Should You Buy an Annuity? header image

Should You Buy an Annuity?

When you’re thinking about your retirement plan, you may want to consider adding one or more annuities to your portfolio. Annuities are tax-deferred insurance contracts; you invest either a single lump sum or a series of small amounts with a life insurance company. In exchange, you will earn interest on that money during the accumulation phase and will receive payments to either you or your beneficiary during the distribution phase.

The answer to the question, “Do I need an annuity?” is dependent on your unique retirement plan, but in most instances annuities can help round-out your retirement plan and offer benefits that other savings vehicles do not.

5 Advantages that Make Annuities a Good Investment

Preparing for retirement today may look different than it did five years ago, and when change is projected it can be comforting to have a strong foundation that annuities can help provide. 

1. Steady Stream of Retirement Income

Annuities are growing in popularity1 in part because they provide a consistent stream of income, which helps address many retirees’ fears of outliving their savings.

There are a variety of ways annuities pay out. The most common is over a specified length of time (typically 5-20 years), but there are also annuities that pay out for the purchaser’s entire life with no survivor benefits or annuities that pay out for the life of the purchaser + another (such as a spouse). In any payout scenario, annuities offer guaranteed income. This can serve as a foundation to riskier investments aimed at helping to offset one of the most worrisome threats to retirement – inflation.

2. Unlimited Contributions to Boost Savings

Unlike some retirement savings vehicles, there is no annual contribution limits when investing in annuities. That means you can be putting money into multiple annuities set to payout at different times or in different ways to help maintain your standard of living and address unexpected expenses that pop up during retirement. 

3. Choose When to Receive Payments

Required Minimum Distributions (RMDs) don’t apply to annuities, so you can set up the annuity to payout on your timeline. That means you can make a distribution plan that minimizes your income tax liability while still giving you the funds you’re looking for.

There are caveats to this – annuities are generally illiquid and withdrawing early would mean paying a penalty. However, building a retirement plan with other types of retirement savings options and different annuities can provide cash flow options that meet your needs. 

4. Take Advantage of Tax-deferred Growth

Taxes are always complicated, and taxation of annuities is no different. In general, though, earnings from annuities purchased with after-tax dollars are tax-deferred until the earnings are paid out. That means that more money is available to be invested during the accumulation phase, increasing your opportunities for return. 

5. Guaranteed Rates of Return with Fixed Annuities

There are two types of annuities: fixed and variable. Variable annuities are more closely tied to the stock market; purchasers trade the benefit of stable cash flow and agree to receive smaller payments when investments are down in order to reap the benefits of larger returns when the investments are up.

Purchasers of a fixed annuity will receive stable, regular payments. Fixed annuities often offer a higher guaranteed rate of return when compared to other retirement savings options. The guaranteed rates of return that come with a fixed annuity offer some protection against market volatility. They are also beneficial in times of higher interest rates by offsetting less-stable investments in a retirement portfolio. 

Who Should Buy Annuities?

Annuities may be particularly helpful for people who are saving for retirement later in life, are close to retirement, have maxed out other retirement savings vehicles or have a lower tolerance for risk. However, they can be an important part of any retirement plan. If you’re wondering if an annuity is right for you, connect with a Farm Bureau agent or financial advisor to discuss how it might benefit your retirement savings plan.

 

1LIMRA, 2022

How can I help you?