What Is the Role of Annuities in Retirement Planning?

If you’ve spent time developing an investment strategy, you might be familiar with the concept of annuities. While you never want every investment in your portfolio to be the same, annuities are an essential part of creating durable wealth. Annuities have become sought after as a retirement planning resource as pension plans become scarcer in the private sector. Before you commit to an investment type, you need to have some knowledge about it in order to choose what will best meet your needs and goals.

With that said, what exactly are annuities, and how can you benefit from them?

How Do Annuities Work?

Annuities are investments that offer investors a form of guaranteed steady income. Oftentimes, people invest in annuities as part of their long-term retirement strategies.

Ty Young of Ty J. Young Wealth Management explains the overall concept: “Here is how the best index annuities work: you contribute money that is completely protected against market losses. However, when the market goes up, your gains lock in on an annual basis. You are earning compound interest without annual fees.”

That might sound too good to be true — you benefit from market gains while remaining completely protected from market losses? Indeed, annuities provide steady, risk-free returns.

Diving deeper from Young’s explanation, here’s how annuities work:

• As soon as you invest money in a given annuity, you’re protected from market losses
• You go up with the stock market, and your gains are locked in on an annual basis
• When the stock market goes down, you lose nothing
• You earn returns via compound interest
• You pay no annual fees

Many investment portfolios include a mix of high- and low-risk investments. The former offers the possibility of greater returns but also carries the risk of greater losses. The latter offers moderate returns with far less risk. For many, annuities are the ideal low-risk investment product as they protect your money from losing value, making it possible to maintain the lifestyle you have worked for. Annuities also offer the option to add additional features and riders, such as death benefits for loved ones and long-term care, which is especially important as people live longer.

Types of Annuities

The world of annuities is a complex one, and there are many different types to choose from, such as:

• Fixed Annuities: Payments are fixed at a given amount outlined in the investment contract. Fixed annuities offer the least risk, as the interest rate won’t fluctuate beyond the terms of your contract.
• Deferred Annuities: Payouts begin at some point in the future, typically after a set date. Typically the date coincides with your retirement date. Because it is deferred, your investment grows without being taxed during this period.
• Immediate Annuities: Payouts are a guaranteed monthly income that starts between one month and one year from when you purchase the annuity and the initial payment is made.
• Variable Annuities: Payouts are periodic, accumulations vary with the market, and are not fixed. They operate similarly to mutual funds. Payments vary based on how well the sub-accounts are doing at any given time.
• Indexed Annuities: You have the option to share in investment market earnings while also getting a guaranteed return. Annuities that are indexed will give you a prospectus.

Different annuity types are suitable for different financial situations. When you work with a qualified financial advisor, they will assess your financial situation and help you choose the annuity that best meets your needs.

Common Misconceptions About Annuities

Annuities offer multiple benefits to investors, but there are several persistent misconceptions that cause people to miss out on the advantages they offer. Below are some of the most common misconceptions that cause investors to bypass annuities.

Myth: All Annuities Are Bad

“There is a common misconception that all annuities are bad,” Young explains. “That is false.”

While it’s true that some annuities have high fees and low returns, choosing the right annuity and using it strategically can enhance your retirement strategy, helping you reach retirement goals such as:

• Income that is guaranteed, predictable, and inflation-adjusted
• Growth with no risk of market loss
• A maximized death benefit for your loved ones

Knowing which annuity to choose and how they can gain from it can be confusing and overwhelming for many. This is where a financial advisor comes in. A qualified financial advisor will learn about your goals and needs to help you select the right annuity.

Myth: All Annuities Have High Fees

Each annuity is different, with different payment and fee systems. Many people will steer away from annuities because they are misinformed and believe they all have high fees. While it is true that some carry high fees, the best annuities, in fact, have no annual fees at all. A financial advisor can guide you to an annuity that will ease your concerns about fees.

Myth: Your Money Will Be…