Why Purchase an Annuity? Understanding the Role Annuities Can Play in Retirement
Retirement should be about enjoying the life you worked hard to build—not constantly wondering whether your money will last.
For many people, the years leading up to retirement bring an important change in financial priorities. While accumulating money may have been the primary goal during your working years, retirement introduces a new question:
How do I turn the money I have saved into dependable retirement income?
An annuity may be one option worth considering.
What Is an Annuity?
An annuity is an insurance product designed to help individuals accumulate money and/or create income, depending on the type of annuity selected.
You generally purchase an annuity from an insurance company using either a lump sum or a series of payments. Depending on the contract, the money may earn interest or receive interest credits based on a specified strategy. Some annuities can later provide an income stream for a specific period or even for life.
There are several types of annuities, so it is important to understand that not every annuity works the same way.
Why Do People Purchase Annuities?
One of the primary reasons people consider an annuity is retirement income.
Think about your working years. You probably received a paycheck every week, every two weeks, or every month. When you retire, that paycheck stops—but your mortgage or rent, utilities, groceries, insurance, transportation, and other expenses continue.
Certain annuities can be structured to provide guaranteed income, including options designed to provide income for life, subject to the terms of the contract.
For someone concerned about outliving their retirement savings, that can be an important feature.
1. Creating an Income You Cannot Outlive
People are living longer, which means retirement savings may need to last 20, 30, or even more years.
An annuity with an appropriate lifetime income feature may provide payments for the remainder of your life, even after the amount originally deposited has been paid back through income distributions, subject to the specific contract terms.
This can help address one of retirement's biggest concerns:
“What happens if I live longer than my money?”
2. Protecting Money From Market Losses
Not everyone approaching retirement wants all of their retirement assets exposed to stock-market fluctuations.
Certain products, such as fixed annuities and fixed indexed annuities, provide protection from direct market losses under the terms of the contract.
A fixed indexed annuity, for example, may provide interest-crediting potential tied to the performance of a market index without directly investing your money in that index.
However, this does not mean you receive the full return of the index. Caps, participation rates, spreads, and other contract provisions may affect how interest is credited.
Understanding those details is important before purchasing.
3. Tax-Deferred Growth
Another potential benefit of an annuity is tax deferral.
Generally, earnings inside an annuity are not taxed until they are withdrawn. This allows money to potentially grow without annual taxation on the credited earnings while it remains inside the contract.
Tax deferral is not the same as tax-free growth. When taxable amounts are eventually withdrawn, they are generally subject to ordinary income taxes.
The tax treatment can also differ depending on whether the annuity was purchased with qualified retirement funds, such as IRA money, or nonqualified funds.
A tax professional should be consulted regarding your individual situation.
4. Creating More Predictability in Retirement
Markets can rise and fall. Interest rates change. Economic conditions change.
But your monthly expenses do not disappear simply because the market has a difficult year.
For some retirees, an annuity can help create a more predictable portion of their retirement income strategy.
For example, someone might use Social Security, a pension, and annuity income to help cover essential monthly expenses while maintaining other assets for additional needs.
An annuity does not necessarily need to represent your entire retirement portfolio. It may simply serve a particular purpose within a broader retirement strategy.
5. You May Already Have Money That Could Be Reviewed
You do not necessarily need to start from scratch.
You may already have money sitting in:
An old 401(k)
403(b) or other employer retirement plan
Traditional IRA
Roth IRA
CD
Savings account
Money market account
Existing annuity
Other retirement assets
Depending on the type of account, your age, tax considerations, and financial objectives, there may be options for repositioning eligible assets.
However, moving retirement money should never be done simply because another product sounds attractive.
Before transferring or rolling over funds, you should understand what you currently own, including guarantees, fees, surrender charges, investment options, tax consequences, and other benefits you could lose by moving the money.
6. Annuities Can Offer Beneficiary and Legacy Features
Retirement planning is not always just about your lifetime.
Many people also ask:
“What happens to the money if I die?”
Depending on the annuity contract and options selected, remaining contract value or a death benefit may be payable to designated beneficiaries.
The specific provisions vary considerably by product, which is another reason to review the contract rather than assuming all annuities provide the same benefits.
Are Annuities Right for Everyone?
No.
An annuity can be a valuable retirement tool, but that does not mean everyone should purchase one.
Annuities may include:
Surrender periods
Withdrawal limitations
Fees or rider charges
Tax consequences for withdrawals
Penalties for certain early distributions
Limits on interest-crediting potential
Different liquidity provisions
Your age, available assets, emergency savings, income needs, liquidity needs, retirement timeline, and overall financial situation should all be considered.
If you need immediate access to all of your money, for example, placing those funds into a long-term annuity with surrender charges may not be appropriate.
The goal should never be to purchase an annuity simply because you have money available. The goal is to determine whether an annuity solves a specific retirement need.
Before You Purchase an Annuity, Ask These Questions
Before making a decision, make sure you understand:
What type of annuity am I considering?
How will my money earn or be credited interest?
Is my principal protected from market losses?
How long is the surrender-charge period?
How much can I withdraw each year?
Are there additional rider fees or charges?
When can I begin receiving income?
Is the income guaranteed for life?
What happens to the remaining money when I die?
What am I giving up if I move money from my current account?
If those questions cannot be clearly answered, you may not have enough information to make a decision.
Your Retirement Money Should Have a Purpose
Having $50,000, $100,000, $250,000, or more accumulated for retirement is an accomplishment.
But simply having money is only part of retirement planning.
You should also understand:
What is this money supposed to do for me?
Is it for emergencies?
Is it intended to grow?
Will you need it to produce monthly income?
Do you want protection from market downturns?
Are you trying to leave money to your children or grandchildren?
Once you determine the purpose of the money, it becomes easier to evaluate which retirement strategies may be appropriate.
Education Before a Decision
At The Williams Agency, our approach begins with education.
Before discussing whether an annuity may be appropriate, we want to understand what you already have, what you are trying to accomplish, and what concerns you have about retirement.
If you have money sitting in an IRA, old 401(k), CD, savings account, existing annuity, or another retirement account, consider scheduling a Retirement & Annuity Review.
Bring your most recent statements. We can review your current situation, discuss how different types of annuities work, and help you understand the questions you should be asking before making a decision.
Ready to Review Your Retirement Strategy?
Schedule your Retirement & Annuity Consultation today.
Come prepared with your current retirement account statements and questions. The purpose of the appointment is simple: educate first, understand your options, and then determine whether an annuity belongs in your retirement strategy.
Important Disclosure
This information is provided for educational purposes only and is not intended as investment, legal, or tax advice. Annuities are insurance products and may include surrender charges, withdrawal limitations, fees, exclusions, and other restrictions. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Product availability, features, rates, and benefits vary by carrier and contract. Consult appropriate financial, legal, or tax professionals regarding your individual circumstances.
