Are annuities a good investment?
Annuities can be a good idea for many retirees. But are they a good idea for you?
If you’re looking for ways to generate retirement income – a stream of regular payments like a pension or salary – you have several options. You can make regular withdrawals from your existing retirement investments, such as FDIC-insured CDs, Treasuries, municipal bonds, stocks, ETFs, mutual funds, and so on. Or, you can look into annuities – which can convert retirement savings into a guaranteed stream of regular income that can last for the rest of your life. No matter which approach you choose, there will be advantages and disadvantages you should be aware of. Is a retirement annuity appropriate for your retirement plan? Take a few minutes to learn:
What is an annuity
What are the different types of annuities
What are their pros and cons
How to decide if they’re right for you
What to consider before you buy an annuity
Where to get professional advice on annuities
What are annuities?
In simple terms, an annuity is a contract with an insurance company to turn your lump sum or periodic premium payments into a reliable income stream for retirement. An annuity company is the provider that issues these contracts and manages the payouts to annuity holders. Some people refer to annuities as “private pensions” because the contract can be made to work just like a pension, providing a regular stream of monthly income that lasts for a set number of years, or even the rest of your life, depending on the specific contract terms.
How do annuities work?
There are several types of annuities, but they all work on the same basic principle. You pay one or more premiums to an insurance company that invests the money to generate returns, which generally grow tax deferred. Then, the insurance company uses those funds to make regular payments to you for the period of time specified in the annuity contract – a fixed number of years or the rest of your life.
Why are annuity contracts typically written by a life insurance company?
Because when you purchase an annuity designed to provide income for the rest of your life, you're essentially transferring the risk of outliving your savings to the insurance company. If you live to age 100 or beyond, the insurance company takes on a legally binding responsibility to provide the annuity payments as specified in your contract. And in fact, some people end up getting far more out of their annuity than they paid in. Life insurance companies have experience managing that kind of risk, along with the actuarial and investment expertise needed to meet long-term payment obligations.
What are the different types of annuities?
There are two basic categories of annuities – immediate annuities and deferred annuities. Most annuities are deferred – you invest for several years before retirement and take the income later. Immediate annuities start paying within a year after you make a single, lump-sum payment.
Generally, people who are still several years away from retirement age choose deferred annuities. The money put into a deferred annuity generally grows tax-deferred. Still, growth can be tied to a fixed interest rate, market securities like stocks and bonds, or a broad index, depending on the type of annuity chosen (see chart below). Those who are closer to retirement age or already in retirement – and want their income stream to begin as soon as possible – are more likely to choose immediate annuities.
Fixed annuities
A fixed annuity is the most predictable type of annuity because it pays a guaranteed, fixed rate of return on the premiums you contribute. When you’re ready to take income, you receive a guaranteed stream of payments.
Variable annuities
A variable annuity doesn’t offer as many guarantees as a fixed annuity but lets you take advantage of the highs and lows of the financial market. The performance of a variable annuity depends on the underlying funds you select, which can fluctuate in value. Any earnings are tax-deferred until you’re ready to start receiving income payments.
Fixed index annuities
Fixed index annuities can provide both premium protection and market growth potential, by providing a minimum guaranteed interest rate combined with potential growth tied to a specific index.
Immediate annuities
Most annuities are "deferred" — you invest for a number of years and then take income later. An immediate annuity is a type of income annuity designed to start payments right away, typically within a year of your lump-sum investment. Immediate annuities can be customized to provide income for a set period or for life, offering reliable income streams and financial security during retirement.
Each type of annuity provides a different mix of benefits
| no | Fixed | Fixed indexed | Variable | Immediate |
Able to provide guaranteed income for life | ✔️ | ✔️ | ✔️ | ✔️ |
Immediate start to income | no | no | no | ✔️ |
Tax-deferred growth | ✔️ | ✔️ | ✔️ | no |
Inflation/cost-of-living adjustments | no | no | no | ✔️ |
Potential for market returns | no | ✔️ | ✔️ | no |
Protection against market losses | ✔️ | ✔️ | no | ✔️ |
Potential legacy for heirs | ✔️ | ✔️ | ✔️ | ✔️ |
Note: The benefits listed are generally available for the type of annuity noted but may not be included in a specific annuity holder's contract: each contract is unique and tailored to the owner's needs.
