Because annuities provide guaranteed, safe retirement income they can be a good option to include in retirement strategies. Investors are drawn to this financial product because it is regarded as a safe investment, which is particularly appealing for those approaching retirement. In this article, 8 industry experts provide insight into how much annuities should factor in retirement planning.

Consider Dividing Your Retirement Expenses Into Two Categories

“For every investment available, it is the right investment for someone and the wrong investment for someone else. There are many areas where an annuity can be an appropriate investment. Here is one example of where and how much of an annuity can be a good fit in retirement.

Consider dividing your retirement expenses into two categories. The first category is all of your critical expenses such as food, clothes, rent/mortgage, taxes, insurance, heat, and any other necessities. The second category is expenses that make life more enjoyable but you have more control over the amount you spend such as, gifts, vacations, recreation, eating out, entertainment, etc.

Your critical expenses must be paid regardless of what interest rates are or how the market performs. It can give you great peace of mind and be a great strategy to have your critical expenses covered by fixed income you can count on. Here’s an example:

Let’s say your critical expenses total $2,750 per month. Now let’s say your pension provides $900 per month and social security provides $850 per month. That leaves a balance of $1,000 per month of critical expenses that must be paid each month. An annuity can be a great solution to provide a guaranteed income to cover that $1,000 you need each month to give you peace of mind in retirement.”

This is one example of how an annuity can be a great fit in retirement. There are many others as well.

Nancy D. Butler, CFP(r), CDFA(r), CLTC(r), Owner, National professional speaker, Award-winning author, Business Coach

Depending On The Person And Their Risk Tolerance In A Retirement Strategy

“Annuities can account for none, a small portion, or more depending on the particular person as well as their risk tolerance in a retirement strategy. For instance, if you’re a conservative investor and only use banking products – such as CDs, money markets, and savings accounts – annuities can be a great alternative as there’s more potential for a higher interest rate. However, if you’re a riskier investor and are heavily invested in the stock market, annuities may not be a fit at all. It all depends on your risk tolerance and if you have any needs.

Other reasons to use annuities include a need for income, guarantees, or a long-term care insurance alternative. Annuities have evolved in the last decade alone and can fit the need for other objectives besides interest rates.”

Carlos Dias Jr., Financial Advisor, Dias Wealth

Annuities Can Be Tremendous Tools If They Are Used For The Right Objective In Retirement

“Annuities have been around since the days of Egyptian Pharaohs. But the word ANNUITY is very misleading. There are hundreds of companies selling hundreds of different contracts.

The majority of annuities that “brokers” are selling have no business being in a retiree’s portfolio. These are variable in performance and do not protect retirees from stock market declines. They also have fees that are anywhere from 2-5%. But annuities can be tremendous tools if they are used for the right objective in retirement.

Originally fixed immediate annuities were used to provide a pension-like income, and can still be suitable for certain circumstances.

For the past decade or so, Fixed Index Annuities “FIA’s” have been widely used across the retirement spectrum.

For those who are in or approaching retirement, fixed index annuities can:

  • Provide 100% principal protection regardless of market declines
  • Provide a lifetime income stream
  • Offer 2-3x the amount of interest that banks, money markets, and CD’s offer
  • Be highly liquid- allowing up to 100% access for emergencies
  • Bypass probate and whatever wasn’t spent goes directly to their heirs- insurance companies don’t keep anything
  • Have a fee of less than 1%

Keep in mind there is no such thing as a perfect investment.

Ultimately, all financial products are just tools- used incorrectly they are inefficient. It’s highly recommended that you use a fiduciary advisor who is licensed to advise both on annuities, as well as securities when determining whether annuities are a fit for your situation. This will help to empower you to make good financial decisions and uncover all of the critical facts.”

Cody A. Crawford, National Social Security Advisor, Investment Advisor Representative, SPG Advisors

Annuities Can Be Extremely Appealing For The Right Individual, But May Not Be Appropriate For Others

“Annuities factor into a retirement plan to whatever extent is appropriate based on one’s objectives and risk tolerance. Below are the primary benefits of annuities.

Safety. Annuities can provide protections that can be found in few, and sometimes no, other products. Fixed annuities are typically among the highest-earning fixed instruments available. Fixed index annuities (FIA, or equity index annuities) provide market-based earning potential with no risk to one’s principal. Even variable (investment-based) annuities can offer minimum rates of return or lock-in gains. Finally, most states’ insurance guaranty funds offer far greater protection than the FDIC provides for bank deposits.

Higher yield. As previously stated, fixed annuities typically offer higher interest rates than bank deposits or money markets. This is then further enhanced by growing the funds tax-deferred.

Tax deferral. Annuities offer tax deferral, resulting in higher effective rates of return. It is a common criticism that IRAs should not be funded by annuities because the tax deferral feature is redundant. In actuality, this is not a valid argument against funding an IRA with an annuity; it simply makes the tax deferral a non-issue in the decision. If there are other features that make an annuity an appealing option, there’s nothing inappropriate about placing IRA funds into it. Of course, when one’s qualified plan options are exhausted, annuities offer another great option for tax deferral.

