Struggling with retirement income? Annuities might be the solution.
Here’s the problem: Social Security replaces only about 40% of pre-retirement income, leaving many retirees with a shortfall. With pensions disappearing and household debt rising, 45% of Americans risk running out of money during retirement.
Annuities can help by providing guaranteed income for life, protecting against market downturns, and addressing the fear of outliving savings. They work like a personal pension, turning your savings into regular payments.
Key Takeaways:
- Types of Annuities: Fixed (guaranteed growth), Indexed (market-linked gains with protection), and Immediate (income starts right away).
- Benefits: Steady income, tax-deferred growth, and peace of mind.
- Drawbacks: High fees, limited liquidity, and inflation risk.
Annuities aren’t for everyone, but they can fill income gaps and reduce financial stress when used as part of a broader retirement plan.
What Are Annuities and How Do They Work in Retirement
Annuities Explained
An annuity is essentially a contract between you and an insurance company, designed to turn your savings into a steady income stream. You make a lump-sum payment – or a series of payments – and in return, the insurer provides you with regular income. This income can last for a set number of years or even for the rest of your life.
Here’s how it works: the insurance company pools your premium with others and invests it. Later, based on the terms of your contract, they’ll pay you a guaranteed amount, either right away or at a future date. In a way, it mimics receiving a paycheck during your working years, but now it’s funded by your savings.
One of the standout features of annuities is their flexibility. Unlike 401(k)s or IRAs, annuities don’t come with annual IRS contribution limits. Their appeal is clear when you look at the numbers: in the second quarter of 2022, total U.S. annuity sales jumped 22%, reaching $77.5 billion – the highest quarterly sales ever recorded by LIMRA.
"For people who are more cautious and want less risk, annuities can offer some peace of mind with a predictable stream of income", explains Melissa Joy, CFP, CDFA, and founder of Pearl Planning.
Every annuity contract involves three key roles: the Owner, who purchases the annuity; the Annuitant, whose life expectancy determines the payment structure; and the Beneficiary, who receives benefits if the annuitant passes away. While these products are created by insurance companies, you can also find them through banks or brokerage firms.
Beyond providing income, annuities help protect retirees from common risks like outliving their savings or market downturns.
How Annuities Protect Against Longevity and Market Risks
Annuities address two major retirement concerns: the fear of running out of money and the uncertainty of market fluctuations. Longevity protection is a core benefit, offering guaranteed income for as long as you live. This assurance is why 97% of annuity owners say their products help them worry less about depleting their savings.
"Protected income is income that is essentially like a paycheck. It’s income that’s going to come in on a regular basis, and it’s going to continue as long as I’m alive", says Michael Finke, Alliance Research Fellow and Professor of Wealth Management at The American College of Financial Services.
Studies show that retirees with annuities often spend twice as much as those relying solely on non-annuitized savings. This confidence likely stems from knowing their income is secure. When it comes to market risks, fixed annuities guarantee your principal and offer a set interest rate. Indexed annuities, on the other hand, tie returns to stock market performance but include safeguards to ensure your returns never dip below zero in any given year.
The benefits are evident: 88% of annuity owners report feeling less anxious about market downturns, while 84% say annuities help them feel more secure against financial fraud or poor decisions later in life.
"Annuities can offer guarantees and security. Newer annuity products allow better matching of income needs and distribution timing. Annuity products have come a long way in recent years, enabling people to better match a specific annuity to their unique needs and preferences", says Stefne Lynch, vice president of product management & client engagement at Fidelity.
By 2024, retirement annuity assets are expected to reach $2.5 trillion, underscoring their growing role in retirement planning. The combination of guaranteed income and market risk protection makes annuities an appealing option for those seeking stability, much like a traditional pension.
"Anybody who is concerned about the risk of markets, who wants a place where their money is going to be growing – and potentially earning – or providing them income when they’re ready to retire", says Tamiko Toland, Alliance Education Fellow and CEO of IncomePath, describing the ideal annuity candidate.
Now let’s dive into the different types of annuities that can help secure your retirement income.
How Annuities Help With Retirement Income Planning
3 Main Types of Annuities for Retirement Income
Annuities play a pivotal role in retirement planning, offering a secure and steady income stream. As retirees increasingly prioritize financial stability, annuity sales have surged. In 2024, U.S. annuity sales hit a record $434.1 billion – a 13% jump from 2023. This growth highlights the appeal of annuities for addressing retirement income needs.
Each type of annuity serves different financial goals, risk preferences, and timelines. Fixed and indexed annuities often defer income, while immediate annuities provide payouts right away. Let’s break down how these options align with your retirement strategy.