What are the advantages of annuities?
Like all other savings and investment vehicles, there are pros and cons to having an annuity. Before deciding whether it’s the right solution for you, familiarize yourself with the benefits and drawbacks of annuities. And if you need additional information or advice, speak to a financial advisor who can help you make the right decision. The “pros” include:
Annuities offer guaranteed lifetime income
With most other retirement savings vehicles, there's a risk of outliving your money. Perhaps the most important advantage of an annuity is that your contract can be configured to provide a life-long stream of guaranteed income - even if you live well past 100.
You can avoid unpleasant financial surprises
With fixed annuities, you'll know how much income you'll be receiving in the future. Plus, you'll be insulated from the stock market and bond market risks.
Most annuities provide tax-deferred growth
Generally speaking, annuities grow tax-deferred, which means you don’t pay taxes on the earnings until you withdraw funds or you convert to a stream of payments (which is referred to as “annuitization” in your contract). This can provide a significant tax advantage if you’re in a lower tax bracket when you start to make withdrawals – such as when you’re in retirement.
There are no contribution limits
Unlike many other retirement savings vehicles – including 401(k)s and Individual Retirement Accounts – there are no contribution limits on annuities. So you can invest as much as you want. And remember: With most annuities, you’ll also enjoy tax-deferred growth.
Annuities can be customized
Your annuity can be purchased with a wide range of features to match your needs today or to anticipate changing needs in the future. Many of these features are related to investments, income streams, and beneficiaries. Still, many annuities now offer riders and add-ons that provide inflation protection, long-term care coverage, enhanced death benefits and more.
An annuity can include a death benefit
Many annuities can be purchased with a death benefit. For example, with certain annuities if you pass away before receiving payments equal to the amount used to buy your annuity, your beneficiary can get the difference – either as a lump sum payment or in installments.
Annuities can help with money management
Annuities can simplify money management by providing a structured approach to saving, investing, and generating income. With options for both immediate and deferred payouts, annuities allow individuals to align their timelines with their financial goals. Plus, the steady stream of income they provide enhances financial stability, enables better budgeting, and helps individuals to maintain their desired quality of life.
You can be confident that your money will be there
An annuity is a contract with an insurance company, and their claims-paying ability guarantees your income payments. By purchasing an annuity from a well-established, financially strong insurance company, you'll be confident that your money will be there when you need it. That's why many people choose to purchase their annuities from Guardian: our company consistently earns some of the highest financial strength ratings from independent ratings agencies like Moody’s, A.M. Best, Comdex, and Standard & Poor’s, and we’ve been meeting our financial obligations with the utmost reliability since 1860. You want to be confident that the company behind your annuity will be there years and decades down the road.
What are the disadvantages of annuities?
Again, every savings and investment vehicle has potential drawbacks – and annuities are no exception. Before you move forward, here are important things to keep in mind:
Returns on annuities may be lower than other investments
For the most part, annuities are less risky than many other investments, including investments in the stock market. However, lower risk usually means lower returns. Choosing between annuities and other investments depends on your financial goals and risk tolerance, and whether you’re seeking guaranteed income or high growth potential.
Fees and other costs may be higher than other investments
The cost of purchasing and maintaining an annuity may include fees such as administrative charges, rider fees, and/or commissions to agents or brokers. In addition, you may be liable for surrender fees and IRS penalties if you make early withdrawals or surrender the annuity before a specified date.
Annuities have very limited liquidity
While annuities can provide the security of regular payouts, they present problems should you ever need more than your regular cash allotment. First, there are usually limits on how much “extra” cash you can withdraw at any one time. Second, you may have to pay relatively high penalties and/or surrender fees for these withdrawals.