Guaranteed income for life or beyond. This refers to the textbook definition of an annuity; a contractual arrangement where the account owner is provided an income stream based on his life expectancy and the account’s future value. An annuity offers the option of providing one’s self a pension that one cannot outlive, and even extending that guaranty beyond one’s life expectancy to provide for survivors.

Again, these features make annuities extremely appealing for the right individual, but may not be appropriate for others. It is critical to obtain a proper analysis by a financial planner or comprehensive advisor thoroughly familiar with annuities.”

Rob Drury, Executive Director, Association of Christian Financial Advisors

They Are Highly Commissioned Products With A Lot Of Fine Print Built Into The Contracts

“To be honest, very rarely do annuities make sense for investors. I mean why do you think you need an annuity? Who is recommending it? Does the person recommending the annuity get paid a commission if you agree to an annuity? Ask a lot of questions just as if you were a little curious kid. A variable annuity could be an option if your tax-deferred accounts hit the contribution limits, you just insist on having an annuity mixed in for a portion of your overall allocation, and you are completely debt-free. I would still recommend a handful of other accounts to invest in before an annuity. You definitely do not want to ever put a retirement account into an annuity. The guaranteed income might seem great to have in theory but, you are missing out on potentially having significantly higher returns over time – and you do not have to pay for all the fees that come along with annuities. You would always want to consult with a professional (not people that sell annuities) so that you can ensure you are going into this decision with your eyes wide open. They are highly commissioned products with a lot of fine print built into the contracts. You must FULLY understand any investments or stay far away from it.”

Gerald Hendrik, Director of New Business and Client Relations, ICMC (International Capital Management Corp) 

Annuities Are One Of The Most Misunderstood Retirement Planning Tools

“Annuities are one of the most misunderstood retirement planning tools. If you look at an annuity as an investment, they are not very attractive. Often insurance fees will drag down your rate of return compared to investing directly into the stock market.

However, annuities provide something more valuable than investment return, the certainty of a guarantee.

The guaranteed income that annuities provide transfers of multiple retirement risks to the balance sheet of an insurance company (longevity risk and sequence-of-returns risk).

The most significant risk for a retiree is retiring into a prolonged down market. If you lock in losses early in retirement because you need income, your portfolio might not have enough principal left to recover when the markets rebound.

If you combine an unlucky order of investment returns with longevity, there is a good chance you will outlive your retirement savings. This uncertainty can lead to stress.

By incorporating income annuities into a client’s asset allocation, clients can spend early in retirement without fear of losing the income stream later in life.”

Joseph Cirillo, Digital Life Insurance Agent, co-founder, Good Life Protection

Each Type Of Annuities Serves A Unique Purpose

“There are many different types of annuities, and each type serves a unique purpose. Income Annuities are simple and easier to understand than most types of annuities. These can significantly improve your retirement as part of your distribution plan.

With an income annuity, you exchange a lump sum of savings for a payment stream that is guaranteed by the issuing insurance company. Generally, an income annuity will guaranty the payments to you for your entire life.

Why is that so significant? Distributions from savings are subject to the risk of depletion. Part of a withdrawal strategy in retirement is thinking about how you want to balance that risk with the level of income you need to replace. If you withdraw too much or your investments take a big hit, you may run it if money. There are ways to mitigate that risk and an income annuity is one way to do that.

For any amount of income that you “purchase” with an income annuity, you transfer that risk to the insurance company. Securing some of your income needs in retirement with an income annuity is one way to diversify your income risk and can help ensure that you can sustain sufficient income throughout retirement.”

Brandon Renfro, Ph.D, Financial planner and Assistant Professor of Finance

Annuities Help Owners Invest In A Diversified Portfolio

“Variable annuities can offer some great advantages when you’re building a retirement portfolio. Oftentimes people find that they can grow their savings faster since taxes are deferred on non-qualified money. This means you will not pay taxes on earnings until you decide to withdraw funds or use the funds for retirement income.

Annuities also help owners invest in a diversified portfolio, so you can grow your assets while keeping up with inflation. It won’t ensure a profit or guarantee against loss, but it helps protect your assets from extreme market swings. There are two other great selling points that make annuities attractive to people evaluating their retirement plans. Some annuities can provide a guaranteed lifetime income, no matter how long you live. Outliving your income stream is a real concern for a lot of people, and an annuity is one-way people can address that worry. The ability to maintain your current lifestyle, no matter how long you live, is the peace of mind few other financial products can provide you with. Another great advantage people see in variable annuities is that they’re able to protect loved ones with a guaranteed death benefit. The ability to leave a financial legacy is something people dream of, but can be made a reality with an annuity.”

Tim Buderus, President, Woodmen Financial Services Inc.

Annuities can provide a foundation for some investors, and have the potential to be a good component in diversification strategies. Factor in what the financial experts in this article have discussed, and always do your due diligence when investing.

Sarah Bauder

Sarah Bauder is a financial writer with over a decade of experience at numerous online publications, writing about alternative investments, retirement, US politics, world economy and more.
Sarah Bauder