Key Takeaways

  • Annuities are generally safe products, with some of their main benefits being principal protection and shield from market risk.
  • The built-in safety of annuities is part of what makes them such an enticing product for conservative investors.
  • As with any financial product or commitment, there are some risks to be aware of. Annuities are not FDIC-insured, which can worry customers regarding what happens to their money if their provider goes bankrupt. But state guaranty associations act as a safety net in these situations.
  • Risk also varies by the type of annuity you buy. For example, while something like a MYGA carries little risk, a variable annuity could result in some loss of your principal.

Annuities are generally considered safe investments. They offer a guaranteed income — often for life — providing security in retirement. As with most financial instruments, they come with their own set of risks. But, with prudent management, annuities can serve as a secure element in your portfolio.

How the Safety of Annuities Compares to Other Options

Annuities function differently from comparable options in that they are not investments but insurance products. 

Depending on the product type, they typically are not exposed to market risk like stocks or bonds. Your principal is also protected, meaning there is no risk of losing your initial investment.

Additionally, the annuitization process can yield you limitless income. Bonds can provide a dependable stream of interest income until maturity. Stocks can grow wealth over very long holding periods. But neither of these investments can convert to a lifetime of guaranteed income at any point in time.

Annuities vs. Stocks and Bonds

Annuities Stocks  Bonds
You Principal Investment is Protected and Not at Risk Yes No No 
Considered a Low-Risk Investment/Product Yes No Yes
Can Be Converted into Guaranteed Lifetime Payments Yes No No

Some differences can make stocks or bonds a better choice based on your circumstances. Stocks, for instance, come with a lot more risk and exposure to loss but also can result in much higher gains, particularly in the short term.

The predictability of annuities is what makes them so attractive. You may experience less growth, but you can do so without the risk of losing your initial investment and with the ability to earn guaranteed payments.

Some types of annuities can also be designed to mimic the features of stocks and bonds. Fixed annuities can simulate the returns of bonds, while fixed index annuities can be tied to the performance of an index like the S&P 500 while still protecting your principal in exchange for a cap on returns.

When clients inquire about annuities, I often compare them to the fixed income component, especially if they don’t have dependents who will require the assets upon their death, or if they have sufficient inheritance to sustain them.

For instance, if a client desires a balanced portfolio, a significant portion could be allocated to equity investments, with another portion invested in an annuity tailored to provide the necessary income. This approach allows them to avoid tapping into the equity portion, which is intended to benefit their heirs. The essence of planning is to offer a lower-risk solution, and annuities can serve as a complement for certain clients.

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What is your goal for purchasing an annuity?

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What Are the Inherent Risks of Annuities?

Timing can play a big role in the risk of annuities.

For example, you could lock in an annuity rate for several years, and then shortly after, see a much larger rate you could have taken advantage of.

There’s also the concern that you could die soon after buying an annuity. Since lifetime payments are one of the main benefits of an annuity, an early death would significantly dampen the product value.

Like some other strategies, you may also risk your money being outpaced by inflation. Some annuity companies address this by offering inflation riders for an additional cost or allowing you to structure your payments to start low and steadily increase over time.

For most annuity types, the fear of actually losing your principal is minuscule. The main risk to this would be the rare situation where the company that issued your annuity goes bankrupt or shuts down.

But, even in this situation, state guaranty associations would likely offer coverage and help you recoup that money.

Are Some Types of Annuities Safer Than Others?

Different types of annuities come with varying levels of risk. Some annuities are both straightforward and safe products.

This includes single premium immediate annuities, which are purchased with a lump sum and often converted into payments immediately. 

Additionally, fixed annuities like multi-year guaranteed annuities offer a set level of growth and function similarly to bonds.

Fixed index annuities offer some reserved market exposure by being tied to an index, allowing you to experience fluctuating growth without ever putting your principal on the line.

But not all types are as risk-free.

The Risks of Variable Annuities

The riskiest type of annuity that is widely available is the variable annuity. This product allocates your money into a legitimate investment portfolio, essentially placing your money into things like stocks and bonds.

They can be a useful way to invest — particularly since they are tax-deferred products — but many of the common rules of annuities do not apply here.

With variable annuities, you can experience much more volatility and risk losing your money.

Some annuities make sense in specific situations, and it’s important to understand your needs before purchasing.

Variable annuities, for example, are often employed by those who have already maxed out their 401(k)s and IRAs as an additional way to build up future retirement savings.

This strategy doesn’t make sense for everyone.

Is An Annuity Right For You?

Our short quiz provides clarity on whether an annuity is a smart choice for your retirement portfolio.

Frequently Asked Questions About Annuity Safety

Are annuities safe for retirement?

Annuities are intended for retirement. As such, they are safe instruments for retirement savings. However, careful planning and due diligence are still critical to getting things right.

Are annuities high or low risk?

Compared to other traditional investments such as stocks and bonds, annuities are low risk. Their fixed rates and guaranteed income make them safe in the right circumstances.

What are the most reputable financial institutions that offer annuities?

Some of the top annuity providers in 2024 include Lincoln Financial, Allianz, F&G and MassMutual.

Still have questions?

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: May 15, 2024
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