Annuities are often associated with ultra-wealthy retirees lounging on yachts, collecting steady payouts without a care in the world. It’s a perception fueled by a belief that annuities are only available to the wealthy.
But here’s the truth: annuities aren’t just for the wealthy. Often, they’re a practical and powerful way for middle-class retirees to create predictable income. The myth that they’re a “luxury-only” product has prevented many people from even considering and potentially missing out on their stability.
Whether you have a small nest egg or a large one, let’s explore how annuities work and see if they’re worth a closer look.
The Origins of the Myth
Several common misconceptions contribute to the perception that annuities are only for the wealthy, such as;
- Big-ticket marketing. In the past, financial firms often promoted annuities as a premium product for high-net-worth clients.
- Large lump sums. Generally, annuities are associated with large investments, requiring several hundred thousand dollars.
- Confusion with pensions. Due to the fact that many pensions are structured like annuities, some believe that investors with substantial assets or corporate connections are the only ones able to access them.
Although annuities require substantial investments, they come in many sizes and structures — many of them designed specifically for everyday retirees.
Annuities 101: How They Actually Work
An annuity is simply a contract with an insurance company. Investments can be made in lump sums or in installments. In return, the insurer promises to make regular payments for a set period or your entire life.
Here’s a basic breakdown of the variations;
- Immediate annuities. After you pay a lump sum, you begin receiving payments right away, usually within 30 days.
- Deferred annuities. If you’re still a few years away from retirement, you can invest now, let the money grow, and take income later.
- Fixed annuities. Guaranteed payments that are not subject to change.
- Variable and indexed annuities. Market performance can influence potential growth (and risk).
The common thread? With annuities, savings can be converted into a predictable stream of income, which could be used to supplement Social Security, pensions, and other retirement plans.
Why They’re Not Just for the Wealthy
It’s not surprising that annuities appeal most to people who aren’t ultra-rich — precisely because they value income security.
- A wealthy retiree can take more investment risk since they have multiple safety nets. Rather than using annuities as a piece of a much larger financial puzzle, they might use them as a conservative piece of it.
- In contrast, middle-class retirees often need every dollar to make ends meet. They find it easier to budget and reduce stress when they know a portion of their income is guaranteed.
You can think of an annuity as a DIY pension — something many Americans no longer receive from their employers. In fact, private sector employees with access to defined benefit plans in 2022 were merely 15%.
The “Income Floor” Strategy
With an annuity, you can create an income floor — an amount you’ll receive every month no matter what happens in the stock market.
As an example;
- Your Social Security benefits cover the majority of your essential expenses.
- The rest is covered by a fixed annuity that pays an additional $1,500 per month for life.
- When your basic needs are met, you can concentrate on growing your investment portfolio.
During market downturns, this approach is especially valuable. An annuity prevents you from having to sell your investments to meet your living expenses at a loss. As a result, you can let your portfolio recover rather than worrying about guaranteed income.
How Much Do You Really Need to Buy One?
When it comes to buying an annuity, you don’t need millions-or even hundreds of thousands- of dollars.
The minimum investment requirements vary widely depending on the type of annuity and the provider. From as little as $1,000 to over $100,000, here is the minimum contribution by annuity type;
- Fixed annuities often start at $5,000 to $10,000 and offer long-term returns with minimal risk.
- Typically, variable annuities require a minimum contribution of $5,000, but some providers request $25,000 up front.
- A $1,000 to $50,000 minimum contribution is required for an indexed annuity.
- Since immediate annuities must be funded with enough to sustain immediate income, they usually have the highest entry point, typically ranging from $25,000 to $100,000.
The amount you start with depends on several factors, including;
- How much do you want to be paid each month or every year?
- Your age and life expectancy.
- Whether you pay in a lump sum or flexible contributions.
- Fee structure and optional riders for annuities
As an example, $100,000 lump sum could provide roughly $500–$600 per month for a 65-year-old, depending on the current interest rate and payout terms. This isn’t enough money to buy a yacht. However, it might be enough to cover grocery, utility, and healthcare bills.
Who Might Benefit the Most
Annuities aren’t right for everyone, but they can be beneficial if you:
- Worry about outliving your money. In retirement, longevity risk can be one of the biggest financial challenges. Whatever your age, annuities can provide you with income.
- Lack a pension. An annuity can provide stability if Social Security is your only guaranteed income.
- Value peace of mind. The thought of locking in a portion of one’s income makes some people sleep better at night.
- Want predictable budgeting. By having fixed payments, you can plan your monthly expenses without constantly checking market performance.
