There are many financial products you can choose to invest in as a part of your retirement portfolio. One of the most complex is an annuity, which is a product that requires a premium payment up front in exchange for a guaranteed retirement income later in life. Generally speaking, annuities are safe and can be a good addition to your retirement plan, but you do have to be careful and make sure you’re buying the right products from financial institutions you trust. Let’s break down the risks and benefits.
For help adding annuities to your portfolio, a financial advisor can walk you through different options for your retirement needs and goals.
Annuities Defined
An annuity is a contract you sign with an insurance company where you pay a predefined premium up front in exchange for payments down the line, likely when you are in retirement. Annuities are popular with retirement investors because they provide guaranteed income during retirement, essentially replacing the pension payments that many workers got in earlier eras.
There are many types of annuities, but generally they fit into two broad categories:
Fixed annuities are the most popular type. This annuity guarantees that you get back all of the principal you put in, plus a small amount of interest. These are not very risky, but you don’t have the chance to see your money grow the way you might with a different investment.
Variable annuitieshave no guaranteed interest. Your principal is generally guaranteed, but the interest depends on the performance of the investments your money is put in. Variable annuities have higher potential for return but also come with significant risk.
Are Annuities Safe?
As long as you are buying from a reputable insurance agency, you can feel safe in purchasing an annuity. That said, it is important to note that annuities are not bank deposits and therefore are not insured by the FDIC. This means that in the result of a systemic collapse, annuities would not be covered by that safety-net. There are state guaranty funds for insurance company collapses in some states, but it varies.
Variable annuities are less safe than fixed annuities, as the payout from a variable annuity is much more dependent on the market. That said, you are still guaranteed to get your principal back, so you won’t technically lose any money. Though, your money will be worth less when you get it back in your retirement, due to inflation, so you are at risk of losing value.
When purchasing an annuity, the key to feeling safe in your investment is to pick a quality insurance company. Check the firm’s credit ratings — there are four credit ratings agencies in the United States to look at: AM Best, Fitch, Moody’s and Standard & Poor’s. If a firm has a high rating from all of these, you can probably trust it. If it doesn’t, you might consider looking elsewhere.
Beyond that, consider how much you are able to pay in premiums and what type of payments you want to get in retirement. For a truly safe investment, look for a fixed annuity. If you’re willing to take a bit more risk, consider a variable option. Either way, getting the help of a financial advisor is a good idea.
One note when it comes to getting a financial advisor’s advice on annuities — some advisors, commonly called fee-based advisors, can earn commissions for selling insurance products, including annuities. This gives them a financial incentive to sell you the annuity that will bag them the biggest commission, even if it isn’t the best choice for you. For unbiased advice, find a fee-only advisor who does not earn commissions.
Bottom Line
Annuities are safe investments, provided you work with a reputable insurance company. As long as you’re confident in the financial soundness of the insurance company selling you the investment, you are guaranteed to get at least your principal back, depending on the type of annuity you purchase.
For more help with annuities, consider working with a professional financial advisor. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Outside of annuities, you should make sure to use a workplace retirement plan like a 401(k) if you have access. Make sure you’re getting your full employer match if any is available!
SmartAsset: Are Annuities Safe to Invest In? As long as you are buying from a reputable insurance agency, you can feel safe in purchasing an annuity. That said, it is important to note that annuities are not bank deposits and therefore are not insured by the FDIC.
They don't want their army of advisors pushing Immediate Annuities, Deferred Income Annuities, QLACs, and Qualified Longevity Annuity Contracts. Why? You can't charge a fee on those, and those are irrevocable lifetime income products, which means that money in the firm's eyes is gone.
Fixed annuities are the least risky annuity product out there. In fact, Fixed annuities are one of the safest investment vehicles in a retirement portfolio. When you sign your contract, you're given a guaranteed rate of return, which remains the same no matter what happens in the market.
Poor Performance of Variable Annuities: Poor performance on the underlying investments of your variable annuity can expose you to a loss. This happens if the annuity is not protected with a guaranteed minimum return option (more on that later).
Yes, some annuities are safe in a recession. Some annuities are even securities. Fixed annuities provide guaranteed rates of return, which means that you know exactly how much you can earn at the end of the term.
Annuities can lose value, especially variable annuities, where returns are tied to investment performance, so poor-performing investments can lead to a lower account value. Indexed annuities may return less than expected due to costs like caps and fees.
Key Takeaways. Annuities can provide a reliable income stream in retirement, but if you die too soon, you may not get your money's worth. Annuities often have high fees compared to mutual funds and other investments.
Variable annuities, as the name indicates, grow at a variable rate because they have some exposure to the markets. Because the markets have ups and downs, a variable annuity is the one instance where you could lose some of your money in an annuity if the market were to fall.
Annuities used to have a bad reputation, and rightly so. In the past, they had long surrender periods (periods when you can't withdraw all your money without a penalty), offered limited options like tax-deferral and standard death benefits, and were often not implemented properly.
Annuities offer numerous features that make them attractive options for high-net-worth individuals. This includes their safety, tax advantages, lack of contribution limits and ability to help diversify a portfolio.
As insurance products, fixed index annuities (FIAs) provide principal protection guaranteed by the issuing insurance company. Therefore, in the worst possible scenario, in a total economic collapse (and the insurance company happens to survive) your principal plus any interest earned would still be “the same” amount.
Annuities can be a bad choice for some people—they have higher fees and less flexibility than some savings options. And depending on the type you choose, your heirs may get nothing after you die even if far less was paid out than you had contributed. but for others they are a great option to help save for retirement.
So, if you have experience and success managing your funds on your own and can convert your assets into an income, there is no reason to buy an annuity. 2. Don't buy an annuity if you're sure you have enough money to meet your income needs during retirement (no matter how long you may live).
Annuities aren't the right retirement planning tool for everyone: Some have high fees, and alternative retirement savings options may offer greater flexibility or the potential for higher returns. But they can be appealing to people who want a lifetime income stream.
Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable annuities pose much more risk than fixed annuities because their performance is tied to market indexes, which recessions tend to pummel.
For instance, a variable annuity might charge fees between 2% to 3%, per Nationwide, which can shrink the value of your account and the return on your investment. Among the costs you might encounter with a variable annuity are: Mortality and expense risk charges.
And while annuities are often marketed as a way to ensure a steady stream of income throughout your retirement, they can be complex and returns can fluctuate for certain annuities. This is why financial gurus like Dave Ramsey and Suze Orman aren't fans of annuities.
This is okay if the compensation among all the bank's product offerings were the same, allowing for unbiased advice. This is not the case, however, as annuities provide the biggest payday to the bank and its sales force (6-7% average commission for the salesperson).
Annuities: Annuity commissions are generally built into the price of the contract. Commissions usually range anywhere from 1% to 10% of the entire contract amount, depending on the type of annuity. For example, fixed-indexed annuities generally earn advisors a 4% commission.
Introduction: My name is Barbera Armstrong, I am a lovely, delightful, cooperative, funny, enchanting, vivacious, tender person who loves writing and wants to share my knowledge and understanding with you.
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