.
Assess Your Situation
Calculate your essential expenses in retirement and compare them to your guaranteed income sources, such as Social Security and pensions. If there’s a shortfall, an annuity can help fill the gap.
If you anticipate living a long life or have a family history of longevity, an annuity can provide financial security for your later years.
- If you prefer safety and predictability, a fixed annuity may be suitable.
- If you’re comfortable with market fluctuations and seek growth, consider a variable or indexed annuity.
Factor in Other Investments
Annuities should complement, not replace, other retirement income strategies. Diversifying your portfolio across different asset classes can help balance risk and reward.
Consult a financial advisor or retirement planner who can help you assess your situation and select the best annuity product for your needs.
Tips for Maximizing Annuity Benefits
If annuities are starting to look like a viable investment option for you, then here are some tips to make the most of them.
- Start Early: The earlier you invest in a deferred annuity, the more time your funds have to grow.
- Diversify: Use annuities as part of a broader retirement strategy.
- Choose Inflation Protection: Opt for annuities with inflation-adjusted payments.
- Be Informed: Understand the terms and conditions of your annuity before signing the contract.
This way you can use annuities to protect yourself and your loved ones from financial uncertainty in the future.
Annuities: An Alternative Retirement Plan for Your Bright Future
There are many ways to structure your retirement income strategies. But it may be worth considering annuities to be a part of your alternative retirement plan, as they can account for anyone who might end up outliving their other savings.
Another way to protect yourself during retirement is to look at senior living options. Housing is usually the biggest expense in retirement along with medical bills. Choosing an amenity- and service-rich independent senior living community like Conservatory at Alden Bridge is a great choice.
Our retirement community in The Woodlands, TX, is beautifully situated next to parks, nature trails, groceries, and essentials. Schedule a tour to see all the amenities and offerings for yourself.
