Retirement Planning: Are Annuities a Good Investment?
Written by
Taylor Milam-Samuel
Edited by
Nicholas Morine
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Annuities are generally defined an insurance contract that exists between an individual and a financial company. That being said, a public sector vehicle such as Social Security can also be defined as an annuity.
The contract outlines the terms of the policy, which usually begins with tax-deferred payments to the account that can be made periodically or as a lump-sum. Immediate annuities also exist, though somewhat less common, and occurs when you “use the annuity to create a source of retirement income and your payments start right away,” according to FINRA.
Eventually, a deferred annuity will provide a monthly, guaranteed payout for the remainder of the insured’s life. There are three types of annuities — fixed, variable, and indexed. Thanks to poor interest rates for bonds and a volatile stock market, annuity sales hit a 15-year high in 2022, per The New York Times.
Additional stability in retirement
Annuities can provide fixed income in retirement. Since most retirement accounts are invested in the stock market, fixed income can help stabilize income during retirement. The annuities contract outlines exactly how much you will receive each month.
Read the fine print
Annuities have gotten a bad reputation over the past few decades due to aggressive sales tactics and a high-commission structure that might encourage agents to sell one product over another (regardless of which would actually be the best fit). This doesn’t change the fact that the product itself can be a useful part of retirement planning, but it does mean it’s a good idea to read the contract’s fine print. Consumers should understand how the agent benefits from the sale, options for ending the contract, and what will happen to the money after they pass away.
Understand the guarantees
Bonds and certificates of deposit (CDs) are other popular picks for income stability in retirement. CD’s are backed by the Federal Deposit Insurance Corporation (FDIC), which means that you will be paid back if the bank goes under. Privately issued annuities are often only backed by the insurer, so there is no guarantee that you will get repaid if bankruptcy or insolvency occurs.
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