Retirement Annuity Basics

Retirement annuities are a popular choice for retirees because of their perceived safety and “guaranteed” returns, but there are several unintended consequences you need to be aware of when buying an annuity.  Annuities for retirement are often sold as investments that can help protect your assets and future income.  Unfortunately, an annuity may end up undermining your long-term investment goals.  Industry statistics suggest annuity sales often peak at just the wrong times.

Fixed Annuities

Fixed annuity sales (those not tied to stocks or bonds, offering a fixed payment) peak when the market is low. This is bad for you because when the market inevitably starts to move up, you may be stuck in a low fixed rate. You should be aware there may be steep penalties for breaking an annuity contract. The chart below shows the pattern of fixed annuity sales.

Fixed Annuity Sales vs. Stock Market Returns

fixed and variable annuity sales vs. stock market returns.
Source: LIMRA, FactSet; S&P 500 Total Return Index level for the period 12/31/1998 through 12/31/2013.
Explanation: Annuity sales peak at the wrong times, showing investors are buying based on emotion not a coherent strategy.

Variable Annuities

Variable annuity sales (which allow for some stock market exposure) tend to peak when the market is high, suggesting everyday investors want to get in on the action.  But when you buy in to a fixed contract at market highs, what happens when the market drops? You’re locked into a long-term contract tied to market returns and have no flexibility to change your strategy to match a dropping market. The chart below shows the pattern of variable annuity sales.

Variable Annuity Sales vs. Stock Market Returns


Source: LIMRA, FactSet; S&P 500 Total Return Index level for the period 12/31/1998 through 12/31/2013.
Explanation: Annuity sales peak at the wrong times, showing investors are buying based on emotion not a coherent strategy.

Annuities in Retirement

Annuities may have a place in your comprehensive retirement plan if used appropriately, but like any complicated financial product, the decision should be made after considerable planning and review—not times of stress or based on short-term market conditions.

Takeaway: Think long and hard before you’re sold a retirement annuity, it may not be right for you.