When retirement planning becomes serious, you must consider where your investments will be held. Anyone who wants to retire at a young enough age to enjoy life has to start thinking about how to make enough money to enjoy life without working. 

Of course, a critical question for those looking at ensuring guaranteed income is whether or not an annuity is right for them. This is a fair question, as annuities are often misunderstood, and many people are unfamiliar with how they work and the upside. 

What Is An Annuity? 

An annuity is a contract with a life insurance company that provides guaranteed income, which can be purchased in one upfront payment or through monthly payments over time. 

Fixed Annuity

The first and most common annuity option is a fixed annuity, which requires you to make premium payments monthly while your annuity grows at a predetermined percentage rate chosen by the insurance company. This amount is “fixed” and will never change over the annuity’s life, so you know exactly how much you will earn as soon as you start receiving payments. 

Variable Annuity

With a variable annuity, you are now making an annuity purchase from the insurance company that is typically invested in accounts like mutual funds. The amount you earn is not fixed and can go up and down based on the portfolio’s overall performance. This means you have more exposure to risk with a mutual fund, but the reward is also higher if the fund performs well. 

Equity Indexed

If you choose an equity indexed annuity, you have a fixed and variable combination, which ties the interest rate to the stock market’s index performance. Should the market have an up year, you’ll get some additional interest toward the end of the contract. On the other hand, if the market does not perform, no interest is added, with the understanding that your annuity won’t lose value either. 

Those Seeking Guaranteed Income

Regarding those who should consider an annuity, there are some general patterns for those who are ideal candidates for this type of investment. The first individuals who best fit this financial profile are those looking for guaranteed income. 

Of course, it isn’t just guaranteed income this individual is after, but predictable monthly income so they know exactly how much money will come in every month. Candidates who best fit this profile are potentially individuals who don’t have a significant pension lifeline and are fearful they may outlive savings. 

These individuals don’t want to worry about stock market volatility, so they are likely to invest in small funds while still wanting to make sure they can pay bills like housing, healthcare, and other daily living costs. 

Decision-Making Criteria 

To know if you fit these criteria, ask yourself if you prefer a steady and reliable source of income to help cover essential expenses. Are you comfortable exchanging some liquidity now for financial security later in life? Most importantly, are you someone who is okay with small(er) guaranteed payouts instead of not worrying about market volatility? 

Real-World Scenario 

Let’s look at someone like John, who has $500,000 in retirement savings and will receive Social Security benefits, which he plans to start taking at 67. However, John worries about covering all his living expenses if the stock market declines over time. 

In this case, John wants to ensure he has an additional $1,000 to $5,00 available monthly from an annuity to help with medical bills, necessities, and his mortgage payment. When considering his investment risks, he decides to take some of his retirement savings and invest in a fixed annuity, which guarantees him a monthly payout to help ease his worries. 

The Risk-Averse Retiree

In the world of retirement savings and planning, millions of individuals consider themselves risk-averse. These individuals are not okay with regular fluctuations in the stock market and want to be more conservative with their retirement financial planning. 

This could also be someone who has already experienced market corrections, such as the one from February to April 2020 during the early stages of the COVID-19 pandemic. It’s entirely reasonable to understand how these individuals might want to protect their nest eggs from any volatility in the market. 

Lastly, someone else who may fit this criterion already feels they have hit a magic number for accumulating retirement funds. They now want to consider how to distribute this money when retired in the safest way. 

Decision-Making Criteria 

To know if you are considered risk-averse and would make for a good annuity candidate, you can ask yourself a few questions. The most important question is to see if you are comfortable with market volatility or if you prefer to have a financial future that is steady and predictable. 

Separately, ask yourself if you are okay with choosing safety and reliability over the possibility of higher potential returns in the stock market. The last question ties back to an earlier thought about whether this person is at a point when they are okay with moving some of their assets toward establishing a guaranteed income stream. 

Real-World Scenario 

Let’s take John and Jane, who are in their mid-50s and saw significant losses during the 2020 financial crisis after panic selling. Their parents also lost money during the 2008 financial crisis, which has made them very cautious about taking chances with the savings they have left. They want to ensure they remain averse to any significant risk after their market experience five years ago. 

They have around $500,000 remaining between different accounts and investments but want to find a way to pool these investments and generate additional income to fund their retirement lifestyle. This would allow them to choose a deferred fixed annuity with a guaranteed lifetime withdrawal benefit, limiting their risk to any market exposure. 

Individuals Looking for Longevity Protection 

The third and final profile that might be right for an annuity is those looking for longevity protection. This group hopes to live into their 80s or 90s without worrying about running through their life savings. 

These individuals want to feel financially stable without worrying about consistent portfolio monitoring. They are also looking to ensure they can supplement Social Security with an income source that won’t run out, providing them with peace of mind that ensures they will have regular payments to rely on no matter how long they live. 

Decision-Making Criteria 

In the case of longevity, these individuals need to ask themselves a few questions. The first question concerns whether they plan to outlive their existing financial resources. Separately, are they also willing to give up direct control of their assets by investing in a guaranteed income platform like an annuity? 

An annuity may be the option they seek if they feel most comfortable paying for future healthcare and long-term care needs. 

Real-World Scenario 

This scenario will focus on Jack, who is in his late 70s and in excellent health. However, he is already looking at a depleted portion of his savings due to unexpected healthcare costs for his spouse. Jack is now looking for an additional income source to ensure he can handle any new healthcare expenses for both of them without investing back into the market. 

Because of his situation, Jack realizes it is ideal to purchase an immediate annuity with some of his remaining savings, which will provide guaranteed income for life. He now feels very comfortable that some of his financial uncertainty is lessened, and he isn’t worried about living another 20 years. 

 

 

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