Why Do People Buy Annuities?

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

What are the benefits of annuities? Why do people buy annuities? When it comes to retirement planning, there are a lot of options to choose from. However, one option that is often overlooked is buying an annuity. Annuities can be a great way to secure your financial future, but many people don’t understand them. This guide will discuss the top reasons to buy an annuity and how they can benefit you!

Why Buy An Annuity For Retirement?

  • Benefit from Tax-Deferred Growth: Annuities allow your investment to grow tax-free until you start to draw income, effectively allowing your money to compound faster.
  • Secure a Lifetime Income Stream: With annuities, you’re guaranteed an income for the rest of your life, ensuring financial stability during your golden years.
  • Insulate Yourself from Outliving Your Savings: Annuities address longevity risk by promising an income stream for a specified period or for life, providing peace of mind about outliving your resources.
  • Stay Ahead of Inflation: Certain annuities can help you keep up with inflation, protecting the purchasing power of your retirement savings.
  • Guard Your Assets from Creditors and Bankruptcy: In many jurisdictions, annuities can offer protection from creditors and bankruptcy, safeguarding your retirement nest egg.
  • Shield Yourself from Stock Market Volatility: Annuities protect against stock market fluctuations, ensuring a steady income stream regardless of market performance.
  • Bypass the Hassles of Probate: Annuities typically avoid the probate process, ensuring a quicker and smoother transfer of assets to your beneficiaries.
  • Alternative to Long-Term Care Insurance: Some annuities offer features similar to long-term care insurance, providing financial coverage for potential healthcare needs in retirement.
  • Secure Better Rates than CDs: Annuities can offer better returns than Certificates of Deposit (CDs), making them an attractive investment alternative.
  • Facilitate Medicaid Eligibility: Certain annuities can be structured to help with Medicaid planning, potentially enabling you to qualify for benefits while protecting your assets.

Seeking Guaranteed Income

People buy annuities primarily to secure a guaranteed income source, particularly for retirement. This regular income can last for a specific period or for life, depending on the type of annuity purchased. This certainty of income, despite market fluctuations, can provide financial comfort and stability.

Protection Against Outliving Savings

Annuities can serve as insurance against longevity risk – the risk of outliving one’s savings. For many, the fear of depleting their retirement nest egg is real. An annuity addresses this concern by providing income for life or a specified period, ensuring a steady stream of money.

Money Can Grow Faster

When you have many years until retirement—and the potential to live many years in retirement—you want to give your money a chance to grow. Because an annuity is a tax-deferred investment, you allow your money to grow faster. You don’t pay taxes on any interest you earn until you withdraw it. This allows all of your interest or investment earnings to compound. It’s important to understand that you get no additional tax advantage when you buy an annuity in an IRA or other tax-deferred account or plan. This is because the earnings and income in the account are already tax-deferred. In these cases, it would be best to consider only an annuity for its features and benefits other than tax deferral.

Why People Buy Annuities

Contribute As Much Money As You Want

Nonqualified, tax-deferred annuities have no IRS-mandated contribution limits. However, other tax-deferred retirement savings accounts, such as 401k plans and IRAs, have limits. This makes an annuity particularly helpful if you’ve contributed the maximum to a 401k or IRA and want to save more money in a tax-deferred vehicle. Here’s another potential advantage: You can allow your annuity to grow as long as you like.

Unlike a traditional IRA or 401k, an annuity isn’t subject to required minimum distributions (RMDs) when you turn age 73 (unless the annuity is held inside another tax-deferred retirement account subject to RMDs).

Why Do Millionaires Buy Annuities

Protection From A Stock Market Crash

Depending on your type of annuity, you can protect your principal and earnings from loss during market downtowns. A fixed annuity, for example, offers a fixed rate of interest over the life of the contract and protects both your principal and interest from loss for the entire term of
the guarantee period you choose.

A fixed index annuity tracks a market index and provides growth opportunities in line with the index’s performance. In addition, any gains are “locked-in” annually, so if the index underperforms in a given year, your previous earnings are protected, guaranteeing that your annuity won’t lose value in a market downturn.

Providing An Inheritance For Beneficiaries

Most annuities have features that allow you to pass the value of your contract directly to your beneficiaries, usually without the proceeds going through probate. You may also be able to designate that a beneficiary receives guaranteed income payments for a certain period or a lump sum.

Generally, your designated beneficiaries will receive the greater of two values:

  • The account value when you die or
  • The amount you contributed to the annuity (adjusted for prior withdrawals).

Another feature of some annuities is a guaranteed death benefit, which ensures that your beneficiaries receive the total account value (including any interest you’ve earned) should you die before you begin receiving annuity income payments.

Why Do Millionaires Buy Annuities?

You might wonder, “Why do millionaires buy annuities if they already have ample wealth?” The reasons are surprisingly similar:

The desire for Stable Income

Even millionaires appreciate the stability that comes with predictable income. The appeal of consistent cash flow, independent of market ups and downs, is universal.

Diversification

Annuities can play a crucial role in a diversified investment portfolio. By adding annuities, millionaires spread the risk across various investment types, potentially improving the overall return while reducing risk.

The Appeal of Fixed Annuities

Why do people buy fixed annuities specifically? With fixed annuities, the income amount is set at the time of purchase and does not change over time. This certainty appeals to those who prefer stability over the potential for higher but variable returns.

Annuities At A Glance

Variable
Annuity
Fixed Index
Annuity
Fixed
Annuity
Immediate
Annuity
Deferred
Income
Annuity
Principal ProtectionNoYesYesYesYes
Access To PrincipalYesYesYesNoNo
Control Over MoneyYesYesYesNoNo
Tax-Deferred GrowthYesYesYesNoNo
Guaranteed GrowthNoYesYesNoNo
Guaranteed IncomeYesYesYesYesYes
Inflation ProtectionYesYesNoYesYes
Death BenefitYesYesYesYes/NoYes/No
Long-Term Care HelpYesYesYesNoNo

Weighing the Pros and Cons: Why Do People Purchase Annuities?

The reasons people purchase annuities are as diverse as the individuals themselves. From providing a guaranteed income and protecting against longevity risk to ensuring wealth preservation and facilitating portfolio diversification, annuities can fulfill multiple financial goals.

But, like all financial products, annuities aren’t for everyone. They can come with high fees, surrender charges, and tax implications. Therefore, consulting with a financial advisor is crucial to understand if an annuity fits your financial situation and goals.

Why Do People Buy Annuities? The Next Steps

If you’re looking for a way to protect your money and ensure you have a guaranteed income in retirement, an annuity may be the right choice. Request a quote today to see how much money you could contribute each month and determine if you’re protected from stock market crashes. You could also provide an inheritance for your beneficiaries that they can count on no matter what happens in the future. Contact us today to learn more about how annuities work and find the best plan for your needs.

Why People Buy Annuities

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Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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