You can’t control the market, how long you’re going to live, inflation, healthcare costs, your healthcare needs, tax changes, pension or Social Security solvency, economic shifts, government intervention, and the list goes on.
There is so much uncertainty in life.
All this uncertainty surrounding retirement is why annuities are so popular. They are a way to transfer risk over to an insurance company and provide some sense of safety for the future. The risk of running out of money is a real concern for many retirees and is why there is an estimated $2.53 trillion in retirement assets are held inside of annuities.1
What is an annuity?
Annuities are issued by insurance companies as a form of insurance, allowing retirees to transfer the risk of running out of money for retirement income or losing money in the stock market away from themselves and onto the insurance company.
There are essentially three types of annuities: variable, fixed rate, and fixed index. The variable allows for stock market investing, the fixed rate has a set rate of interest, and the index has a proprietary crediting method that is tied to the index.
The fixed rate and index rate have guarantees against loss of principal, while the variable has a degree of downside risk similar to any other investment. The index and variable have benefits that can be added for a fee that provide the annuity holder a guarantee for income in their retirement.
The income benefits vary from contract to contract and are typically associated with your age. The older you are, the higher the payout percentage can be, and it is determined by the proprietary calculations for the insurance company.
Is an annuity right for you?
Whether or not you should use an annuity depends on your situation. This is not a popular position to have – since those who sell annuities suggest that everyone should own an annuity, while those who sell investments tend to badmouth annuities. When it comes to who may be a candidate for annuities:
- Consider saying yes if you are someone approaching retirement who wants to grow and help protect your retirement income or simply wants to keep some of your money out of the market.
- Consider saying no to annuities if you don’t fall into one of these two camps.
Common myths about annuities
The four most common myths about annuities are:
- Annuities have lower growth potential. The truth is that some annuities can grow just as competitively as a regularly managed portfolio.
- An income annuity will run out of money. The truth is that while, yes, an annuity can run out of money, an investment portfolio carries the same risk of running out of money – only without the insurance.
- Annuities are too expensive. The truth is that some annuities can be expensive when you add together all the rider options and contract fees, but what is often not mentioned is that some annuities have no fees at all.
- The stock market has historically performed well enough that there is no need for the guarantees of an annuity. The truth is that we don’t know for sure what the future holds.
In summary, whether you use an annuity or not is less important than understanding why you’re making the decision. Just like anything you insure, no one loves insurance unless they find themselves using it to replace something valuable that they lost. At that point they are thankful they have it.