Key Takeaways
- Annuities grow tax-deferred and are known to offer competitive rates.
- If you choose a straightforward contract, annuities are a safe and secure investment option.
- Annuities offer a guaranteed lifetime of income with legacy options for your loved ones.
- Some annuities allow riders, which customize annuities with additional benefits, like long-term care and disability coverage.
- Annuities diversify your portfolio and can improve your potential returns.
Annuities Have Tax Benefits and Good Rates
Many investors buy annuities for their unique tax advantages. Annuities grow tax-deferred, meaning your dividends, interest and capital gains all remain untaxed while held in the annuity. Your funds will only be taxed when withdrawn. Moreover, if you drop to a lower tax bracket in your retirement years, you’ll be taxed less compared to what you’d be taxed today.
Michael M. purchased an annuity from Annuity.org because he found its tax benefits to be a standout feature.
“One thing about an annuity is that you don’t have to pay taxes until you actually get the interest dividend from the account. So, you can accumulate until you decide to withdraw, and then it will be taxed,” he said.
When asked if Michael feels he benefits from his annuity, he said, “Oh yeah, definitely. It fits what I was looking for with a good rate and tax benefits.”
Compared to other investments, annuities can offer higher rates. For example, at the time of his purchase, Michael found annuities to have a better rate than other investments. “Compared to certificates of deposit, annuities get a better rate with protection.”
This isn’t to say annuity rates always beat CD rates. It’s important to research current annuity rates and evaluate them, as well as their features, before making a purchase.
In the years leading up to retirement, annuities can fulfill two important requirements for retirement planning: security and tax deferral.
When I speak with clients about annuities, I stress that we discuss how they would fare in the best- and worst-case scenarios because it is important to visualize opportunity cost. This can be a helpful exercise to not only decide whether a particular investment vehicle is appropriate but also how much of a portfolio should be invested in it.
Stephen Kates, CFP®Founder of Clocktower Financial ConsultingStephen Kates is a Certified Financial Planner™ and personal finance expert specializing in financial planning and education. Stephen has expertise in wealth management, personal finance, investing and retirement planning.
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They’re a Safe Investment Option
Annuities are considered a safe investment for several reasons. Most prominently, they are state-protected, endorsed by financial professionals and offer principal protection.
All 50 states, the District of Columbia and Puerto Rico have state guaranty associations that protect annuity owners, if the issuing company goes bankrupt.
But this doesn’t mean you should purchase an annuity from any company. Research annuity companies with high ratings that have little to no risk of going bankrupt. Review our list of the best annuity companies to get a head start.
Insights From a Financial Expert
Wendy Swanson RICP®, CLTC®, NSSA®, a Retirement Income Certified Professional™ offered her thoughts on the security and principal protection of annuities.
Annuities are guaranteed. You have different backings that go through the financial institution, and there are state guaranties behind the annuities themselves. It is one of the safest places you can put your money.
What I love about an annuity is that I can put a portion of my money into a vehicle, and no matter what happens with the market, I’m going to know that it is safe. And, I’m at least going to get some minimal interest crediting, regardless of what’s occurring in the markets.
Wendy Swanson, RICP®, CLTC®, NSSA®Retirement Income Certified Professional™Wendy Swanson has been in the insurance industry since 1996. She provides unbiased consulting insight on safe money solutions for advisors who have clients with income, retirement and estate planning needs.
Remember that some annuities can be riskier than others. If you do not want to bear any market risk, a fixed annuity is appropriate. A fixed index annuity or a variable annuity will expose you to elevated levels of risk.
Be sure to compare all types of annuities to find one that exhibits an appropriate risk profile for you.
Annuities Allow You To Leave a Legacy
If structured correctly, annuities can provide guaranteed lifetime income and legacy options.
You can make a lump-sum payment or multiple smaller payments to receive income distributions for life.
Annuities have been projected as the best hedge against longevity risk, according to a Behavioral Case Study for Annuities by T. Rowe Price.
As for legacy purposes, you can purchase an annuity for a child or plan to transfer your own annuity to a child. This could be for your own child or a grandchild.
