Are Annuities a Good Investment for Retirees?

Annuities are a vehicle that can help seniors find financial stability in retirement. They come in many different forms and formats, and there are options available to those who are nearing or already in retirement. An annuity’s stream of payments can help ensure that you’ll never outlive your savings.

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    Christian Simmons

    Christian Simmons

    Financial Writer and Certified Educator in Personal Finance

    Christian Simmons is a financial writer who has worked professionally as a journalist since 2016. As an active member of the Association for Financial Counseling & Planning (AFCPE), Christian prides himself on his ability to break down complex financial topics in ways that Annuity.org readers can easily understand.

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    Lamia Chowdhury

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    Stephen Kates, CFP®

    Founder of Clocktower Financial Consulting

    Stephen Kates is a Certified Financial Planner™ and personal finance expert specializing in financial planning and education. Stephen has expertise in wealth management, personal finance, investing and retirement planning.

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  • Updated: August 7, 2023
  • 6 min read time
  • This page features 5 Cited Research Articles
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APA Simmons, C. (2023, August 7). Are Annuities a Good Investment for Retirees? Annuity.org. Retrieved June 15, 2024, from https://dev.annuity.org/annuities/buy/are-annuities-good-investments-for-retirees/

MLA Simmons, Christian. "Are Annuities a Good Investment for Retirees?" Annuity.org, 7 Aug 2023, https://dev.annuity.org/annuities/buy/are-annuities-good-investments-for-retirees/.

Chicago Simmons, Christian. "Are Annuities a Good Investment for Retirees?" Annuity.org. Last modified August 7, 2023. https://dev.annuity.org/annuities/buy/are-annuities-good-investments-for-retirees/.

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Key Takeaways

  • Running out of money in retirement is a major concern for seniors. Annuities can help to prevent that from happening by offering a guaranteed stream of payments that last through retirement.
  • Seniors who are already at or in retirement may still have options. Immediate annuities, which involve investing a lump sum of cash, can begin paying out right away. There are other annuity options with short accumulation periods.
  • There are annuity alternatives for seniors to consider that can help create income in retirement, such as investing in certificates of deposit and bonds.

Why Should Seniors Consider Annuities?

Annuities are one way for seniors to secure their finances as they move into their golden years.

According to a financial article from Yahoo, two-thirds of Americans are worried that they will run out of money during their retirement. An annuity can help prevent that from happening.

You typically pay into an annuity either over time or in a lump sum. The annuity grows interest, and you eventually receive a stream of payments.

That payment stream can be set up to last the rest of your life, guaranteeing a reliable income so you never reach a point where you run out of money.

Consider this realistic example: You are 60 years old and have cash savings on hand, so you choose to put a large chunk of that money into a deferred annuity. Depending on how you structure the contract, your principal could spend the next 10 years growing in value before you start receiving a stream of monthly payments when you turn 70 that will last your entire life.

This ensures that, no matter how long you live, you will continue to receive cash and not have to risk hitting a wall on your finances.

Annuities offer one of the most important commodities retirees need: guaranteed income. Many advisors recommend that retirees seek to cover their essential expenses using sources of guaranteed income so that they don’t have to worry about covering their most important living costs. Many retirees can do this largely through their Social Security, but annuities can offer supplemental guaranteed income for those that cannot.

What Should Retirees Look for in an Annuity?

When retirees are looking for the right annuity to buy, a typical goal is finding one that can help ensure they don’t risk running out of money in retirement.

Annuities come in many different forms and with many different purposes. Some are meant to grow over decades and build up tax-deferred growth. Others include a cash value component that can build over time.

For seniors and retirees, these options may make less sense since they don’t offer immediate help or a guaranteed stream of payments in the short term.

Other types of annuities do offer immediate payouts or can be structured to build value over a shorter period. These formats may be more suited to help those who have already entered retirement or are not attempting to grow an investment over multiple decades.

Read More: First-Time Annuity Buyers

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What Are the Best Annuities for Retirees?

The best annuity for a retiree will depend on the specific circumstances of that retiree. Options vary depending on how much time you are willing to wait before receiving a stream of payments and how far you are into retirement.

The amount of risk you are willing to take on will also play a role.

Immediate Annuity

Retirees can benefit from immediate annuities, which involve depositing a lump sum of cash into an annuity and receiving payments immediately without a waiting period for the investment to grow or for cash value to accumulate. You purchase the annuity and immediately begin receiving money from it.

