It can be tough to predict how long your retirement savings will need to last. Will you live to age 75? Or even past 100? Annuities can provide a guaranteed income stream in retirement that lasts the rest of your life and helps eliminate some financial stress about outliving your savings. When you know there's a reliable income to help supplement Social Security, a pension and other retirement money, it opens up possibilities—so you can focus on living the retirement you want with confidence.
As with any product, there are pros and cons of annuities. Understanding them can help you decide whether an annuity is a good retirement solution for you.
How annuities work: A quick review
There are two phases to an annuity: accumulation and payout.
Accumulation phase: Building your assets
When you purchase an annuity, you provide either a one-time or regular premium contributions. You can elect a date in the future when you'll start taking payouts. This period before you start taking payouts is referred to as the accumulation phase.
If you withdraw money from your annuity during the accumulation phase, there is typically a surrender charge period. This means your withdrawals may be subject to a surrender charge. This is because money is meant to stay and grow until you use it in retirement.
You'll have different options for how your money can potentially grow during the accumulation phase depending on the
Payout phase: Taking retirement income payments
When you are ready to begin the payout phase, you may elect how you will take money out of the annuity. You may take ad hoc withdrawals, systematic withdrawals, or a settlement option (also known as annuitization). Depending on the settlement option you elect, payments will continue for a set period or for the rest of your life. A
What are the types of annuities available?
Annuities come in a variety of types, each with varying options. As you weigh options, also think about when you want to start getting payments and what investment options you prefer. Here's an overview of two of the most common types of annuities:
Fixed annuities: The type with a guaranteed interest rate
There are multiple
Traditional fixed-rate annuitiesearn interest at a guaranteed minimum interest rate, or a current rate if higher. With a fixed interest rate, you know in advance how much your annuity will grow. Multi-year guarantee annuitiesyou lock in a rate for a set period of time, for example, three, five, seven, or nine years, somewhat similar to CDs. At the end of the period, you typically have these options: You can withdraw your funds, renew your annuity at then-current rates, choose an annuity payment option, or leave the money with the insurer, where it will earn interest at a renewable one-year rate set by the company. Fixed indexed annuitiespay rates based on the performance of a market index, such as the S&P 500, without actually putting your principal at risk in the market itself. If the index has positive returns, you may earn more interest (up to a cap, such as 7%) than you would with a traditional fixed-rate annuity.
Variable annuities: The type dependent on market performance
You may choose to add a
The earnings from variable annuities are tax-deferred until you take payments. You can choose to receive payments immediately or later, and you may have options for death benefits if you pass before payouts start.
Guaranteed retirement income: Ways to make your savings last
What are the pros of annuities?
Like many other retirement income options, there are pros and cons of annuities. However, annuities have many upsides that may benefit your long-term financial plan. Here are some key ones to consider:
The option for lifetime guaranteed income
Perhaps the biggest advantage—and the key characteristic—of an annuity is its guaranteed payments throughout retirement. Outliving your money is a real concern for retirees. Thrivent's Retirement Readiness Survey found that 39% of retirees are worried their savings won't last through their lifetime. With any annuity, you can opt for lifetime income, which means you'll have money coming to you regularly no matter how long you live. Annuities can be a good option to help bridge the gap between Social Security and other retirement funds.
The potential for tax-deferred growth
Any earnings from your annuity
They offer a death benefit with guarantees
If you die before you receive your lifetime income (or any payout option), annuities generally provide a death benefit that guarantees your beneficiaries never will receive less than the amount contributed to the contract, less any withdrawals or fees.
What are the cons of annuities?
Before deciding on any financial product, it's important to consider the potential drawbacks. Here's what to know about the disadvantages of annuities:
There are costs & potential penalties
Before purchasing an annuity, get a rundown of the potential fees you may need to pay during the life of the contract. Most annuities charge fees for annual maintenance and operations. If you take out funds early, you also may have to pay surrender charges and tax penalties.
They may not keep pace with inflation
Is an annuity good investment?
For some investors, an annuity can be a good fit. It all depends on your long-term retirement goals, financial situation and investment strategy. An annuity also can provide another option for tax-deferred investment growth if you've maxed out your other retirement contributions.
One thing to consider, though, is the potential tax implications. Work with your tax professional to determine how to maximize your tax strategy with annuities, especially if withdrawals in retirement could bump you into a higher income tax bracket.
Get advice from a trusted professional
Before making any investment decisions, it's a good idea to discuss your situation, concerns and goals with a professional, who can help you determine if an annuity is the right fit for you. To learn more about annuities, connect with a local