Retirees often wonder, “Will I outlive my money? ” In a world where pensions disappear and markets remain unpredictable, annuities consistently deliver peace of mind.
Despite their appeal, annuities have a controversial reputation. Many financial advisors avoid or dismiss them. Ask retirees, however, and you’ll hear a different story: they treasure knowing they’ll receive a check every month, regardless of the circumstances.
So why the disconnect? In this article, we’ll examine why annuities remain popular among retirees, as well as why advisors tend to view them skeptically.
What Exactly Is An Annuity?
An annuity is a contract between you and an insurance company. Typically, you give the insurer a lump sum or make payments over time, and in return, they pay you regularly, often for the rest of your life. In a way, it’s like creating a personal pension.
Annuity types include;
- Immediate Annuities. After funding, payments begin
- Deferred Annuities. Your money can grow as payments start later
- Fixed Annuities. Guaranteed interest rates and predictable payments
- Variable Annuities. Depending on investment performance, payments fluctuate
- Indexed Annuities. With some downside protection, tied to a market index (like S&P 500)
Annuities all share one thing: a promise of guaranteed income, which retirees greatly value
Why Retirees Find Annuities So Appealing
When it comes to retirement, annuities offer security, predictability, and simplicity during a time meant for leisure, not financial stress.
Peace of mind.
In retirement, you should unwind, pursue hobbies, enjoy your family, and not constantly monitor your investment portfolio. With annuities, retirees can turn their hard-earned savings into a guaranteed, predictable, and reliable income. This eliminates concerns about potential market downturns or excessive spending.
Protection against longevity risk.
One of the most significant, yet often underestimated, financial risks in retirement isn’t just market volatility – it’s longevity risk. According to the Nationwide Retirement Institute survey, nearly three in four Americans fear they will run out of money before they run out of time.
One of the only financial tools specifically designed to address this very real concern is annuities, particularly lifetime annuities. No matter how long you live, they continue to pay out, providing an invaluable financial safeguard.
Embracing simplicity.
Generally, retirees don’t want to manage complicated investment portfolios. Constantly monitoring market fluctuations, rebalancing assets, and making complex withdrawal decisions can be exhausting. With annuities, you can set it and forget it.
Once established, they simply deliver regular checks, simplifying financial management and releasing mental energy for more enjoyable pursuits. This simplicity is highly beneficial to retirees who want to be hands-off with their retirement income.
Positive behavioral benefits.
Investing in annuities can promote sound financial behavior in retirement. By offering retirees a reliable “income floor,” they can subtly reduce their temptation to overspend. Retirement income guarantees enable retirees to stay on budget and feel confident in the longevity of their overall financial plan when basic living expenses are covered.
Offers customizable coverage.
Flexibility is an often-overlooked advantage of annuities. As with life insurance policies, annuities can be customized with various “riders” to enhance their benefits. The riders allow you to add valuable protections and modify your coverage.
- Long-term care rider. Due to the high costs associated with long-term care, this rider is increasingly useful as the number of adults over 65 increases. By protecting your other assets, your annuity helps cover the costs of long-term care if you need it later in lif.e
- Guaranteed Minimum Withdrawal Benefit (GMWB). With this rider, you can withdraw a predetermined amount every year, regardless of market performance, until you recoup your whole investment value. You can access your funds without sacrificing your principal.
- Guaranteed Minimum Income Benefit (GMIB). You will receive a minimum income stream even if your underlying investments perform poorly or lose money. In the event of market downturns, it acts as a safety net.
- Impaired risk rider. A specialized rider like this is crucial for individuals with pre-existing health conditions. Since income is needed over a shorter period, annuities offer significantly higher payments.
- Inflation rider. This rider protects your annuity payments from inflation eroding their purchasing power. Over time, it maintains the purchasing power of your income despite being capped at a certain percentage.
Spousal protection.
As a couple, concern over the financial well-being of the surviving spouse is paramount. In a joint life annuity, income payments continue after the death of one spouse at a reduced rate. Being able to rely on a stable income stream is a significant comfort and security for the surviving partner
A “bridge” to delayed Social Security benefits.
According to research from Wharton, defined-contribution retirement accounts can benefit from deferred income annuities. In addition, a variable deferred income annuity with equity exposure would be beneficial to retirees’ well-being. In addition, lower-paid and less-educated retirees would be better off using their retirement assets to bridge their consumption ga.p
Why Financial Advisors Exercise Caution (And Sometimes Criticism)
Considering the benefits of annuities, why do some advisors hesitate to recommend them? There are four main reasons for their caution;
Complexity and lack of transparency.
Some annuity products are incredibly complex, making them a significant challenge for advisors. In addition to high fees, some annuities can have hidden surrender charges (penalties for early withdrawals) and confusing riders (additional benefits)
A product that is hard to explain clearly to clients is understandably unwelcome, as well as harder to compare objectively with alternatives that are easy to explain. Transparency can erode trust when there is a lack of it.
Perceived lower returns.
Most annuities, especially those with extensive guarantees, offer less growth potential than stock market investments. When growth-oriented advisors prioritize maximizing investment performance, this can feel like settling. As such, an advisor focusing on accumulation might view annuities as detrimental.
