The Truth About Annuities
You may have heard that annuities are the answer to everything, or that you should never own one. The truth is in between. Annuities are tools. Used for the right job, they can provide protection and income you can’t outlive. Used for the wrong one, they can tie up money you need. Here’s the straight story.
What is an annuity?
An annuity is a contract with an insurance company. You give the company a sum of money, all at once or over time, and in return the company agrees to protect it, grow it under the contract’s terms, and, if you choose, pay you an income, for a set number of years or for the rest of your life.
Social Security and pensions are two of the few sources of income that last as long as you do. For many families, an annuity is a way to create a third.
Protect
Shield savings from market losses, depending on the type.
Grow
Earn interest that is not taxed until you withdraw it.
Pay
Turn savings into income you can’t outlive.
Create your own personal pension.
Fewer people retire with a pension today. An annuity is one of the few ways you can create guaranteed income for life on your own, a paycheck that keeps coming no matter how long you live.
You may already own an annuity: Social Security.
Social Security works much like an annuity. You pay in during your working years, and it pays you a monthly check for life, with benefits that can continue to a surviving spouse. A pension works the same way. An annuity lets you add to that foundation with your own savings.
Income for one life, or two
Income can be set up to last for your lifetime, or for two lives, yours and your spouse’s, so payments continue for the survivor. That makes it a strong tool against the income cliff.
Two ways to turn it on
Annuitization: you convert a lump sum into a stream of payments. Lifetime income rider: on many deferred annuities, an optional rider lets you start lifetime withdrawals while keeping access to your remaining account value. Riders usually have an added cost.
Choose how it pays out
Common options include life only (highest payment), joint and survivor (covers two lives), life with a guaranteed period, and refund options so unused money can pass to beneficiaries. Each choice changes the payment amount.
Keep income money out of the market’s swings
A market drop right before or early in retirement can do lasting damage to savings you’re drawing from. Placing the money you need for essential income in a fixed or fixed indexed annuity protects it from market losses, so your paycheck doesn’t depend on what the market does that year.
Guarantees, including lifetime income, are backed by the financial strength and claims-paying ability of the issuing insurance company. Payment amounts depend on your age, the option you choose, and the contract’s terms. Income riders are optional and may carry an annual fee. Once annuitized, the money is generally no longer accessible as a lump sum.
Get the basics on indexed annuities
A short educational video from the Indexed Annuity Leadership Council, an industry group, explaining how fixed indexed annuities work. Watch it, then bring your questions to your conversation with us.
Video by the Indexed Annuity Leadership Council. Video not playing? Watch on YouTube ↗
The right job for an annuity.
An annuity works best as one piece of a coordinated plan, not the whole plan. Families most often use one to:
- Fill the income gap: cover the difference between what you spend and what Social Security and pensions pay.
- Protect a surviving spouse: soften the income cliff when one Social Security check stops.
- Bridge to Social Security: provide income in the years before you claim, so you can wait for a larger check.
- Protect savings you can’t afford to lose to a market drop right before or after retiring.
Already own an annuity, or have a quote?
Bring it in. We’ll explain what you have in plain English: the surrender schedule, the real costs, the income it can provide, and how it compares with other options.
Book an Annuity ReviewDifferent annuities do different jobs, and they also come with costs, limits or surrender terms. The question is not whether everyone should have one. The question is whether one fits your needs.
Explore annuity types, myths and questions →What people hear, and what’s actually true.
The Truth About Annuities
Our workshop on annuities, guaranteed income concepts, and common misconceptions. New dates will be announced soon.
Let’s see if an annuity belongs in your plan.
We start with your income plan, not a product. Education first, without pressure.
Book a Retirement DiscoveryOr call (803) 761-0136 or email info@db2financial.com