How can annuities help me during retirement?

Annuities can help during retirement by providing a steady stream of income, which can supplement other retirement funds like Social Security or a 401(k). Here’s how they can benefit you:

1.  Guaranteed Income: Annuities, especially fixed or immediate annuities, offer predictable payments for a set period or for life, reducing the risk of outliving your savings. For example, a single premium immediate annuity might pay you $2,000 a month for life in exchange for a lump sum.

2.  Protection Against Market Volatility: Fixed annuities provide stable returns unaffected by market swings, unlike stocks or mutual funds. Variable annuities, while tied to market performance, often include options like guaranteed minimum income benefits to limit downside risk.

3.  Tax-Deferred Growth: With deferred annuities, your earnings grow tax-free until withdrawal, allowing your investment to compound faster than in a taxable account. For instance, a $100,000 deferred annuity at 4% annual growth could be worth about $148,000 in 10 years, pre-tax.

4.  Customizable Options: Annuities can be tailored to your needs. You can choose lifetime payouts, joint-life options for you and a spouse, or even inflation-adjusted payments. Riders like long-term care coverage can address specific retirement concerns.

5.  Longevity Risk Management: With people living longer (average life expectancy in the U.S. is about 79 for men and 82 for women), annuities ensure you won’t run out of money, especially with lifetime payout options.

Considerations:

•  Costs: Annuities often come with fees (e.g., surrender charges, mortality and expense fees), which can eat into returns. Variable annuities might charge 2-3% annually in fees.

•  Liquidity: Once you annuitize, accessing your principal can be difficult or impossible, so you lose some flexibility.

•  Complexity: Products like variable or indexed annuities can be hard to understand, requiring careful review of terms.

•  Inflation Risk: Fixed payments may lose purchasing power over time unless you opt for an inflation rider, which increases costs.

Example: A 65-year-old retiring with $500,000 might buy an immediate annuity yielding $2,500/month for life, ensuring basic expenses are covered alongside Social Security. Alternatively, a deferred annuity could grow their savings for 10 years before payouts begin, balancing growth and future income.

Before buying, assess your retirement needs, compare annuity types (fixed, variable, indexed), and consult a financial advisor to ensure it fits your plan.