Loss of liquidity.
If you invest a substantial sum in an annuity, it often becomes illiquid. It can result in significant penalties, surrender charges, or the loss of crucial benefits if these funds are accessed early. Having little access to funds in case of an emergency or an unforeseen opportunity is a major drawback for advisors who emphasize financial flexibility. Often, clients want easy access to their money.
Conflicts of interest.
Some annuity products have historically paid substantial commissions to agents or advisors. In the past, commission structures have led to instances of product pushing or mis-selling, tarnishing the entire annuity category.
To avoid any ethical gray areas or the appearance of a conflict of interest, fiduciary advisors may simply avoid annuities altogether to act in their clients’ best interests.
Bridging the Gap: When Annuities Make Sense
Annuities are like any financial instrument. Their value depends entirely on how, when, and for whom they are used. Understanding where they fit into a comprehensive retirement plan is key.
In many cases, annuities are a wise investment for those who;
- Market fluctuations can be unpredictable, so you want income that is guaranteed
- Want a protective layer to protect their savings from outliving them
- In your later years, you prefer a hands-off approach to investment management
- In addition to a modest pension or Social Security, you need to supplement your income with other sources
- Peace of mind and financial security are your top priorities
Essentially, annuities are the perfect solution for many seniors’ deepest financial concerns and anxieties
The Rise of the “Income Floor” Strategy
Forward-thinking financial planners are increasingly adopting a balanced retirement income strategy referred to as an “income floor.” This involves providing retirees with guaranteed, predictable sources of income. By establishing an income floor, retirees can then invest with increased risk with their remaining portfolio, achieving growth without compromising their basic needs.
An income floor typically consists of;
- Social Security benefits
- Pensions (if available)
- Lifetime annuities
A Single Premium Immediate Annuity (SPIA) or a Deferred Income Annuity (DIA) would be ideal in this situation. They’re simple, transparent, and low-cost, making them an excellent choice for people seeking guaranteed income.
Modern Annuities Are Better Than You Think
Historically, advisors were cautious about annuities, but the landscape has changed in recent years. With today’s sophisticated and transparent annuity market’
- Lower fees. “No-commission” annuities are now available from some insurers, removing conflicts of interest often associated with traditional sales.
- Enhanced flexibility. Annuities and contracts have become more customizable thanks to riders and contract structures like inflation protection.
- Greater transparency. Comparing annuity quotes, features, and ratings of various insurers has become easier than ever with online tools and platforms.
In addition, innovative products have emerged, such as buffered annuities and registered index-linked annuities (RILAs). For retirees seeking more than just fixed returns, hybrid products provide market participation, growth potential, and downside protection.
What To Watch Out For
Annuities can be beneficial, but due diligence is essential. Five key steps are outlined below;
- Understand the type. SPIAs designed solely for income differ greatly from complex variable annuities with numerous riders. Be sure you understand what kind of annuity you are buying.
- Compare quotes. Despite the same product and benefit, annuities are not one-size-fits-all, and prices can vary significantly among insurers. Compare quotes from multiple companies with the help of an independent, licensed advisor who can help.
- Check the insurer’s financial strength. Annuity payments are backed by the insurance company’s economic health and claim-paying ability. Consider insurers with high financial strength ratings, like A.M. Best, Moody’s, or S&P.
- Read the fine print. Review all terms and conditions thoroughly before signing any contract. Be aware of the surrender period, what payout options are available, death benefits, and inflation-adjusted income payments.
- Don’t annuitize everything. While annuities provide security, maintaining liquidity is essential for emergencies and future opportunities. In general, retirement savings should be annuitized to cover necessary expenses, but not so much that you cannot use them.
Final Thoughts: Don’t Dismiss Annuities—Understand Them
While annuities aren’t a magic bullet, they aren’t the enemy either. They can be a powerful tool for retirees seeking security, simplicity, and guaranteed income.
Advisors shouldn’t automatically avoid them. But, retirees shouldn’t blindly chase them. Creating a plan that integrates thoughtfully is the ke.y
Retirement success isn’t about chasing returns. It’s about peace of mind. For many, annuities provide exactly that.
FAQs
Are annuities safe?
In particular, fixed and immediate annuities from well-rated insurers. Rather than the stock market, they’re backed by the insurance company. Before buying, check the insurer’s financial strength.
Do annuities keep up with inflation?
Not always. A basic annuity usually offers fixed payments. There are, however, some policies that provide inflation riders or COLAs that adjust payments annually. It’s also possible to offset inflation risk by combining annuities with investments that grow over time.
Can I leave money to heirs with an annuity?
If you choose the right options, yes. Payments to beneficiaries can continue if you pass away early, if you have a “cash refund” or “period certain” rider. There is no death benefit with a life-only annuity.
What’s the best age to buy an annuity?
It depends. In the 40s and 50s, deferred annuities are purchased for future income, while immediate annuities are purchased during retirement (late 60s and 70s). For lifelong income security, wait until you’re ready.
Image Credit: SHVETS production; Pexels
