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Where Do Annuities Fit into My Retirement Strategy?

Life is full of uncertainty. But with the right retirement plan, you can rest comfortably knowing your financial future is secure. Annuities can help with that, offering a steady stream of income once you retire from your career. Here’s how annuities can contribute to your retirement strategy.

What Are Annuities?

An annuity is a type of insurance product designed to provide income during your retirement. How do annuities work? After you make your initial investment, the annuity makes payments to you at a future date, or at regular intervals beginning from the time that the annuity matures.

There are many different types of annuities. Some offer monthly, quarterly, and even annual payments, while others can provide a lump-sum payment. The amount you earn depends on the nature of the annuity itself as well as the length of your payment period.

The Benefit of Annuities for Retirement Planning

Annuities provide much-needed stability in your retirement years. Receiving regular payouts from your annuity can supplement the income you receive from your other retirement accounts and Social Security payments.

But an annuity can also assist in your long-term investment goals. Ty Young, CEO of Ty J. Young Wealth Management, explains that “the correct annuity, used properly, can be a tremendous tool for achieving investment/retirement goals. The right annuity can provide much-needed growth and safety simultaneously. For example, you can eliminate one-half of the market risk of your portfolio with little or no effect on your positive rate of return.”

This means that annuities can be an ideal way to supplement your other investments, making them part of a well-rounded retirement strategy.         

How to Choose the Right Annuities

It’s easy to get overwhelmed by the number of annuity options currently available. But you can narrow down your choices by asking the following four questions.

1. Does the Annuity Provide Safety of the Principal?

Ty Young says that you should start by asking: “Does the annuity provide safety of principal? The best annuities are completely protected against market losses.” 

If the answer to this question is no, retirees could discover that their retirement plans have been negatively impacted by an unstable market. Research carefully to keep your money secure.

2. What Is the Historical Rate of Return of the Annuity?

According to Ty Young, investors should be asking a series of questions about the rate of return. 

“What is the historical rate of return of the annuity? For the best annuities, it’s 6%–8% compound. How is the rate of return calculated? In the best accounts, it’s in the S&P 500 with a participation rate or a cap. How often are your gains locked in? In the best accounts, gains are locked in annually.”

3. Does It Have Zero Fees?

Next, Ty Young recommends that you examine the costs of the annuity. “Does it have zero fees? The best annuities have zero annual fees.” Not every annuity will be free of fees, so investors will need to weigh these costs against the expected rate of return.

4. What Is the Duration of the Annuity?

Finally, Ty Young suggests asking: “What is the duration of the annuity? The best annuities currently are between 5 years and 8 years.” This can vary based on withdrawal rate and rate of return, so it’s important to find a retirement vehicle that aligns with your retirement timeline and expected financial needs.

Annuities: Part of a Broader Retirement Strategy

Retirement plans are as diverse as the people that make them. As you consider your future, it’s important to think about your personal and financial goals and then create a financial strategy that matches those goals. Annuities can provide stability to your retirement plan, making them a valuable part of your investing strategy.

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