Should You Buy an Annuity? What to Know Before Investing

Should you buy an annuity as part of your retirement planning? That’s a great question. Buying an annuity — or more than one — is part of many people’s retirement portfolio. In brief, annuities (sometimes called deferred annuities) are tax-deferred insurance products that offer income payments in retirement. You invest either a single lump sum or a series of multiple amounts with an insurance company. In exchange, you will earn interest on that money during the accumulation phase and will receive payments to either you or your beneficiary during the distribution phase.

The answer to “Do I need an annuity?” depends on your unique retirement plan, what you need and what you’re looking for. In most instances, buying an annuity can help  diversify your retirement portfolio and offer benefits that other savings vehicles do not. Preparing for retirement today may look different than it did five years ago, and in times of change, it can be comforting to have the strong foundation that annuities can help provide. 

Here are five additional topics to think about when you consider annuities. 

1. Does Buying an Annuity Make Sense for Your Retirement?

Annuities are growing in popularity in part because they can provide a consistent stream of income, which helps address many retirees’ fears of outliving their savings.

Annuities pay out in a variety of ways. The most common way is over a specified length of time (typically between 5 and 20 years). But some annuities pay out for the purchaser’s entire life with no survivor benefits; others pay out for the life of the purchaser and another person (such as a spouse). In any payout scenario, annuities can offer guaranteed income. This can serve as a foundation to riskier investments, which may be aimed at helping to offset one of the most worrisome threats to retirement — inflation. 

If you’re also relying on Social Security, an annuity can serve as an additional stream of income.

2. Buying an Annuity: Maximize Savings with Unlimited Contributions

Some retirement savings vehicles have annual contribution limits, but buying an annuity does not. That means you can invest money into multiple annuities set to pay out at different times or in different ways. If you plan well, this  may help you maintain your standard of living and address unexpected expenses that pop up during retirement. However, keep in mind that some annuities include surrender fees if you decide to withdraw funds early. 

3. Choosing When to Receive Payments

A deferred annuity can give you flexibility regarding withdrawal, helping you plan for when you’ll need the money. You can design a distribution plan that works right for you – giving you the funds you’re looking for. The Required Minimum Distributions  apply to qualified annuities, but you can set up your annuity to pay out on your timeline, within IRS tax guidelines.

4. Fixed Annuity Rates and Tax-Deferred Growth

Taxes are always complicated, and the way annuities are taxed is no different. In general, though, earnings from annuities purchased with after-tax dollars are tax-deferred until the earnings are withdrawn. That means that more money is available to be invested during the accumulation phase, increasing your opportunities for return. Fixed annuities can offer steady growth with limited downside risk, making them an appealing option for those seeking stability in retirement financial planning.

5. Indexed Annuities vs. Fixed Annuities: Choosing the Right Option

Each of these annuity types provide a different type of flexibility so you can choose based on your financial situation and your retirement portfolio. 

• Indexed Annuities: can use an interest rate based on the performance of a particular market index. This type of annuity can allow for upside market potential without fear of losing principal. Indexed fixed annuities can provide steady retirement income payments that can help with risks like inflation by responding to changes in the market.
• Fixed Annuities: can offer a guaranteed rate of return when compared to other retirement savings options, such as stock market investments, providing protection against market volatility. With a fixed annuity, you can receive stable and regular payments — a great baseline for your future.

Both options play a different role in retirement income and ensuring long-term financial stability. Consulting with a financial advisor can help you determine which annuity fits your overall retirement plan.

Who Should Buy Annuities?

 Annuities may be particularly helpful for people who are saving for retirement later in life, are close to retirement, have maxed out other retirement savings vehicles or have a lower tolerance for risk. However, they can be an important part of any retirement plan. If you’re wondering if an annuity is right for you, connect with a Farm Bureau agent or financial advisor to discuss how it might benefit your retirement savings plan.