Annuities: What You Need to Know

Your annuity should be tailor-made to meet your requirements and ambitions. Asking the appropriate questions is all it takes to choose the best option for your future.

While annuities are a terrific way to safeguard your assets in retirement, they are sometimes ignored due to their complexity and misunderstandings.

An annuity might be a terrific choice to secure your wealth in retirement, but it is often ignored due to its complexity and misunderstandings.

Annuities: What Are They?

An annuity can be either fixed, fixed-indexed or variable.

Fixed annuities are comparable to certificates of deposit (CDs), except that they are guaranteed by an insurance company rather than a bank. Short-term investments like this are ideal for risk-averse investors because they provide a fixed rate of return for a fixed period (often three or five years) and grow your money tax-free. You can withdraw your principal plus any accrued interest after the period. Several fixed annuities currently offer higher returns than certificates of deposit or Treasury bonds.

Investors with a low to moderate risk tolerance will find a fixed indexed annuity (FIA) a reliable long-term savings option. A fixed index annuity (FIA) is a low-cost retirement savings vehicle that provides the security of a designated account while allowing you to participate in market growth via a portfolio of index funds, such as the S&P 500.

Guaranteed growth and income for life can be added to an FIA for a charge (usually 1%), regardless of how the market performs. You can also select an FIA that offers no growth guarantees but potential index earnings instead (no fee). Both plans provide safety for your first investment.

Although their performance is often tied to mutual funds and index funds (for around a 2% charge), variable annuities offer the most significant potential for growth but also the tremendous potential for risk. Variable annuities, suitable for persons with a high-risk tolerance, are available in various forms. Some even promise assured growth and lifetime income if the buyer pays a premium (usually 1%). The cash value of policies of this sort typically does not provide a guarantee against the loss of principle.

Alternatively, you can protect yourself from loss for a charge with some variable annuities by setting a maximum that your account can lose.

Exactly Why Annuities Are So Crucial

The stock market has been on its longest bull run ever during the past decade. Yet, investors were reminded of the importance of portfolio preservation by the severe declines in 2000–2002, 2008, 2020, and 2024.

An annuity is an excellent way to diversify and protect your portfolio from market volatility. Most annuities preserve your initial investment, and some even offer a guaranteed rate of return, no matter how the market is doing. Additionally, an income rider may provide you with a lifetime or even multiple lifetimes of guaranteed income. An annuity is a terrific way to supplement your retirement income since it offers security that no other investment can match.

Customization is unlimited with annuities.

As such, you should ask yourself the following queries to help you choose the best annuity for your retirement:

  1. What are my retirement goals, and how can an annuity help me achieve them?
  2. What type of annuity is best for my situation – immediate or deferred, fixed or variable, indexed or hybrid?
  3. What are the fees associated with the annuity, including surrender charges, administrative fees, and mortality and expense charges?
  4. What is the financial strength and stability of the insurance company offering the annuity?
  5. What is the annuity’s guaranteed interest rate, and how does it compare to other grants or investment options?
  6. What are the annuity’s withdrawal restrictions and penalties?
  7. Does the annuity offer any additional features or benefits, such as a death benefit or a long-term care rider?
  8. How will taxes affect my annuity payments, and what are my options for minimizing tax liabilities?
  9. What is the annuity’s payout structure – will I receive a lump sum or periodic payments?
  10. How will the annuity supplement my existing retirement income, such as my Social Security and a pension, and how does it fit into my retirement plan?

Keep sight of why you’re looking for an annuity in the first place. Since the volatile market, buying an annuity can help safeguard and maintain your investments. Engaging with an external financial adviser with access to various annuity options and asking the right questions can help you make the best selection for your retirement, even though it may initially feel daunting.