How Annuities Can Help Fund Retirement

Published on Mon, 09/23/2019 - 20:25
teaching child to count coins - stacking coins in hand

How much will you need for retirement? It’s a difficult question to answer, but one thing is clear – many Americans are worried that they don’t have enough. According to Retirement Insecurity 2019, a report from the National Institute on Retirement Security, 58 percent of Americans are concerned that they won’t achieve financial security in retirement, while 79 percent admit they don’t know enough about investing to ensure that their savings last through retirement.

For people looking for a more secure retirement, annuities could help. Before deciding whether annuities are right for you, it’s important to understand how they work and how they differ from other financial tools.

Annuities and Longevity

There are many reasons that make it difficult to calculate how much money you’ll need in retirement, but one variable stands out: your lifespan. No one knows how long they will live. While most people hope that they will enjoy a very long life, longevity comes with a financial drawback. The longer you live after retirement, the more money you need. If you’re lucky enough to enjoy a very long life, your retirement savings may run out.

Annuities provide a solution. Because lifetime annuities will continue paying out for as long as a person lives, the insured never has to worry about running out of money.  This guaranteed income is good news for the millions of Americans worried about achieving a financially secure retirement.

How Do Annuities Work?

An annuity is a financial arrangement that pays a sum of money each year. Although the annuity payments may be limited to a set number of years, other annuity arrangements can last for the rest of a person’s life.

Insurance companies sell annuities to people who want to secure a reliable income in the future. As the insured, you purchase an annuity now, either with a single purchase or a series of investments. During retirement, you collect your annuity payments.

There are multiple types of annuities. Fixed annuities offer a fixed annual payment. Indexed annuities offer an annual payment that is tied to a stock market index. Variable annuities offer a payment that is tied to your investments. Some annuities begin paying out immediately, while others won’t start paying out until a later time.

Annuities differ from other financial tools in important ways:

  • They can provide a guaranteed income stream.
  • They offer tax advantages. You will not pay taxes on interest earned until you take money out of your annuity.  
  • They have no annual contribution limit. You can contribute as much as you want.

Are There Any Drawbacks?

All financial tools and investment opportunities come with drawbacks.

According to the U.S. Securities Exchange and Commission, state insurance commissioners regulate fixed annuities and indexed annuities, while the SEC regulates variable annuities. However, you should make sure the company you purchase the annuity from is trustworthy and reliable.

Also make sure you understand how your annuity works, including any fees and penalties. While it may be possible to surrender an annuity early for its cash value, doing so may incur significant fees and penalties.

Want to learn more about your annuity options? Contact the life insurance team at Heffernan Insurance Brokers.