March 3, 2021

How Do Annuities Work?

A volatile market can throw a wrench in your retirement plan. In the last 15 years, the stock market has seen two of the largest drops in history: once during the housing crisis of 2008 and again in 2020 following global uncertainty surrounding the COVID-19 pandemic. If you are planning your retirement, you might have lost some sleep this past year when the market bottomed out. You’re not alone and, thankfully, you have retirement planning options to help alleviate the stress of a fluctuating market.

BetterLife’s annuities can help you avoid the volatility of the stock market and create steady, dependable income during retirement. Annuities are ideal for protecting and growing your retirement savings, and they provide a safer alternative to investing in the market.

How does an annuity work?

An annuity is a contract with an insurance company where your money earns interest over time and you choose when you start receiving payments. Basically, you pay in and at a time of your choosing, you start getting paid out from your investment while avoiding the risk of an unpredictable market.

How do Annuities work?

“It’s a place for you to put some money that will be boring, predictable and, most importantly, guaranteed since they are backed by the financial strength and claims-paying ability of the insurance company,” says Brian Passehl, Sales Director at BetterLife. “When you need it, it will be there for you.”

Typically, you can choose to receive income in the form of flexible payments or regular payments that can last your entire lifetime. There are two types of annuity payments you can choose from: deferred or immediate annuities. Deferred annuities protect and grow your money now while providing the option to receive payments at a later time, like during retirement. Immediate annuities provide payments right away when you invest a lump sum of money.

Why should I consider an annuity?

If you are planning for retirement or looking for somewhere to invest an inheritance or settlement, an annuity is a risk-averse way to ensure you have dependable income regardless of market performance. Passehl says that it is important to compare an annuity to like products, such as CDs, bonds, money in your mattress, and checking accounts. An annuity can be a great way to create that guaranteed income, and it typically has a better return than a 5-year CD or savings account.

Couple looking at retirement plan together“If you have 10 years or less until either retirement or the point in time you’ll need the money, it should not be exposed to risk,” says Passehl. “There has never been a 10-year full down market. It has always recovered. If you have invested money that you don’t need in the next 10 years, you could likely recover your losses. If you have less time and may need the money sooner, it should be in a safer place.”

An annuity might not be for everyone. While you get the advantage of not losing during market downturns, you could miss out on large gains that other investments might bring you. The important thing to keep in mind, though, is that gaining large amounts of money is not the point of an annuity. “You will get a return of your money. Maybe not giant gains, but it will return your money at no loss,” says Passehl. “Use it to protect assets that you cannot afford to be exposed to risk.”

One good reason to choose an annuity as part of your retirement plan is that an annuity is the only financial vehicle that allows you to create an income stream you cannot outlive. If you put money in, you can generally choose how long it pays out, whether that is 5, 10, 20 years, or even the rest of your life.

Another appealing option for an annuity is tax-deferred growth. The annuity keeps growing until you are ready to begin drawing on it for income. When you retire, you might be in a lower tax bracket and therefore have to pay a lower rate on your taxable gain, an attractive option to any investor.

Why would I want to invest in an annuity?

  • Tree growing out of money - investment annuity imageYou got a new job and need to transfer your pension or 401(k) funds to a safe place.
  • You received an inheritance and want to find a place to safely invest it.
  • You would like a more conservative approach when saving for retirement.
  • You are saving for retirement and want to establish a traditional or Roth IRA.
  • You want to give to charity as a final wish.
  • You would like to establish a monthly income stream.

 

What are the risks of annuities?

An annuity is safer than almost any other investment you will make. Safer, however, doesn’t mean zero risk, so there are a few things to consider.

“The real risk is market loss,” Passehl says. “If you put $100,000 today in a 10-year annuity and the market grows by 80% over that time, you will not get that gain on your money. The flip side of that is that if the market drops 80% during that time, you don’t lose.” An annuity typically doesn’t have a cost associated with it when you set it up, but there can be a withdrawal or surrender fee if you want to take the money out earlier. This allows your investment to retain some liquidity to provide cash when needed. 

Is an annuity right for me?

Happy couple hiking in retirement after purchasing an annuityAsk yourself how comfortable you are with risk when it comes to your investments. As you get closer to retirement, it is a good idea to give yourself some cushion and dependable income so that you can cover your expenses without having to worry about the inevitable fluctuations of the market.

The best way to figure out if an annuity is right for you is to sit down with your insurance agent or financial planner to get a clear picture of your finances and retirement needs. An annuity can bring reliability and peace of mind to your retirement. It can give you the freedom to enjoy your time more and stress about the market less.

Learn more about why an annuity might be the right choice for you by contacting your local BetterLife agent today!