Our editorial team interviewed two annuity owners, Syble Solomon and Ronnie Zelek, who discussed the lifetime income and legacy benefits of their annuities.
Lifetime Income & Legacy Highlights From Annuity Owners
Syble Solomon’s Backstory
Solomon was skeptical about the annuity buying process until she was promised her money would remain within her family and she’d be protected for life.
Her Take
Making a decision was difficult until I could see the options. I needed assurance that we weren’t going to be losing the money, that it wasn’t just going to go into the stratosphere or an insurance company and all that money we worked for would be gone from our family.
Knowing that we weren’t going to lose money and that I was protected for the rest of my life made it much easier.
Ronnie Zelek’s Backstory
Ronnie Zelek’s mother purchased an annuity for him when he was young, and it has provided him with financial stability ever since.
His Take
It’s helped supplement a lot of things in my life. For example, my buying power of things was accelerated in some shape or form because I had this extra little pool of money coming to me monthly. So, that’s always been a little bit of help.
Not every annuity contract is the same. It’s important to meet with a financial advisor to determine what annuity type will offer you the best level of income protection and legacy options.
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They’re Highly Customizable
Annuities are customizable with options to include riders, negotiate contract details and select portfolio indexes. Annuity customization options vary, depending on the annuity type and issuer.
Riders can be added to your annuity contract to achieve extra benefits. Some riders provide additional income in the event you become disabled or require long-term care coverage. Other riders protect against inflation via adjustable payments. Some companies offer riders for free, but most charge additional fees.
Michael M. found the rider customization benefits useful.
“I have a couple of riders on an annuity. I’m happy with my decision. There are specific benefits you can select. It might cost you more, but it’s worth it,” Michael M. told Annuity.org.
You can determine how your annuity pays out and other important features of your contract details. For example, some annuities allow coverage for two people in a single contract. If one person passes away, the second will continue to receive their payments.
The other way annuities are customizable relates to selecting indexes. This feature only pertains to indexed annuities, which provide payments that can increase, depending on the performance of a specified market index. Some companies offer a wide range of indexes to choose from, while others only offer a few options.
I have a couple of riders on an annuity. I’m happy with my decision. There are specific benefits you can select. It might cost you more, but it’s worth it.
Read More: How to Customize an Annuity
Annuities Diversify Your Portfolio
Buying an annuity diversifies your portfolio, which usually reduces risk and leads to higher long-term returns.
Chris Magnussen, a licensed insurance agent, offered his take on the benefits of diversifying your portfolio with an annuity.
“Purchasing an annuity can have a very positive impact on your retirement portfolio. It can be seen as that foundation that you build upon. Purchasing an annuity will remove a lot of risk from your overall investments,” Magnussen said.
You may have heard of the phrase “Don’t place all your eggs in one basket.” In this case, the basket is your portfolio, and an annuity is one of the eggs. You can have many different eggs, such as money market accounts, certificates of deposit and stocks. However, to achieve the greatest diversification benefit, each of the eggs in your portfolio should exhibit a unique risk profile.
Michael M. purchased his annuity partially for diversification reasons. “I did some research. I read about the pros and cons based on my needs. I made a decision that I want a portfolio of different things, so it’s not all in one basket.”
Remember, not everyone has the same diversification goals. Think about how much you need to save for your retirement, how much risk you are comfortable assuming and how many investments you can simultaneously juggle.
If any of the reasons to purchase an annuity resonate with you, reach out to a licensed financial advisor to determine whether an annuity could fit in your portfolio.
Purchasing an annuity can have a very positive impact on your retirement portfolio. It can be seen as that foundation that you build upon. Purchasing an annuity will remove a lot of risk from your overall investments.
Christopher MagnussenLicensed Insurance AgentChristopher Magnussen is a licensed insurance agent and financial services expert with more than 20 years of investment experience at TD Ameritrade, Edward Jones, Axos Clearing and other financial institutions.
Beat the Bank With Fixed Annuity Rates As High As 6.4%