Annuities Explained: How They Can Support Long-Term Retirement Income
June marks Annuity Awareness Month, providing an opportunity to better understand one of the most misunderstood tools in retirement planning. While many people have heard of annuities, few understand the different types available and the role they can play in a retirement income strategy. Understanding how annuities work can help determine whether they may fit into a broader financial plan.
What is an annuity?
At a high level, an annuity is a contract with an insurance company designed to turn your savings into future income. You contribute money, either as a lump sum or through a series of payments, and in return, the insurer provides income later. That income can be paid for a set number of years or even for the rest of your life.
In addition to providing income, annuities offer tax-deferred growth. This means any earnings within the annuity are not subject to current income taxes and can continue to grow until funds are withdrawn. For some individuals, this can be a valuable way to supplement other retirement savings.
Because annuities are designed to provide predictable income and help manage longevity risk, they can play a meaningful role in helping retirees avoid outliving their assets.
Understanding the different types of annuities
There are several types of annuities, each designed to meet different financial goals and comfort levels with risk:
Immediate Annuities
Income begins shortly after you invest. Immediate annuities are often used by retirees seeking a predictable stream of income to help cover current living expenses.
Deferred Annuities
Income begins at a future date, allowing assets to accumulate on a tax-deferred basis before withdrawals or income payments begin.
Fixed Annuities
Fixed annuities provide a stated interest rate and may offer predictable future income. Because they are not directly tied to market performance, they are often used by individuals seeking stability and protection of principal.
Variable Annuities
Variable annuities offer growth potential through investment subaccounts while providing tax-deferred accumulation. Because returns are tied to market performance, account values may rise or fall over time.
Indexed Annuities
Indexed annuities offer tax-deferred growth potential linked in part to the performance of a market index, such as the S&P 500. Depending on the product design, they may provide varying levels of protection from market losses while allowing investors to participate in a portion of market gains.
Riders
Many annuities offer optional riders that can provide additional benefits, such as guaranteed lifetime income, enhanced death benefits, or long-term care-related features. Because riders typically come with an additional cost, it’s important to evaluate whether the added benefits align with your financial goals.
In some cases, the rider benefits themselves are a primary reason for incorporating an annuity into a long-term financial plan. The goal is simple: to help create long-term financial stability and provide income you cannot outlive.
Why longevity planning matters
Retirement planning is not just about how much you save. It is also about how long those savings need to last.
A successful retirement plan is not just about accumulating assets—it’s also about creating sustainable income. As people live longer, the risk of outliving savings becomes a growing concern. Longevity planning focuses on developing income strategies that can help support financial needs throughout retirement, annuities are one tool that may help address this risk.
According to the American College of Financial Services¹, 52% of Americans do not consider how long they may live when making saving and investment decisions, this can create a significant gap in planning.
Statistics tracked by the Social Security Administration indicate that a 65-year-old today has an average life expectancy of age 84 for men and age 87 for women². However, averages tell only part of the story, as many retirees will live well beyond those ages, in fact, there is nearly a 25% chance that one member of a 65-year-old couple will live to age 95³.
While no single solution is right for everyone, annuities are one tool that may help address this risk by providing a source of income designed to last for a specified period or even a lifetime.
Factors to consider when evaluating annuities
Annuities are not appropriate for everyone, but they can be extremely valuable when used properly as part of a comprehensive financial plan. Depending on an individual’s goals, annuities may be used to help address longevity risk, create predictable income, or support estate and legacy planning objectives.
Because annuities are designed to meet specific financial objectives, they may not be appropriate for every investor. Factors such as liquidity needs, time horizon, risk tolerance, and overall financial goals should be carefully considered before purchasing an annuity.
How annuities fit into a broader retirement strategy
Annuities are long-term tools, so they work best when used thoughtfully as part of a broader financial plan. A well-designed retirement plan often includes multiple sources of income, such as Social Security, pensions, savings and investments, rental income, and, in some cases, annuities. No single product is the solution for every retiree. Instead, the focus should be on developing a strategy that brings together the right combination of tools to support long-term financial goals.
Is an annuity right for you?
If you’re wondering whether an annuity may have a place in your retirement strategy, we’re here to help. We can work with you to evaluate your income needs, retirement goals, and overall financial picture to determine whether an annuity—or another strategy—may be appropriate for your situation.
Contact our office to schedule a conversation and learn more about how annuities may fit into a comprehensive retirement income plan.
📞 508-636-6521
📩 info@fpa-online.com
¹ American College of Financial Services, 2022 Retirement Income Literacy Study
² Social Security Administration, Actuarial Life Table, 2024
³ Society of Actuaries, Longevity Data