Fixed Annuities
Fixed annuities are straightforward and reliable. They come with a guaranteed interest rate for a set period, ensuring steady growth and predictable income. With fixed annuities, the insurance company guarantees a minimum interest rate, shielding your money from market volatility.
This makes fixed annuities a popular choice for risk-averse individuals who value stability over chasing higher returns. For instance, current fixed annuity rates range between 5.25% and 6.80%. Your principal is protected, and returns are consistent, offering a safe haven during unpredictable market conditions.
However, this security comes with a trade-off: your returns are capped at the guaranteed rate, meaning you won’t benefit from strong market gains.
Indexed Annuities
Indexed annuities strike a balance between security and growth potential. They tie your interest earnings to the performance of a market index, like the S&P 500, while protecting your principal from losses during market downturns. This setup allows you to enjoy market-linked gains without direct exposure to risk.
"If you are thinking about buying a fixed index annuity, make sure you understand how growth is credited to your account. You may have a minimum guaranteed return, but your upside will be capped as well", says Brandon Renfro, Ph.D., CFP®, RICP®, and co-owner of Belonging Wealth Management.
The popularity of indexed annuities is expected to grow, with LIMRA projecting sales to exceed $120 billion in 2024. These annuities feature participation rates and caps. For example, if the S&P 500 gains 12% and your annuity has a 10% cap, you’ll earn 10%. While they carry more risk than fixed annuities, they offer a safer alternative to variable annuities.
Indexed annuities are ideal for those seeking market-linked growth while keeping their principal intact.
Immediate Annuities
Immediate annuities are designed for retirees who need income right away. They start paying out within a year of purchase – sometimes as quickly as a month – making them a practical choice for addressing immediate financial needs.
When you buy an immediate annuity, you make a lump-sum payment and receive regular income payments almost immediately. This turns your savings into a dependable income stream. For example, a $100,000 lump sum can generate payout rates between 6.5% and 10.5%, depending on the terms.
The payments can last for a set period or for life, depending on your contract. However, there’s a downside: once you purchase the annuity, you lose access to the principal. This lack of liquidity makes immediate annuities unsuitable for emergency funds or unexpected expenses.
| Feature | Fixed Annuity | Indexed Annuity | Immediate Annuity |
|---|---|---|---|
| Interest Rate | Guaranteed, fixed | Variable, market-linked | N/A – pays out immediately |
| Risk Level | Lower | Moderate | Lower |
| Income Start | Deferred | Deferred | Immediate |
| Principal Protection | Yes | Yes | N/A – converts lump sum to income |
When deciding among these options, think about your financial timeline and risk tolerance. If you need income now, an immediate annuity makes sense. Prefer guaranteed growth? Look into fixed annuities. Want market-linked growth with some protection? Indexed annuities might be the right fit. Interestingly, only 34% of men and women surveyed have annuities in their retirement portfolios, suggesting many retirees could benefit from exploring these tools.
"A good annuity rate in 2025 is one that balances strong, competitive returns with the right level of security and flexibility for your situation", advises Angelica Leicht, senior editor for CBSNews.com’s Managing Your Money section.
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Pros and Cons of Using Annuities for Retirement
Annuities come with a mix of advantages and disadvantages that can significantly influence your retirement strategy. While they offer some appealing benefits, it’s essential to weigh them against their potential drawbacks.
Main Benefits of Annuities
Guaranteed Lifetime Income
One of the biggest perks of annuities is the assurance of a steady income for life, regardless of market fluctuations. As Schwab highlights:
"Annuities offer you guaranteed income for life – in any market".
This stability becomes crucial when you consider that one-third of today’s 65-year-olds are expected to live to age 90. Traditional retirement savings may not last that long, making annuities a safeguard against running out of funds.
Peace of Mind and Improved Well-being
Retirees with annuitized income often experience greater satisfaction and fewer symptoms of depression – by 43% and 39%, respectively. Knowing that essential expenses are covered allows many to enjoy life more freely, spending on travel or hobbies without financial stress.
Tax-Deferred Growth
Annuities let your money grow tax-deferred, meaning you won’t pay taxes on earnings until you start receiving payments. This can lead to faster compounding compared to taxable investments.
Principal Protection
Fixed and indexed annuities protect your initial investment, shielding it from market losses.
Simplified Financial Management
Instead of managing multiple accounts and worrying about withdrawal rates, annuities provide a predictable monthly paycheck, much like a pension.
Protection Against Elder Fraud
Because annuity funds are not easily accessible for large withdrawals, they can serve as a safeguard against financial abuse, a growing concern for older adults.
