Are Annuities a Good Investment?

An annuity is essentially a contract between you and an insurance company. This financial vehicle is designed to provide a fixed, guaranteed stream of income. You pay the insurance company a premium, either all at once or as regular monthly installments, in return for a future monthly payout. You can customize your annuity with riders to make it fit your particular needs and circumstances.

Annuities can be fixed or variable. Fixed annuities detail a specific monthly payout amount, while the payout from variable annuities might fluctuate due to market conditions. Annuities are also categorized by when they begin to pay out; immediate annuities start right away, while deferred annuities start at a pre-defined later date.

Annuities provide you with regular income, which makes them a smart choice when planning for your retirement. Although many people rely on Social Security for all their financial needs in retirement,  Social Security is only intended to supplement your retirement income, not replace it. Unfortunately, for 37% of men and 42% of women, Social Security represents 50% or more of their retirement income, according to the Social Security Administration.

An annuity can be a good part of a long-term plan but it isn’t generally considered a wise short-term investment strategy. It’s important to assess your financial goals when crafting a financial plan that will lead to a comfortable retirement. Those goals, along with your level of risk tolerance and your personal circumstances, will help you decide if an annuity should be part of your retirement portfolio. Consider consulting with a financial advisor to examine your financial needs so you can properly set your priorities.

The main benefit of buying an annuity is that it guarantees a regular income, which can also make it a good choice for diversifying your retirement portfolio. Annuities can also help you combat inflation. In addition, they can help you defer taxes and can even provide a death benefit for your beneficiaries. Less volatile than equity investments like stocks, an annuity can also provide you with security and peace of mind. 

An annuity contract can last for decades, which means you will always have a source of income during your retirement. Regardless of the market performance of your other retirement investments, your annuity income will continue to provide long-term security.

Annuities can grow tax-deferred. You won’t have to pay tax on your interest earnings until you begin to withdraw from them, at which point they are taxed as ordinary income. Contrary to a 401(k) or IRA, an annuity has no contribution limit.

The income provided by most annuities is not subject to the fluctuation of the stock market. For instance, for an annuity with a fixed payout, the insurance company takes on the risk of poor market performance instead of you. Knowing exactly how much you’ll receive can help you build a solid retirement plan.

You can enhance your annuity with a death benefit rider, leaving behind a larger lump sum for your beneficiaries. That way your beneficiaries will be more secure and have help paying any taxes potentially owed on your estate.

Every financial vehicle has potential disadvantages and advantages, including annuities. An annuity limits not only your access to your funds but also to other opportunities with the potential for higher growth. Annuities also come with associated fees and charges. Although you are guaranteed an income stream, the returns are generally modest and there is always the risk that inflation might outrun your returns.

All investments have associated fees and charges; annuities are no exception. They also have surrender penalties, which can diminish your returns and leave you with less than you may have hoped for.

Annuities are considered illiquid investments, which means you typically cannot easily access the money they contain outside the pre-set limits. Additionally, the funds you spend to purchase an annuity might reduce your ability to invest in other potentially more rewarding opportunities.

The returns on an annuity are generally modest. They are meant to be safe investments, so earnings are correspondingly small. There’s a chance that those smaller returns may not be able to keep up with the pace of inflation in the future. There is also the extremely rare risk that something might happen to the insurance company providing the annuity. If that happens, you might lose your premiums without receiving any of the payouts.

If you’re looking for a way to ensure you don’t run out of money during your retirement, investing in an annuity might be a good choice. The returns on an annuity can be modest but the guaranteed income (and tax-deferred growth) can ensure you don’t outlive your savings.

Annuities can also help you pay for the cost of long-term care. As the majority of Americans over 65 will need long-term care at some point, it’s important to know how you can cover the cost.

When you choose to purchase an annuity, you’ll have to make some choices about how you want it to pay out, grow and more.

Buying an annuity is a personal choice and may not always be right for your personal needs and circumstances. Don’t hesitate to consult a financial professional for advice and information so you can decide if an annuity is right for you. There are also other annuity alternatives available to you.

Editor Malori Malone contributed to this article.