Understanding Annuities: A Guide for National Awareness Month

This June, we observe National Annuity Awareness Month, an ideal time to reflect on our retirement planning amidst current economic concerns like market volatility and rising interest rates. Annuities can offer a beacon of stability in such an unpredictable financial environment.

What Is an Annuity?

An annuity is a financial product that involves making payments to an insurance company in exchange for regular income later, either for a predetermined period or for life. This structure offers a predictable income stream, making it a preferred choice for many planning their retirement.

Why Consider an Annuity?

Annuities provide several enticing benefits, such as lifetime income and features for legacy planning including death benefits. They also offer tax-deferred growth, with the potential for compounding gains – a concept coined as the 'triple tax benefit' because principal, interest, and tax savings all earn interest. Certain types of annuities also provide market protection, shielding your savings from downturns.

Are More People Choosing Annuities?

The popularity of annuities is on the rise. Annuity sales hit a record $432.4 billion in 2024, a remarkable 12% increase from 2023. While projections for 2025 are more moderate, annuities continue to play a significant role in portfolio diversification.

What Are the Downsides of Annuities?

Undoubtedly, annuities come with downsides. These include high fees such as sales charges, administrative fees, and investment management costs. There are also risks associated with rising interest rates, inflation, and potential insurer failure, though state guaranty associations provide some protection. Tax impacts and early withdrawal penalties, like ordinary income tax and surrender charges, are also considerations.

Annuities aren't a one-size-fits-all solution but can be a powerful tool in particular retirement strategies. To determine if annuities could enhance your retirement plan, we encourage consulting with a financial professional to explore their potential fit within your strategy.