Annuities: A Secure Investment for Your Retirement

Annuities: A Secure Investment for Your Retirement

Retirement planning is a critical aspect of securing your future, and one tool that is gaining significant traction is annuities. As of the first quarter of 2024, total annuity sales reached a record $113.5 billion, marking a 21% increase compared to the previous year, according to LIMRA’s U.S. Individual Annuity Sales Survey. This surge in sales reflects the growing popularity of annuities as an essential part of many investors’ retirement strategies.

Annuities have been around for centuries, dating back to early Rome, when citizens would make a lump-sum payment on a contract called an annua in exchange for annual income for life. While modern-day annuities are far more complex, their purpose remains the same: to provide financial security for retirement.

1. What Are Annuities?

An annuity is an insurance product that involves a contract where you, the purchaser, pay an insurance company to manage your investment. The funds grow tax-deferred, and in many cases, the annuity will eventually provide a steady stream of income. The income can last for a set period or for the remainder of your life, offering a safeguard against outliving your savings.

Annuities offer a wide range of benefits, especially for retirees who need a predictable income stream. According to the National Association for Fixed Annuities (NAFA), more retirees are choosing annuities for peace of mind, knowing they won't run out of money in their later years.

2. Should You Add a Rider to an Annuity?

Annuities can be customized with additional features called riders. These can provide added benefits, such as a long-term care rider, which increases your payout if you need long-term care. Other riders ensure that if you pass away before fully receiving the annuity's benefits, your beneficiary will still receive payments.

However, it's important to note that riders come at an additional cost. When you add a rider, the regular income payments might be smaller. Always ensure that the added benefits justify the extra expense. You can learn more about annuity riders and their implications at NAFA’s Guide.

3. Annuities vs. Certificates of Deposit (CDs): Which Pays More?

Many individuals seeking guaranteed returns turn to annuities instead of CDs. As of 2024, annuity sales have surged, partly due to their higher returns compared to CD rates. For example, fixed-rate annuities are delivering solid returns in a way that CDs can’t match, especially in the current economic climate.

According to LIMRA, fixed-rate deferred annuity (FRD) sales totaled $83.1 billion in the first half of 2024, marking a 15% increase from the previous year. This growth comes despite the fact that CD rates have been relatively flat, with the average 12-month CD rate at just 1.85% in July 2024, as reported by the FDIC.

4. Immediate vs. Deferred Annuities: What's the Difference?

Annuities are classified into two main categories: immediate and deferred.

• Immediate Annuities: These begin paying out income almost immediately, making them a great option for retirees who want guaranteed income right away.

• Deferred Annuities: These are designed for people still in the accumulation phase. Your contributions grow tax-deferred until you're ready to start withdrawals, typically at retirement age.

Deferred annuities provide greater flexibility since you can continue to add to them before retirement. The decision between immediate and deferred annuities depends on your current financial situation and when you need the income to begin.

5. How Do Annuities Grow Your Money?

Annuities come in several different varieties that determine how your money grows:

• Fixed Annuities: These offer a guaranteed interest rate for a set period, providing stability and predictability.

• Variable Annuities: These allow you to invest in mutual-fund-like subaccounts, so your returns are tied to the performance of the investments you choose.

• Indexed Annuities: These annuities grow based on a stock market index, such as the S&P 500, providing potential for higher returns while still offering some protection from market downturns.

Annuities are a good option for individuals who have maxed out contributions to IRAs and 401(k)s, as they are not subject to the same annual contribution limits.

6. Joint Life vs. Single Life Annuities

For couples, joint life annuities are a popular choice. While they provide a slightly lower monthly payout compared to a single-life annuity, they guarantee that income will continue for as long as either spouse lives. This ensures that both partners have financial security in retirement.

Single-life annuities, on the other hand, offer higher payouts but cease when the annuitant passes away. This might be a good choice if you're certain that you don't need to provide for a surviving spouse.

7. How Annuities Benefit Both Men and Women

Typically, women tend to live longer than men, so their payouts from an annuity might be smaller in comparison. However, some people use the strategy of "laddering" annuities: buying one now and another later to increase income as they age.

According to data, men generally receive higher payouts than women because of their shorter life expectancy. If you're a woman considering an annuity, keep this in mind as you plan for your retirement.

8. What Happens if You Cash Out Early?

Although annuities offer the flexibility to access your funds, there are penalties for early withdrawal. These penalties, called surrender charges, can be significant in the first few years and may last up to 10 years. Additionally, withdrawing funds before the age of 59½ typically incurs an early withdrawal penalty.

9. Annuity Protection in Case of Insurer Bankruptcy

Annuities are protected by state guaranty associations, which ensure that you continue to receive payments even if the insurer goes bankrupt. The level of protection varies by state, so it's important to choose a financially stable insurance company.

10. Can You Buy an Annuity Within a 401(k)?

Some 401(k) plans now offer the option to purchase an annuity. This can provide guaranteed income in retirement and is a good option for those looking to convert part of their 401(k) into a predictable income stream. However, annuities purchased through a 401(k) may come with different features, so it's important to understand your plan’s details.

Conclusion

Annuities are becoming an increasingly important tool for retirement planning, with sales reaching record highs in 2024. They offer a reliable income stream in retirement and can help safeguard against the risk of outliving your savings. However, as with any financial product, it’s essential to understand the different types of annuities and the benefits they offer before making a decision.

For more information on annuities and how they can fit into your retirement strategy, you can visit LIMRA’s U.S. Individual Annuity Sales Survey and National Association for Fixed Annuities.