Annuities can provide a guaranteed lifetime income stream in retirement, no matter how long you live. They thrive under high interest rate environments and are currently offering the highest payouts seen in years.
Recent market trends have led to a surge in their popularity. The cause – which resulted in record total U.S. retail annuity sales of $385.4 billion in 2023 and $106.7 billion in the first quarter of 2024 – can be traced back to the COVID-19 pandemic. Just before that, the market had reached its all-time peak. Then the after-effects brought about record-high inflation, rumors of impending recession and unprecedented market volatility.
For many the thought of losing a substantial portion of their retirement savings made them willing to trade the possibility of gains for the promise of safety. And with the Fed raising interest rates to the highest levels in 15 years, the stage was set for products like annuities. And take center stage they did.
Guaranteed income for life
The word “guarantee” doesn’t come up very often in conversations about investing and retirement planning. But in the case of annuities, that’s exactly what you can get: guaranteed income, at a guaranteed amount for a guaranteed duration, as long as you live.
When you purchase an annuity, you enter into a contract with the insurance company. There’s no health screening required to buy an annuity, just a simple calculation an actuary performs to determine the amount you’ll be paid based on your life expectancy, the date you choose to start taking payments, the amount you put in and the interest rate environment. The higher interest rates, the more you can receive.
Lifetime income through annuities
Fixed income annuities
With an immediate income annuity, you put in a lump sum and earn a fixed payment for the rest of your life. You’ll receive income within 12 months of your purchase—one month after you buy your annuity for monthly payments. While monthly income payments are most common, you can also choose to receive quarterly, semiannual or annual payouts. Your payment amount is determined by your life expectancy from the date of purchase and the amount you put in. If you select an annuity with a “cash refund” death benefit and die before your income payments equal the full amount of your annuity purchase price, your beneficiary will receive the difference. And should you outlive your initial investment, you‘ll continue receiving payments. A great option for retirees looking for a guaranteed income stream, an immediate income annuity gives you a steady monthly check in retirement, just like Social Security.
If you’ve got some time before you retire, a deferred income annuity gives you the opportunity to grow your money tax-deferred for a period of time and unlike immediate annuities, you can convert this money into guaranteed income payments at a later date. Typically, the longer you delay your start date the higher your income payments will be.
Whether you invest in an immediate or deferred annuity, both options provide the advantage of a guaranteed income stream throughout retirement. However, this benefit does come with the trade-off of having limited control over these assets. It’s also worth noting that once your policy is in place and the income start date is set, you’ll have little flexibility to change this date, if possible.
Guaranteed living withdrawal benefit riders
In addition to income annuities, guaranteed living withdrawal benefit riders added to other types of annuities have become an increasingly popular option. They provide more control over the underlying assets while still providing an income payment for life.
The rider can be added to a variety of deferred annuities like variable, structured, indexed or fixed - each having its own set of risks and rewards. It offers you the flexibility to invest your annuity’s underlying cash value, providing options to protect yourself from market downturns. No matter what happens to your invested balance, your income remains guaranteed. The rider gives you the choice to either start receiving income immediately or defer it until a later date. Unlike immediate or deferred income annuities, you’re not required to make this choice in advance. You simply let the insurance company know when you’re ready. In exchange for this flexibility, income payments may be slightly lower.
Deciding for yourself
Annuities can be a great option for those approaching or in retirement who are looking for a guaranteed source of income that won’t falter no matter what happens in the market. The healthier you are and the longer you live, the more value they’ll bring. No one can predict the future of the market for any investment vehicle. But with an annuity, you can predict – and guarantee – how much income you’ll get for the rest of your life.
Keep in mind that opting for a lifetime income option with an insurance company is an important decision that will last the rest of your life, so choosing the right partner is a key part of the process. The income guarantees offered by annuities are backed by the company’s claims paying ability, so selecting a highly rated insurance company is a great way to protect your investment.
Talk with your advisor about how an income annuity can help support your long-term financial plan.
Sources: annuityfyi.com; brighthousefinancial.com; immediateannuities.com; limra.com; macrotrends.net; money.com; newyorklife.com
Annuities are long-term, tax-deferred investments intended for retirement purposes. Annuity guarantees are subject to the claims-paying ability of the issuing insurance company. Any withdrawals may be subject to income taxes, and prior to age 59 1/2 a 10% federal penalty tax and state penalty taxes may apply to the taxable amount. Withdrawals from annuities will affect both the cash value and the death benefit.
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