Immediate annuities provide a straightforward way to ensure that your retirement savings can last for the duration of your lifetime. By converting a portion of your nest egg into an immediate annuity, you can secure a steady stream of payments set to monthly intervals — or another time frame of your choosing — to prevent the risk of running out of money.

Fixed Annuity

Fixed annuities make sense for many seniors as a stable and low-risk way to guarantee income in retirement.

A fixed annuity is simple. The payout of the annuity is not tied to anything like an index or a stock market, meaning you will receive steady, predictable payouts from the annuity.

There is less chance to grow your investment this way beyond minor interest rate bumps, but fixed annuities provide the stability and security that many retirees are looking for.

Indexed Annuity

An indexed annuity can be a solid option for seniors who are looking for some, but not much, risk in the hope of getting a little more money out of their annuity.

The interest rate of an indexed annuity is tied to an index’s performance. This creates the potential for greater returns and more money than you would get from a fixed annuity.

Indexed annuities often include caps in both directions. Even if the index performs remarkably well, your gains will be capped at a certain point. In exchange, the floor is capped as well, so you don’t have to worry about a dramatic negative swing even if the index performs poorly.

This allows retirees to participate in and benefit from some risk without having to worry about their money being significantly affected in the event of a market downturn.

Read More: Reasons To Buy An Annuity

Expert Tip

Fees can be high with indexed annuities. Consumers should seek to understand how the cap works and how the fees are levied.

Variable Annuity

Another common type of annuity is the variable annuity, which is grown through heavy investment. Variable annuities may not make the most sense for retirees since they can include a significant amount of risk.

Given the shorter time frame seniors are working with to grow their wealth and receive payments, the potential downturn of the investments that a variable annuity is tied to could be significantly damaging. This is less of a concern for someone younger planning to grow their annuity over decades.

Deferred Annuity

The other common type of annuity is a deferred annuity, where money is invested into and grows over a period of years. This makes sense for retirees in some situations, like if you want to start adding money now but don’t need a payout for another 10 or 15 years.

But many seniors and retirees may be looking for a more immediate way to stretch their income over a long period of time.

Read More: Are Multiple Annuities a Good Idea?

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Alternatives to Annuities for Retirees

Annuities are not the only way for seniors to extend their savings and reach financial security in retirement. There are several other paths that retirees can consider.

One such option is a certificate of deposit (CD). According to the U.S. Securities and Exchange Commission, when you purchase a CD, you are placing money in an account for a set period that can range from a few months to years.

After that time has passed, you receive your principal plus interest. This can be an easy and low-risk way to park additional money in an account where it will grow before taking it out when you need it later in life or retirement.

Another low-risk option for retirees is investing in bonds. These work similarly to CDs, as you essentially lend money to an organization (like a bank) when you purchase the bond. In exchange, the interest earned on the bond is distributed back to you as a stream of payments.

You will eventually get your principal back as well when the bond reaches maturity.

Be aware that CDs and bonds will have taxable interest, unlike annuities which are tax-deferred. Contact a trusted financial advisor to weigh your options in retirement.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: August 7, 2023

5 Cited Research Articles

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  1. Iacurci, G. (2021, October 22). Longevity Annuities Can Be a Good Deal for Seniors. But Not Many People Buy Them. Retrieved from https://www.cnbc.com/2021/10/22/longevity-annuities-can-be-a-good-deal-for-seniors-but-not-many-people-buy-them.html
  2. California Department of Insurance. (2018). Annuities What Seniors Need to Know. Retrieved from http://www.insurance.ca.gov/0150-seniors/0600informationguides/seniorannuitiesguide.cfm
  3. Pennsylvania Insurance Department. (n.d.). Annuities for Seniors. Retrieved from https://www.insurance.pa.gov/Coverage/Pages/Annuities-for-Seniors.aspx
  4. U.S. Securities and Exchange Commission. (n.d.). Bonds. Retrieved from https://www.investor.gov/introduction-investing/investing-basics/investment-products/bonds-or-fixed-income-products/bonds
  5. U.S. Securities and Exchange Commission. (n.d.). Certificates of Deposit (CDs). Retrieved from https://www.investor.gov/introduction-investing/investing-basics/investment-products/certificates-deposit-cds