Annuities: Facts vs. Myths
Annuities stand out as a cornerstone for ensuring financial stability in retirement. For most of our clients, annuities already form a critical part of their retirement portfolio—and for good reason.
The current state of annuities
“The year 2023 was a record-breaking year for annuity sales,” wrote Jennifer Schell for Annuity.org, “and 2024 could see even more Americans choosing annuities for their retirement income needs.”
The increase in annuity sales is widely attributed to rising interest rates. “Annuities provide lifetime income, so depending on the number and type you consider in your plan, you could experience a significant increase in starting retirement income since 2021 of about 15%. All because interest rates are up,” wrote Jerry Golden for Kiplinger.
While specific returns vary by the type of annuity, the consensus is that they remain a reliable component of a well-rounded retirement strategy.
Insurance companies have also been innovating, introducing new annuity products that offer more flexibility and options to cater to a diverse range of needs and preferences. These developments make it an opportune time to review your existing annuity contracts or consider how new annuity products might enhance your retirement planning.
Why annuities are a wise choice
An annuity is essentially a contract with an insurance company designed to pay you a constant rate of return or income later, typically during retirement. This income can be scheduled to start immediately or at some point in the future and can last for a predetermined period or for the rest of your life. The decision to include annuities in your retirement portfolio is prudent for several reasons:
Facts about annuities
Here are some basic facts about the value of having annuities in your portfolio.
Fact: Annuities provide guaranteed income. Perhaps the most significant benefit of annuities is the guarantee of a steady income stream in retirement, providing peace of mind that you will have financial support regardless of market conditions.
Fact: Annuities offer tax advantages. The funds you invest in an annuity grow tax-deferred until you begin to receive payouts, potentially allowing your investments to grow more substantially over time.
Fact: Annuities offer protection from market volatility. Annuities can offer a buffer against the ups and downs of the stock market, ensuring that a portion of your retirement income is unaffected by market fluctuations.
Fact: Annuities provide steady and consistent growth. Annuities often provide a fixed rate of return, which means your investment grows at a predictable rate. This stability is crucial for long-term planning, ensuring that your retirement funds are not only protected but also consistently increasing over time, unaffected by the short-term volatility of the stock market.
Myths about annuities
Myth: I won’t have access to my annuity principal. Annuities provide free withdraw provisions that allow you to take a percentage of your principal on an annual basis.
Myth: I can’t use my annuity to pay for long-term care needs. Some annuities allow you to withdraw 100% of your funds if you need to use the principal to pay for care as you age in place or in a nursing facility.
Myth: My annuity cannot be transferred to my heirs. Since an annuity is considered an insurance contract, there are beneficiary provisions that allow you to transfer the funds to individuals you choose. The funds transferred are not subject to estate probate laws.
Understanding annuities for newcomers
For those who have not yet included annuities in their retirement portfolios, it’s worth considering the unique advantages they offer. Here’s a brief overview:
Immediate vs. deferred annuities: Immediate annuities start paying out soon after you make your investment. Deferred annuities begin payouts at a future date. This flexibility allows you to tailor your investment to your specific retirement timeline.
Fixed vs. variable annuities: Fixed annuities provide guaranteed payouts, while variable annuities allow your payments to fluctuate based on the performance of the underlying investments you choose. This choice lets you balance security with growth potential.
Lifetime income: Some annuities offer the option of lifetime payments, ensuring that you won’t outlive your savings—a critical consideration given the increasing longevity of today’s retirees.
Peace of mind for unexpected expenses
For those who have already incorporated annuities into their retirement planning, rest assured that this was a strategic decision that continues to offer financial security and stability. Annuities not only provide a safeguard against market volatility, but also ensure a consistent income stream to support your lifestyle in retirement. What’s more, they can be used to pay for unexpected long-term care needs.
For individuals on the fence or exploring options to bolster their retirement savings, we at Longevity Income Solutions are happy to help you understand fully how annuities can fit into your overall retirement strategy. With the right guidance and a clear understanding of your financial goals, we can help you achieve peace of mind for years to come.