While these benefits make annuities appealing, they come with some significant limitations.
Drawbacks to Consider
High Fees and Commissions
Annuities often come with steep fees. Financial advisors may earn commissions ranging from 6% to 8%, compared to around 2% for mutual funds. As Doug Collins from Fortis Lux Financial explains:
"Some types of annuities can have high fees in return for the guarantees associated with them, but these vary with the specific product as the term ‘annuity’ can mean a wide range of solutions, and costs vary across the spectrum".
Limited Liquidity
Accessing your money can be challenging. Surrender charges, which typically last six to eight years, may apply if you withdraw funds early. As Jon Preston of Commonwealth Financial Group notes:
"Surrender periods and early-withdrawal penalties restrict liquidity, underscoring the need for professional guidance".
Inflation Risk
Fixed annuities may not keep pace with rising costs of living. While payments remain steady, their purchasing power can decline over time.
Complexity
Annuities can be difficult to understand, even for seasoned investors. The wide range of features, riders, and terms increases the risk of choosing a product that doesn’t align with your needs.
Risk of Early Death
If you pass away shortly after purchasing an annuity, you might not receive the full value of your investment. For instance, immediate annuities stop payments upon death.
Redundant Tax Benefits
Buying an annuity within a tax-deferred account, such as a 401(k) or IRA, might not provide additional tax advantages. In such cases, you could end up paying extra for features you don’t need.
| Pros | Cons |
|---|---|
| Guaranteed income | High commissions |
| Custom features | High fees |
| Simplified money management | Surrender charges |
| Tax-deferred growth | No extra tax benefits in IRAs |
| Higher contribution limits | Limited access to funds |
| Death benefit protection | Inflation risk |
When Annuities Make Sense
Annuities can be a smart choice if you’re in good health, have funds set aside for short-term needs, prefer low-risk options, and want guaranteed income to cover essential expenses.
When to Avoid Annuities
They may not be suitable if you need liquidity, are put off by high fees, already have guaranteed income from Social Security or pensions, or prefer higher-growth investments despite market risks.
Ultimately, balance is key. Financial experts often suggest using annuities as one part of a diversified retirement plan. They can provide stable income for essential expenses while leaving room for other investments to grow and offer flexibility.
How to Choose the Right Annuity for Your Needs
Picking the right annuity isn’t about finding a one-size-fits-all solution – it’s about choosing one that aligns with your specific retirement goals. Marcel Miu, CFA, CFP, and founder of Simplify Wealth Planning, explains it perfectly:
"Most people approach annuities backward. They focus solely on the product rather than how it fits into their overall plan. That’s like choosing kitchen appliances before designing the house."
The secret lies in understanding your financial situation and matching it with annuity features that meet your retirement needs. Let’s break down how you can align annuity options with your goals.
Matching Annuities to Your Financial Goals
Start with Your Income Gap
The first step is to figure out how much additional income you’ll need. Tally up your essential monthly expenses – things like housing, healthcare, food, and utilities – and subtract any income you expect from sources like Social Security or pensions. For example, if your monthly expenses total $5,000 and Social Security provides $3,000, an immediate annuity could cover the $2,000 shortfall.
Consider Your Timeline
Your retirement timeline plays a big role in choosing the right annuity. As Jordan Gilberti, CFP, founder of Sage Wealth Group, points out:
"Understanding personal financial goals and risk appetite is essential. Annuities can provide peace of mind, but they must fit within the broader context of one’s retirement plan."
If you need income right away, an immediate annuity might make sense. On the other hand, if you’re planning for future needs, a deferred annuity allows your investment to grow before payouts begin.
Match Risk Tolerance to Annuity Type
Your comfort level with market ups and downs should guide your decision between fixed, indexed, and variable annuities. Fixed annuities offer stability, while indexed and variable annuities involve more risk but may provide greater growth potential.
Evaluate Payment Options
Think about whether you want lifetime income or payments for a set period. Lifetime payments can help protect against outliving your savings, though they often come with smaller monthly payouts. Alternatively, period-certain annuities offer larger payments for a fixed term. If ensuring income for a spouse is a priority, joint-life options might be worth exploring, though they typically reduce payments after the first beneficiary passes.
Also, don’t overlook liquidity. Annuities often come with restrictions like withdrawal limits and surrender charges, so it’s important to understand how accessible your funds will be.
As Charles Schwab advises:
"Every benefit you receive from an annuity can have a commensurate risk, tradeoff, or real or potential cost – in some cases, several. So, make sure you ask questions about the risks and tradeoffs based on the benefits your annuity offers."
