Understanding Annuities as a Retirement Strategy

December 20, 2024

Retirement is a milestone that many Americans approach with a mix of excitement and trepidation. According to Gallup, 42% of non-retired U.S. adults are very worried about not having enough money for retirement. As you plan for your golden years, finding ways to secure a stable income becomes crucial, and annuities may just be your answer.

Annuities offer a guaranteed income stream that can last throughout your retirement years, providing a foundation of financial security when you need it most. Let's explore how this financial instrument can fit into your comprehensive retirement plan and help you achieve the retirement lifestyle you've always envisioned.

What Are Annuities?

Annuities are financial contracts offered by insurance companies. When you purchase an annuity, you make either a lump-sum payment or a series of payments to the insurer. In return, the insurance company commits to providing you with regular payments, which can start immediately or at a future date.

The insurance company invests the money you pay into the annuity. Your future payments consist of your original investment plus any interest earned, minus fees. These payments can continue for a specified period or for the rest of your life, depending on the terms of the contract. They are primarily designed to provide a steady income stream during retirement.

Types of Annuities

• Fixed annuities: These provide a guaranteed interest rate and consistent income payments. You'll receive a predetermined amount at regular intervals.
• Variable annuities: The payments from these annuities change based on the performance of chosen investment options. You have the potential for higher returns but also face greater risk due to market fluctuations.
• Indexed annuities: These annuities blend elements of fixed and variable types. Your returns are tied to a specific market index, such as the S&P 500 but they offer some protection against market downturns.

Benefits of Including Annuities in Your Retirement Plan

Annuities offer several advantages that make them an attractive component of a retirement strategy.

Guaranteed Income

The primary benefit of annuities is the assurance of a steady income stream, which can last for a specified period or even for life. This guaranteed income provides a foundation of financial stability and complements other retirement income sources like Social Security.

Tax Advantages

Many annuities offer tax-deferred growth. What this means is that you don't pay taxes on the earnings until you start getting payments. This feature can potentially lead to greater long-term growth of your retirement savings.

Evaluating When To Buy An Annuity

Timing plays a crucial role in maximizing the benefits of an annuity.

Timing Considerations

Consider purchasing an annuity when you're nearing retirement or already retired. This allows you to lock in a potentially higher payout rate based on your age and life expectancy.

Longevity Risk Management

Annuities serve as an effective hedge against the risk of outliving your savings. By providing a guaranteed income stream, they ensure you have financial support no matter how long you live.

Common Misconceptions About Annuities

Despite their benefits, annuities are often misunderstood. Here are a few misconceptions.

Complexity and Costs

Many modern annuity products offer straightforward terms and competitive fees. Some annuities have no fees at all, particularly multi-year guaranteed annuities and many fixed indexed annuities. Variable annuities may have higher costs, but these often cover additional benefits like lifetime income guarantees.

Flexibility Issues

Contrary to popular belief, many annuities now offer flexibility in terms of withdrawals and death benefits. Some products can include customizable withdrawal plans, beneficiary options, and potential for growth through additional features. Some products allow partial withdrawals or include riders for emergency fund access.

Integrating Annuities With Other Retirement Savings

Annuities can play a vital role in a diversified retirement strategy.

Diversification Strategy

By combining annuities with other retirement accounts, such as 401(k)s and IRAs, you create a balanced approach to retirement income. Annuities provide a stable base of guaranteed income, while other investments offer growth potential. Plus, non-qualified annuities, paid for with after-tax dollars, are not subject to some of the contribution limits that qualified annuities are.

Wealth Transfer Strategies

Some annuities offer features that facilitate wealth transfer to heirs, making them a valuable tool in estate planning. These options can help ensure your loved ones are financially secure after you're gone.

Peace of Mind

Incorporating annuities into your retirement plan can provide invaluable peace of mind. Knowing you have a guaranteed income stream can alleviate worries about market volatility or outliving your savings. 

If you think annuities could work out for you, 1891 Financial Life, specializes in providing tailored insurance solutions for all our customers. Our team is equipped to help you understand the best possible option for you with expertise and compassion. Contact us today for personalized assistance and to explore your options.

About 1891 Financial Life

Our culture is about looking out — for you, for others, for family, for the community. That is how we go “Beyond Life Insurance.”

At 1891 Financial Life, we don’t just sell policies, we offer possibilities. We pride ourselves on giving back to the communities that we serve by providing quality and comprehensive insurance solutions. We are a not-for-profit life insurance Society, which means the sales from these financial service products help fund member benefits along with social, educational, and volunteer programs designed to respond to community needs. In 2023, 1891 Financial Life was listed by Forbes as one of "The World's Best Life Insurance Companies."

Our portfolio is extensive, ranging from various life insurance policies to our annuities to support your financial needs no matter what stage of life you’re in.