Common Objections (and the Truth Behind Them)
“Annuities have high fees.”
In some cases, yes, especially with multi-rider variable annuities. However, many fixed annuities don’t charge ongoing fees. It’s important to pay attention to the details when purchasing a financial product.
To make your life easier, though, here’s what you might encounter when it comes to annuity fees;
| Fee Type | Typical Range |
|---|---|
| Commissions | 1% – 8% |
| Admin fees | 0.3% |
| Surrender charges | 0% – 10% |
| Mortality & expense risk | 0.5% – 1.5% |
| Fund expenses | 0.06% – 3% |
| Riders | 0.25% – 1% |
| Rate spreads | 2% |
“Once I buy one, my money is gone.”
Not necessarily. Many annuities offer beneficiaries the option of partial withdrawals or beneficiary options. In some cases, your principal is returned if you pass away before the term is up. It’s all about choosing the right contract.
“I’ll get better returns in the stock market.”
Possibly. However, annuities aren’t designed to beat the market. Rather than speculating, they’re designed to provide security. As a trade-off for guaranteed income, less growth potential is offered.
How to Evaluate an Annuity (Without Overthinking It)
When considering annuities, consider the following;
- Identify your essential expenses. In this category, you’ll find expenses like housing, food, healthcare, insurance, and more.
- Add up your guaranteed income sources. A few examples would be Social Security, pensions, or rental income.
- Decide if you have a gap. To bridge that ga,p if your guaranteed income is not enough, consider an annuity.
- Compare quotes. Remember, the terms and rates of insurance vary from company to company.
- Understand the fine print. Pay attention to payout options, fees, and death benefits.
And most importantly? Consult a fee-only financial advisor for help determining whether an annuity fits into your retirement plan.
The Psychological Side of Annuities
You can’t just focus on the math when it comes to retirement — you also have to consider the way you feel about the math. When you withdraw money for living expenses, market fluctuations can cause anxiety, even with a solid investment portfolio.
But, that’s not all. According to BlackRock, in retirement, nearly all (97%) say their annuity eases the fear of outliving their money. As a result, 93% of respondents feel less stressed about paying for routine expenses.
However, the benefits go beyond a steady income. It’s estimated that 88% of people believe their annuities provide them with some level of stability during uncertain economic times. Additionally, 84% of respondents said it reduced the risk of becoming a victim of financial fraud or making poor investment decisions as they aged.
In many ways, annuities serve as emotional safety nets. When you have income that isn’t subject to market swings, you can enjoy retirement more freely.
The Bottom Line: Stability Isn’t Just for the Rich
In a nutshell, annuities are not only for wealthy retirees. Anyone, regardless of net worth, can create a more secure and predictable retirement income with these flexible, widely available tools.
Whether you have millions or a modest nest egg, the real question isn’t “Am I rich enough to buy an annuity?” The real question is, “Would guaranteed income reduce my stress and make retirement more enjoyable?”
If so, then you should consider an annuity as a practical safeguard for your financial future, not as a luxury.
FAQs
Do I need a large amount of money to buy an annuity?
No.
Although some people invest large lump sums, many annuities have minimum investment amounts as low as $1,000. It’s also possible to fund certain annuities gradually over time, making them accessible to retirees with modest savings.
Are annuities safe?
In retirement, annuities are a safe way to plan for income, especially for those who value principal protection and predictability. But each type of annuity and each issuing company provides a different level of safety.
Additionally, state guaranty associations insure annuities, and coverage levels may vary from state to state. According to the National Organization for Life & Health Insurance Guaranty Associations, most policies cover at least $250,000 per customer, per company, although some annuities may not be covered. If you have questions about your state’s guarantee association, you can contact them.
Can I leave an annuity to my heirs?
Yes.
A death benefit or “period certain” payout option ensures payments continue to beneficiaries for a set period of time with many annuities. If you pass away too soon, others may be able to return your unused principal.
Will I lose access to my money once I buy an annuity?
Not necessarily.
In some annuities, you can withdraw partial payments or choose a flexible payout option. It’s possible, however, that withdrawals will lower your future payments or subject you to surrender charges if you take them early.
Are annuities a good fit for everyone?
There is no one-size-fits-all financial product. Investing in an annuity can be a good idea if you want a predictable lifetime income or don’t have a pension. But they may not be necessary if you already have several sources of income and a low rate of market volatility. If you’re thinking about partnering with a fee-only financial advisor, they can help you decide if they are a good fit.
Image Credit: Greta Hoffman; Pexels
