Want to reduce your risk of outliving your savings and create a shield against market downturns? An annuity might be right for you. Here’s how to determine whether to add one to your financial plan.
By Matt D’Amico, CFP®, ChFC®
If you’re approaching retirement, one of the biggest concerns you may face is whether your savings will truly last. After years of working, saving, and planning, the thought of running out of money—or being forced to cut back your lifestyle because of market downturns—can feel overwhelming. The good news is a seamless transition into retirement is possible with retirement income planning.
Retirement income looks different for everyone. You may be able to count on Social Security, pensions, and income from 401(k)s, IRAs, and other retirement accounts. For some, annuities add a layer of predictability. Here’s how to tell if annuities could be a valuable addition to your retirement income planning.
What Role Do Annuities Play in Retirement Income Planning?
Annuities let you convert some of your retirement savings into guaranteed future income. Take a closer look at how they work:
- You make a payment (usually a lump sum or installments) to an insurance company.
- The funds grow tax-deferred.
- The insurance company pays you back with interest over time.
Many people who incorporate annuities into their retirement income planning do so because they are often lower risk than other investments. This is especially true of fixed annuities, where your future payments are determined by your contract with the insurer, not by investment performance.
The Pros and Cons of Annuities
Like other tools for retirement income planning, annuities have both benefits and downsides. These are some of the pros of investing in annuities:
- They offer a guaranteed income stream.
- They help reduce longevity risk, or the risk of outliving your savings.
- They’re highly tax-efficient because they allow for tax-deferred growth.
- Some, like fixed annuities, shield your principal from market downturns.
Annuities are also highly customizable. You can choose an annuity that makes payments for a fixed term, like 20 years, or for the rest of your life. In many cases, you can pass the remainder of the annuity to loved ones after your death.
It’s also important to think about the cons of annuities for income planning, such as:
- Some annuities come with high fees and complex fee structures.
- Withdrawing money early can lead to major financial penalties.
- Annuities generally have lower growth potential than other kinds of investments.
Most annuity contracts are highly complex and can be difficult to understand. That’s why it’s important to work with a financial advisor when selecting an annuity.
When Annuities Make Sense
Each person’s financial situation is unique. However, these are a few scenarios where investing in an annuity often makes sense:
- You’re risk-averse and want to shield your retirement income from market volatility.
- You’ve maxed out other tax-deferred retirement income sources like your 401(k).
- You’re worried about outliving your savings.
- You’re looking to create a retirement income “floor” and don’t have a pension.
If you think an annuity may be right for you, our team can help you choose the one that best suits your needs.
Alternatives to Consider
Annuities aren’t the right choice for everyone. And even if you do want to incorporate an annuity into your retirement income planning, it shouldn’t be your only investment. Here are a few alternatives you might consider:
Certificates of Deposit (CDs)
These investments offer guaranteed returns, usually over short periods of time.
Bonds and Bond Ladders
Bonds are another type of low-risk investment, and they come with lower fees. “Bond ladders” allow you to receive regular payouts.
Real Estate Investment Trusts (REITs)
Investing in REITs can potentially lead to regular dividend payments. Because real estate appreciates over time, REITs often keep up with or even outpace inflation.
Need Help With Retirement Income Planning?
The benefits of annuities in the current market are many, but a strong retirement plan includes several sources of income tailored to your needs. At Networth Advisors, LLC, we help each client build a thorough retirement plan aligned with their future goals. Our approach is holistic. Whether through income strategy or legacy planning, we simplify the complexities so you can make smart financial decisions.
If you’re ready to take a closer look at your retirement income planning, contact us online today. To schedule a meeting, call (800) 822-3639 or email schedule@networthadvisorsllc.com.
Frequently Asked Questions
Are annuities a good option for retirement income planning?
Annuities can be a strong tool for income planning if you want predictable, guaranteed income in retirement. They may help reduce the risk of outliving your savings and provide stability during market downturns, especially if you don’t have a pension. However, annuities aren’t right for everyone, since some come with high fees, surrender charges, and limited liquidity. The right fit depends on your overall retirement goals, income needs, and risk tolerance.
How do annuities compare to other retirement income options like CDs or bonds?
Annuities, CDs, and bonds can all support retirement income planning, but they serve different purposes. CDs and bonds often offer lower fees and easier access to funds, while annuities can provide guaranteed lifetime income and tax-deferred growth. Many retirees use a mix of these options to create both flexibility and stability. At Networth Advisors, we help clients compare these strategies and build income plans designed around their specific retirement needs.
When should I consider adding an annuity to my retirement plan?
You may want to consider an annuity if you’re approaching retirement and looking to create a reliable income “floor” for essential expenses. Annuities can also make sense if you’ve already maxed out other tax-advantaged retirement accounts or if market volatility makes you uneasy. Income planning works best when annuities are evaluated as part of your full financial picture, not in isolation, so professional guidance can help you decide whether one fits your long-term strategy.
About Matt
Matt D’Amico, CFP®, ChFC®, is a financial advisor at Networth Advisors, a financial planning and wealth management firm in Canonsburg, PA. Matt specializes in simplifying income planning and legacy preservation for pre-retirees and retirees. A Saint Vincent College graduate and co-author of Networth for Retirement, he leverages deep industry experience from New York Life and MassMutual to help clients make smart, informed financial decisions.
