Should You Consider Annuities?

A retirement plan can benefit from annuities. As a result, they provide guaranteed retirement income, similar to what workers receive with a traditional pension plan. There are fewer defined benefit plans than ever, so every worker must create a retirement plan. With an annuity, even if your 401(k) or other workplace retirement plan runs out, you’ll still have income for the rest of your life. The current market volatility and rising interest rates make now a perfect time to buy an annuity. According to the first quarter’s annuity market growth, Americans are taking advantage of the opportunity.

Financial institutions sell annuities for specific amounts in exchange for a lump sum or periodic payments. You can receive payments immediately or wait until a later date, depending on the type of annuity you buy. Annuities generally fall into two categories: fixed and variable.

Fixed annuities

Periodic payments are available with these annuities. Payments are calculated by the insurance company based on the account owner’s age, how long the payments will last, and how much money is in the account. The account owner can set up payments for several years or their lifetime.

Variable annuities

There are many benefits to variable annuities, one of which is tax-deferral. With a variable annuity, you won’t owe federal income taxes until you withdraw the money or receive income payments to yourself or someone else. You can also move your money between investment options without paying taxes.

Are Annuities a Good Investment Right Now?

Due to insurance companies’ investments in fixed income securities like bonds, annuity rates tend to rise when interest rates rise. A decrease in interest rates, however, will also lead to a reduction in annuity sales and a decrease in annuitized payments. 

In 2024, the Federal Reserve raised interest rates for a second consecutive time by 0.75 basis points (three-quarters of a percentage point), the fourth rate hike of the year and the highest level since December 2018.

 Aside from offering long-term growth and income, annuities are generally considered safe investments. Most contract holders view them as insurance against the risk of outliving their retirement savings. With rates rising, workers near retirement and early retirees may be able to boost their income through higher payments. This trend will likely continue until the Federal Reserve stops raising interest rates to fight inflation. Annuities grow tax-deferred, so you won’t have to pay taxes until you withdraw money or receive payments. You would be taxed on your withdrawals and payments if you bought the annuity with pre-tax funds.

Investments in annuities can provide investors with income and growth over the long term. However, investors will also have to pay taxes on withdrawals and payments. As interest rates rise, annuities offer higher payouts, making them more attractive. When rates go down, your amounts will also be smaller. Discuss all the benefits and risks with a qualified financial expert when buying an annuity.