Does a Retirement Annuity Make Sense for Your Golden Years?

In times of wild market swings and low-interest rates from Treasurys, CDs, and other fixed-interest assets, annuities can bring a sense of calm and predictability to a portfolio. Many people refer to annuities as “retirement annuities,” because they are particularly well-designed for retirement goals.

Annuities are the only instrument capable of paying you a guaranteed income stream for as long as you live. No other instrument on the planet offers this.

You can think of this in terms of a monthly paycheck or money for life. You will receive a check in the mail from the life insurance company that you can count on, again and again, for the rest of your lifetime.

That is no matter how equity markets perform. Annuity income can therefore be seen as a kind of “private pension.”

Speaking in an analogy, you already have your own annuity with Social Security payments. You paid into Social Security’s coffers during your career. Then, when retired, you receive a monthly income that pays you like clockwork.

Annuities work in much the same way. They can be a great supplement to the assured income you will receive from your Social Security payouts.

Depending upon your overall goals, annuities can also help you reach your objectives with other contract features as well. Here’s a look at why retirement annuities can bring predictability to your lifestyle and stability to your portfolio.

1. Retirement annuities and their payouts are based on well-managed pooled risks.

Annuities are backed by high capital reserve requirements. There are also extensive safeguards at a state level to keep your money intact.

Annuity carriers are required by law to have at least one dollar in their cash reserves for every dollar of outstanding annuity premium. What if a carrier does become insolvent? Then state reinsurance funds will step in and reimburse all contract and policy owners up to a certain amount, such as $300,000.

2. Retirement annuities help you determine how much money you need.

They bring clarity to the question of “how money money do you need to retire.” Retirement annuities can also help shore up income gaps when markets perform badly just before you retire or when life savings fall short.

If you have a fixed index annuity, then you can also earn interest based on an underlying financial benchmark. Your money earns interest based on a portion of the growth of that benchmark, such as the S&P 500 price index.

You can annuitize any type of annuity in order to receive a guaranteed lifetime payout. Or you can simply opt to take a systematic withdrawal so that you can retain control of the principal in the contract.

3. Retirement annuities help manage the risks associated with aging.

A retirement annuity helps us manage the effects of changing health over time. They can also reduce the risks of someone’s lessening ability to manage financial decisions as they age. This can especially helpful for couples planning for financial security for a surviving spouse.

If you elect to receive a guaranteed lifetime stream of payments, then many annuities will double or even triple your payment if you become disabled or need long-term care.

The increased payout will last until you deplete the value of your contract. Then it will revert back to your “regular” payment and last for as long as you live. This type of annuity can be a good alternative for clients who want long-term care insurance but can’t be underwritten due to health conditions.

4. Retirement annuities make it easier to plan your lifestyle.

With an annuity, you can be secure in the knowledge of how much baseline income you will receive each month.

As mentioned previously, annuity income can be regarded as a sort of private pension. This does enable us to be able to count on annuity payments as a definite, reliable source of income.

About the only way that you couldn’t receive payments under this arrangement would be if the insurance carrier were to become insolvent. As history shows, this hasn’t happened all that often.

Even then, state reinsurance funds would step in and reimburse contract holders up to a certain sum of money such as $300,000. Once the money has been handed back to the contract owner, they could then simply purchase another annuity from a company with more financial stability.

5. Retirement annuities bring stability to a retirement portfolio.

They use the power of actuarial science and well-managed risk pools to ebb out the volatility of other assets in a personal retirement portfolio.

The guaranteed payments from annuities allow people to take greater risks elsewhere for more financial growth. For example, if a retiree with $500,000 buys a $100,000 immediate annuity, then they can probably take greater risks with the bond portion of their portfolio.

They will be better able to weather the ups and downs in the bond markets. Alternatively, they could also take more risk with stock portions of their portfolios.

The definite income from the annuity gives them more options in either case.

6. Retirement annuities bring peace of mind in black swan events.

Think of unpredictable events like the novel coronavirus pandemic. Life insurance companies have an excellent track record of company longevity and strength even in times like these.

When the markets get wild, annuities can become a stalwart source of stability that remains unchanged by changes in interest rates or market performance.

The insurance company can weather these changes. How? 

Because of the broad pool of investors that it can draw from and the wide range of low-risk investments in its portfolio. Individual investors can’t duplicate this sort of stability, regardless of how they invest their money.

Is a Retirement Annuity Right for You?

Retirement annuities can do many things for retirees during their golden years. They can provide guaranteed growth and income, protect their money, and also give tax-advantaged growth for non-qualified money inside them.

Consult your financial advisor for more information on annuities and how they can benefit you during your golden years. If you are looking for a financial professional to help you work through your retirement “what ifs,” many financial professionals are available at SafeMoney.com to assist you.

Use our “Find a Financial Professional” section to connect with someone directly. Should you need a personal referral, call us at 877.476.9723. You can request an initial appointment to discuss how you can further reach your financial goals.