Some annuities can lose money
While fixed annuities guarantee a specific interest rate, it is possible to lose money with other kinds of annuities. For instance, variable annuities are tied to the performance of underlying investments, which can lead to investment gains or losses. In addition, some types of annuities may not provide a "return of principal" death benefit, which means that some of the initial investment may be lost if you pass away before receiving the full value of the annuity payments. Before purchasing an annuity, please make sure that you understand the potential risks associated with the type of annuity you are considering.
Annuity contracts can be very complex
Some annuities, such as variable and fixed indexed annuities, are complex financial instruments, and their contracts are usually much more involved than those used for other investment options. This can make it difficult to understand the true costs and benefits of a specific annuity, and to determine whether it is appropriate for your retirement plan. Bottom line: You should consult a trusted financial professional before purchasing an annuity.
Are annuities a good investment for you?
Every person's situation is different, but there's a simple, popular way to think about whether an annuity benefits your retirement plan. First, add up all known regular expenses you’ll have during retirement, then subtract other types of retirement income that are guaranteed, like pensions or Social Security. If there's a gap, then consider an annuity as part of your retirement planning strategy, along with 401(k) plans, life insurance cash value, and other assets. After all, annuities are one of the only financial vehicles that guarantee you won’t outlive your income – no matter how long you live.
Guardian can help you decide.
Connect with a local financial professional who can explain your options - including fixed annuities, fixed index annuities, and variable annuities – review the available tax benefits, and help you decide what makes sense for your retirement plan.
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Frequently asked questions about annuities
1 How Much Does A $100,000 Annuity Pay Per Month accessed July 2023
Important considerations about annuities
This material is intended for general public use. By providing this content, The Guardian Life Insurance Company of America, The Guardian Insurance & Annuity Company, Inc. and their affiliates and subsidiaries are not undertaking to provide advice or recommendations for any specific individual or situation, or to otherwise act in a fiduciary capacity. Please contact a financial representative for guidance and information that is specific to your individual situation.
This material is for information use only. It should not be relied on as the basis to purchase a variable, fixed or immediate annuity or to implement a retirement strategy.
The information provided herein is not written or intended as investment, tax or legal advice and may not be relied on for purposes of avoiding any federal tax penalties. This information supports the promotion and marketing of annuities.
There are no additional tax benefits if you purchase an annuity to fund an IRA or qualified retirement plan. Therefore, an annuity should only be purchased in an IRA or qualified plan if you value some of the other features of the annuity and are willing to incur any additional costs associated with the annuity to receive such benefits.
Current tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the particular set offa cts and circumstances. Entities or persons distributing this information are not authorized to give tax or legal advice. Individuals are encouraged to seek specific advice from their personal tax or legal counsel.
Variable annuities are long term investment vehicles designed to help investors save for retirement and involve certain contract limitations, fees, expenses and risks, including possible loss of the principal amount invested. The investment return and principal value may fluctuate so that the investment, when redeemed, may be worth more or less than original cost. As with many investments, there are fees, expenses and risks associated with these contracts. All guarantees including the death benefit payments are dependent upon the claims paying ability of the issuing company and do not apply to the investment performance of the underlying funds in the variable annuity. Assets in the underlying funds are subject to market risks and may fluctuate in value.
Withdrawals of taxable amounts from a variable or fixed deferred annuity will be subject to ordinary income tax and possible mandatory federal income tax withholding. If withdrawals are taken prior to age 59½, a 10% IRS penalty may also apply. Withdrawals may also be subject to a contingent deferred sales charge.
Variable annuities and their underlying variable investment options are sold by prospectus only. Investors should consider the investment objectives, risks, charges and expenses carefully before investing. This and other information are contained in the prospectus or summary prospectus, if available, which may be obtained from your investment professional. Please read it before you invest or send money.
Fixed and variable annuities are issued by The Guardian Insurance & Annuity Company, Inc. (GIAC). All guarantees are backed exclusively by the strength and claims paying ability of GIAC. Variable annuities are issued by GIAC, a Delaware corporation, and distributed by Park Avenue Securities LLC (PAS). Both GIAC and PAS are wholly owned subsidiaries of The Guardian Life Insurance Company of America, 10 Hudson Yards, New York, NY 10001.
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