Annuities Explained: Your Financial Lifeline in the Universe of Retirement


Mon Feb 05 2024

Explaining Annuities

Imagine that your retirement is located in a far-off galaxy. To get there, you need to assemble your own ship that will traverse the galaxy. Well, in this case, your ship is your retirement account(s) which will be responsible for transporting you to your retirement. Along this intergalactic journey, you’ll undoubtedly need to make repairs to your ship along the way. To do this, you’ll need a lifeline that will keep you safe and tethered to your ship. Annuities are this lifeline. 

Let me explain. Investopedia defines annuities as “an insurance contract issued and distributed by financial institutions with the intention of paying out invested funds in a fixed income stream in the future.” 

In layman’s terms, this means that you pay an insurance company and then they’ll make sure that you have steady income for life. It’s like Social Security, but with a private company. With this in mind, annuities can serve as lifelines because they produce consistent income that keeps you safe and “tethered” to your retirement accounts as you travel through retirement.

Without an annuity, you could run the risk of getting separated from your ship and floating away into space.

Annuity Basics

It’s important to note that there are a handful of different types of annuities that you can choose from. To get a clear idea of what’s best for you, I recommend speaking with a financial advisor or reading more about specific types of annuities. That said, here are the four most common types of annuities:

  1. Single Premium Immediate Annuity (SPIA): You receive income in exchange for a lump-sum investment, offering Social Security-like cash flow. You can also include features like a cost of living adjustment (so that your payments keep up with inflation) or beneficiary protection (such as a cash refund)
  2. Deferred Annuity: You receive guaranteed income in the form of a lump sum or monthly income payments on a date in the future. You can pay either a lump sum or monthly payments to your provider.
  3. Fixed Annuity: You receive a guaranteed fixed interest rate on your investment for an agreed upon period of time (the guarantee period).
  4. Variable Annuity: Allows you to invest your money into sub-accounts, similar to those in a 401(k). Sub-accounts can help an annuity’s growth keep up with, and sometimes outpace inflation.

In general, most annuities have two main phases:

  • The accumulation phase: When you fund an annuity either through consistent payments or a lump sum (if you’re fortunate enough to have a lump sum of cash). If you’re familiar with Social Security, think of this phase as the taxes you pay before turning 62.
  • The annuitization phase: This is when the script flips and you start receiving payments, instead of making them. 

Annuities For Retirement: Pros and Cons

Just like with most investments, there is a range of pros and cons associated with buying annuities. In general, annuities are investments that can help offer guaranteed income in exchange for monthly payments or a lump sum payment. 

Pros of annuities:

  • Consistent, Lifetime Income: Annuities can provide a steady and guaranteed income stream. This can be especially beneficial for retirees looking for a reliable source of funds

  • Risk Management: According to Fidelity, annuities can manage three different types of risks: stock market volatility, outliving your savings, and inflation eating away at your purchasing power.

  • Tax Savings: Earnings within an annuity grow tax-deferred until withdrawals are made. This can allow for potential tax savings over time.

  • Flexibility: Some annuities offer flexibility in terms of payout options, allowing you to choose between a lump sum, periodic payments, or a combination of both.

  • Death Benefit: Many annuities come with a death benefit, ensuring that your beneficiaries receive a payout even if you pass away before receiving the full value of the annuity.

Cons of annuities:

  • Opportunity Cost: Annuities do not provide you with the highest return of all time, especially when compared to other investments. As a general rule, the more stability an investment provides, the lower your return would be. On that note, when you buy an annuity you give up the potential of earning a higher return from other investments. But, the benefit is that you secure stable income.

  • Fees and Expenses: Annuities often come with fees and expenses, which can include sales charges, administrative fees, and underlying investment fees. These costs can erode returns over time.

  • Illiquidity: Annuities are generally less liquid compared to other investments, meaning that it’s harder to sell them if you want to get your money back. In fact, withdrawals before a certain age may result in surrender charges.

  • Complexity: The various types of annuities and their features can be complex, making it challenging for some individuals to fully understand the terms and conditions.

  • Market Risk (Variable Annuities): Variable annuities are usually invested in equities or other similar investments. This means that the value of the investment can go up or down based on the performance of the market.

  • Inflation Risk: Fixed annuities may not provide protection against inflation, meaning that the purchasing power of your income may decrease over time.

Think of picking an investment for your retirement like choosing a spaceship to use on an intergalactic travel through space. There is really no “right or wrong” answer to the question “which ship is right for you.” This is because the right answer depends on where you’re going, when you want to get there, and how far your journey is.

Why Do I Like Annuities?

Okay, so putting all of the generic “pros and cons” aside–why do I like annuities?

To start, in the sake of full disclosure, I’m not gearing up to enter my retirement. I’m a 27-year-old finance writer that lives in San Diego. With this in mind, it wouldn’t make much sense for me to buy an annuity right now. But, I still love the idea of annuities and will very likely buy one at some point.

Annuities provide something that’s incredibly hard to come by when it comes to investing: reliability. Almost all other investments seem wishy-washy next to an annuity. Consider the following investments:

  1. Stocks: Prices Can fall and companies can cut their dividends after a bad quarter. 

  2. Real estate: Markets are constantly rising/falling in value. Plus, losing a tenant can turn a property from a profitable investment into a money pit.

  3. Bonds: These are actually not bad in terms of reliability.

  4. Cryptocurrency: This asset class is probably the opposite of reliable.

Annuities, on the other hand, can provide you with guaranteed income for life. If you’re about to venture out on your journey through the cosmos in search of a comfortable retirement then it’s definitely worth bringing a lifeline on your journey that can help provide you with consistent income during your voyage.

Of course, none of this is a recommendation to buy an annuity, as I’m not a licensed financial advisor. 

How to Buy an Annuity

When it comes to annuities, there are 14 main companies that you can purchase an annuity from. These include: 

  1. Allianz SE

  2. American Equity Investment Life Holding Company

  3. American-National

  4. Aspida

  5. Athene

  6. Delaware Life Insurance Company

  7. F&G Annuities & Life

  8. Global Atlantic

  9. Jackson National Life Insurance Company

  10. Lincoln National Insurance Corporation

  11. MassMutual

  12. Nationwide

  13. Pacific-Life

  14. Silac Insurance Company

As far as which companies or annuities are the best ones for you…well, that’s a bit out of the scope of this article. Luckily, you can read more by checking out our comprehensive insights into America’s top annuity providers. These insights will be able to help you find the lifeline that is right for you!

I hope that you’ve found this article valuable when it comes to learning about annuities. If you’re looking to learn more, please subscribe below to get alerted of real articles as we write them.