Secure Stream Income‘s Expert Annuity Guidance
Once you’ve identified your financial needs, professional advice can help you navigate the complexities of annuities and refine your choice.
Personalized Financial Analysis and Educational Resources
Secure Stream Income starts by analyzing your financial situation and breaking down the details of annuities – like fees, surrender periods, and payment options. Licensed agents review your retirement income sources, expected expenses, risk tolerance, and long-term objectives to recommend the most suitable annuity. They also compare options from multiple insurance companies to ensure you get competitive terms.
Insurance Company Vetting
The financial health of the insurer matters. Secure Stream Income evaluates companies using ratings from AM Best, Moody’s, and S&P, prioritizing those with strong ratings. After all, the guarantees an annuity offers are only as reliable as the company providing them.
Ongoing Support and Coordination
Annuities work best when they’re part of a broader strategy. Secure Stream Income helps coordinate annuity payouts with other income sources, like Social Security and 401(k) withdrawals, to optimize your retirement plan. Their agents provide ongoing support, from the initial selection process to adjusting your strategy as your needs evolve.
Conclusion: Building Stable Retirement Income with Annuities
Annuities provide a steady and reliable way to generate income during retirement. With fewer workers – just 22% – covered by pensions today, and Social Security projected to pay only 81% of benefits by 2034, annuities step in to address these challenges.
David Blanchett, head of retirement research for PGIM DC Solutions, explains their value simply:
"An annuity is like a personal pension… No matter how long you live or what happens in the market, you’ll get some benefit."
Whether you choose a fixed annuity for stability, an indexed annuity for growth potential, or an immediate annuity for quick payouts, each type can help close income gaps and manage risks highlighted earlier.
Financial experts often suggest dedicating 20% to 40% of your portfolio to annuities, leaving the rest for emergencies and investments that can grow over time. This balanced approach provides peace of mind through guaranteed income while maintaining flexibility for unexpected expenses.
Brandon Buckingham, Vice President of the Advanced Planning Group at Prudential Retirement Strategies, underscores their importance:
"With the decline of traditional pensions and the future value of Social Security in question, protected lifetime income from products like annuities can help relieve a retiree’s fear of outliving their savings."
If you’re considering annuities as part of your retirement plan, Secure Stream Income offers a personalized approach. Their licensed agents can assess your financial needs, compare options from multiple insurers, and help you design a strategy that aligns with your goals.
FAQs
Is an annuity the right choice to boost my retirement income?
Determining whether an annuity fits into your retirement plan starts with understanding your financial goals and your need for guaranteed income. Take a close look at your current income sources, like Social Security or a 401(k), and evaluate if you need an additional, steady stream of predictable income.
Key factors to think about include when you want to start receiving payments (immediate or deferred), the type of payout structure you prefer (lifetime or fixed term), and the potential returns. Annuities can be particularly helpful if you’re worried about outliving your savings or want to minimize financial uncertainty during retirement.
For a tailored evaluation, consider reaching out to a trusted financial advisor. They can help you figure out how an annuity might fit into your overall retirement plan and address any income gaps you may have.
What are the tax benefits and considerations of annuities compared to other retirement savings options?
Annuities provide the benefit of tax-deferred growth, meaning you won’t owe taxes on your earnings until you start making withdrawals. This works similarly to traditional IRAs and 401(k)s. However, the way taxes apply depends on the type of annuity you have:
- Qualified annuities: These are funded with pre-tax dollars, so your withdrawals are fully taxable as income.
- Non-qualified annuities: These are funded with after-tax dollars, so you only pay taxes on the earnings portion of your withdrawals.
Unlike Roth IRAs, contributions to annuities aren’t tax-deductible. However, the ability to grow your investments tax-deferred can help you build wealth over time. While annuities don’t provide immediate tax advantages like some retirement accounts, they can be an effective way to create a steady income stream for retirement while postponing taxes until you actually need the money.
What should I consider when deciding between fixed, indexed, and immediate annuities for retirement income?
When choosing between fixed, indexed, and immediate annuities, it’s important to weigh your retirement timeline, comfort with risk, and income requirements.
- Fixed annuities provide steady, guaranteed payments, offering peace of mind if you prioritize stability and want to steer clear of market fluctuations.
- Indexed annuities have growth potential linked to market performance. While they come with some risk, they can be a better match for those aiming for higher returns and willing to accept some unpredictability.
- Immediate annuities begin payouts immediately, making them a practical choice if you’re retired or about to retire and need income right away.
Ultimately, your decision should align with your financial objectives, how soon you’ll need the income, and your willingness to handle risk. Consulting a financial professional can help you craft a plan tailored to your situation.
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