Are Annuities Safe to Invest In?

There are many financial products you can choose to invest in as a part of your retirement portfolio. One of the most complex is an annuity, which is a product that requires a premium payment upfront in exchange for a guaranteed retirement income later in life. Generally speaking, annuities are safe and can be a good addition to your retirement plan, but you do have to be careful and make sure you’re buying the right products from financial institutions you trust. Let’s break down the risks and benefits.

For help adding annuities to your portfolio, a financial advisor can walk you through different options for your retirement needs and goals.

What Are Annuities?

An annuity is a contract you sign with an insurance company where you pay a predefined premium up front in exchange for payments down the line, likely when you are in retirement. Annuities are popular with retirement investors because they provide guaranteed income during retirement, essentially replacing the pension payments that many workers got in earlier eras.

Annuities can be a valuable component of a well-rounded financial plan, offering a unique blend of security and growth potential. There are many types of annuities, but generally, they fit into two broad categories:

Fixed annuities are the most popular type. This annuity guarantees that you get back all of the principal you put in, plus a small amount of interest. These are not very risky, but you don’t have the chance to see your money grow the way you might with a different investment.
Variable annuities have no guaranteed interest. Your principal is generally guaranteed, but the interest depends on the performance of the investments your money is put in. Variable annuities have higher potential for return but also come with significant risk.

As with any financial product, it’s essential to assess your individual needs and consult with a financial advisor to determine if annuities align with your long-term goals. By doing so, you can make informed decisions that enhance your financial security and peace of mind.

Are Annuities Safe?

As long as you are buying from a reputable insurance agency, you can feel safe in purchasing an annuity. That said, it is important to note that annuities are not bank deposits and therefore are not insured by the FDIC. This means that as a result of a systemic collapse, annuities would not be covered by that safety net. There are state guaranty funds for insurance company collapse in some states, but it varies.

Variable annuities are less safe than fixed annuities, as the payout from a variable annuity is much more dependent on the market. That said, you are still guaranteed to get your principal back, so you won’t technically lose any money. Though, your money will be worth less when you get it back in your retirement, due to inflation, so you are at risk of losing value.

How to Pick the Right Annuity

When purchasing an annuity, the key to feeling safe in your investment is to pick a quality insurance company. Check the firm’s credit ratings — there are four credit rating agencies in the United States to look at: AM Best, Fitch, Moody’s and Standard & Poor’s. If a firm has a high rating from all of these, you can probably trust it. If it doesn’t, you might consider looking elsewhere.

Beyond that, consider how much you can pay in premiums and what type of payments you want to get in retirement. For a truly safe investment, look for a fixed annuity. If you’re willing to take a bit more risk, consider a variable option. Either way, getting the help of a financial advisor is a good idea.

One note when it comes to getting a financial advisor’s advice on annuities — some advisors, commonly called fee-based advisors, can earn commissions for selling insurance products, including annuities. This gives them a financial incentive to sell you the annuity that will bag them the biggest commission, even if it isn’t the best choice for you. For unbiased advice, find a fee-only advisor who does not earn commissions.

How to Plan for Retirement With an Annuity in Mind

When planning for retirement, considering an annuity can be a strategic move to ensure a steady income stream during your golden years. Annuities are financial products offered by insurance companies that provide regular payments in exchange for an initial investment. They can be particularly appealing to those who want to mitigate the risk of outliving their savings.

Incorporating an annuity into your retirement plan can complement other investment vehicles, such as stocks, bonds, and real estate. Annuities can provide a guaranteed income, which can be a stabilizing factor in a diversified portfolio. This guaranteed income can help cover essential expenses, allowing you to take more calculated risks with other investments. However, it’s crucial to balance the security of annuities with the growth potential of other assets to ensure your portfolio remains robust and adaptable to changing market conditions.

One of the key considerations when planning for retirement with an annuity is understanding the tax implications. Annuities offer tax-deferred growth, meaning you won’t pay taxes on the earnings until you start receiving payments. This can be advantageous if you expect to be in a lower tax bracket during retirement. However, it’s important to note that withdrawals before the age of 59½ may incur penalties, and all distributions are taxed as ordinary income.

Selecting the right annuity involves assessing your financial goals, risk tolerance and retirement timeline. Fixed annuities offer predictable payments, making them suitable for those seeking stability.

Bottom Line

The safety of an annuity can depend on the financial strength of the issuing company. It’s advisable to research the insurer’s ratings and reputation before committing to an investment. While annuities can provide peace of mind with guaranteed income, they may not be suitable for everyone, particularly those who need liquidity or have a higher risk tolerance. Ultimately, whether annuities are a safe investment depends on individual financial goals and circumstances.

Financial Planning Tips

For more help with annuities, consider working with a professional financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Outside of annuities, you should make sure to use a workplace retirement plan like a 401(k) if you have access. Make sure you’re getting your full employer match if any is available!