Will an Annuity Align With Your Investment Goals?


You have likely encountered several longer-term investment options as you plan for retirement. One option you may have come across is an annuity. Some initially appealing benefits of an annuity contract are tax-deferred growth and the prospect of guaranteed lifetime income. However, you might want to consider whether an annuity aligns with your long-term investment goals before signing on the dotted line.

To determine if an annuity would meet your needs, first consider your retirement goals. Next, research how annuities work, their benefits and their drawbacks. Then compare your goals with the annuity’s benefits to see if they align or if your goals might be better served by an alternative investment.

What Are Your Retirement Goals?

In our experience, there can be a divergence in how investors envision their retirement years. Retirees may wish to travel more, dedicate themselves to a favorite hobby, open a business, or simply spend more time with family and friends.

Understanding your vision in detail can help answer three critical questions that address your future financial needs:

  • How much will your retirement cost?
  • How will you pay for it?
  • How will you generate retirement income?

As you consider these questions, consider some common retirement planning goals: growth, cash flows or a combination of both.

  • Growth: You may want your investments to outpace inflation or continue growing beyond your retirement time horizon.
  • Cash flow: You may want cash flow to provide for your expected and unexpected expenses, whether they are discretionary (things you want) or non-discretionary (things you need).
  • Combination: You may want a combination of growth and cash flow to support your retirement needs.

Unexpected Costs and Increased Life Expectancy

As you work toward your retirement goals, consider some often overlooked factors:

  • Longer time horizon requires more growth: Medical advancements mean people are generally living longer now than in the past. You may need to plan for a longer investment time horizon than initially expected to avoid to outliving your savings later in life.
  • Consider unexpected costs: Your biggest unexpected costs will likely come from healthcare. Not only might you need more healthcare services as you age, but healthcare costs have been outpacing inflation. [i]
  • Inflation can erode your purchasing power: Since 1925, inflation has averaged approximately 3% per year.[ii] If that rate continues, a person who currently requires $50,000 for annual living expenses would need approximately $90,000 in 20 years and $120,000 in 30 years just to maintain the same purchasing power.

Let us now take a closer look at what annuities may offer.

How Annuities Work

An annuity is a financial product provided by an insurance company. As with a life insurance policy, you pay a premium to the insurance company, either as a lump sum or in a number of payments. In return, you receive income payments (payouts) over a specified time period. These payments are usually either a fixed rate of income (fixed annuity) over a certain time period, or variable based on the returns of underlying assets in sub-accounts (variable annuity).

Annuity terms vary between annuity products and insurance companies. Following is a brief description of several common types of annuities.

Immediate annuities allow annuity owners to begin receiving payments right away.

Deferred annuities start paying income at a later date and may grow until that time.

Fixed annuities guarantee a fixed payment or minimum rate of return over a set time period, similar to a bank Certificate of Deposit.

Variable annuities’ payments are generally based on the performance of underlying assets in sub-accounts. Some variable annuities guarantee a minimum rate of return even if the underlying assets underperform.

Indexed annuities offer a rate of return based on a specific market benchmark, such as the S&P 500, often with a certain minimum return and a capped maximum return.

Annuities can have many considerations and features that may not be found in other investment products. Many types of annuities don’t offer the same liquidity as other investment vehicles. If you need cash immediately during retirement, you may have to pay penalties to access cash above your contracted payment amount. In some cases, if you need to cash out an annuity before a specific surrender period, you will likely have to pay additional surrender charges in order to receive your money.

You now know how to determine your retirement goals and how various types of annuities are structured. You are ready to answer an important question.

Will an Annuity Align With Your Retirement Goals?

  • Determine if your retirement goals require growth to support your lifestyle. The guaranteed income from an annuity could shelter you from short-term market volatility. But guaranteed annuity returns can yield much less than traditional investments over the longer term. Although certain types of annuities, such as indexed or variable annuities, may provide returns based on a security investment or an index, fees, caps and expenses can reduce overall returns.
  • Can you afford annuity fees and expenses? Even a small annual fee can eat into returns over time, especially when you include fees for additional benefits. Compounded over the longer term, can you afford them?
  • Do you have immediate access to cash? If you or your spouse encounter a medical emergency, natural disaster or other event requiring immediate funds, will you be able to terminate your annuity contract, and can you afford the surrender charges if so? It may be less costly to generate cash flow through more liquid investments.
  • Will your annuity payments keep up with inflation? Some insurance companies offer an inflation rider to protect against the risk of your annuity income not keeping pace with inflation. However, the additional fees can reduce your payouts and diminish the value of that protection.
  • Do you plan to leave a legacy to a charity or an inheritance to your children and grandchildren? Some annuity plans come with death benefits or the option to purchase additional death benefits. Death benefit guarantees may provide benefits to heirs over a certain time period if you pass away before the contract ends. When evaluating the fees often associated with death benefit riders, you may consider alternatives that may be better suited to passing on a legacy.

Are Annuities A Good Investment?

Understanding whether annuities align with your retirement goals can be difficult. We have helped many investors plan to meet their income needs at retirement. Download one of our educational brochures or call to speak with one of our experienced professionals to determine which investment products are right for you.

[i] Source: FactSet, as of 01/09/2018. Consumer Price Index data from 12/31/1990 – 12/31/2017.

[ii] Source: FactSet, Inc.; as of 2/12/2018. Based on US BLS Consumer Price Index from 12/31/1925 – 12/31/2017, average annualized inflation was 2.91%.

Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations.