Are annuities a smart investment? Let’s explore their nature, functionality, and the compelling reasons women should think about them.
Financial concerns often circle around one major fear: running out of funds during retirement. Research reveals that 66% of Americans worry about depleting their retirement savings, a valid concern since half of U.S. households might not have sufficient income to sustain their lifestyle in retirement.
It’s clear that there’s a pressing issue, and without action, many could exhaust their retirement savings long before their time is up.
The silver lining? We possess tools to address this challenge. Annuities are gaining traction, with interest and purchases on the rise. In 2023, annuity sales reached a record high, with total fixed-rate deferred annuities at $164.9 billion, a 46% increase from 2022. But what exactly are annuities, and are they a wise investment? Let’s break it down.
WHAT IS AN ANNUITY?
Essentially, an annuity is a “financial agreement between you and an insurance firm,” explains Minji Ro, Chief Strategy Officer. “These products are primarily designed for retirement, providing a reliable income stream during retirement and ensuring a guaranteed income for life, even if your initial investment is fully utilized.”
Here’s the gist: you make a lump sum payment or a series of payments to the insurance company, which then guarantees you regular payments in return. These can extend for a set number of years or for your lifetime, potentially covering you and a spouse.
While they may seem complicated, some annuities are straightforward. Ro likens them to cars: do you need a basic mode of transport or a luxury experience? “Are you focused on safety or speed?” Ro asks. “With annuities, we’d inquire, ‘Do you need protection? Do you want to ensure you won’t outlive your income and seek certainty?’ Some prefer a guaranteed paycheck for life.”
This concept of lifetime income is particularly attractive to women, highlights Jason Fichtner, Chief Economist. Women typically earn less than men, save less for retirement, and often outlive their partners by several years. Hence, women may face a greater risk of financial insecurity.
Here are three reasons women should consider annuities for financial stability.
REASON 1: RISK TOLERANCE
Women generally have a lower risk tolerance compared to men. Our preference for safety leads to a higher percentage of our savings held in cash. Annuities can provide a solution by guaranteeing lifetime payouts.
“Annuities appeal to economists, as they transfer some risk to the insurance company,” Fichtner shares. Think of them as a bond-like component in your investment portfolio. This stability enables you to take more risks with your remaining investments. With guaranteed income, your other assets can recover during market downturns.
REASON 2: SPENDING HABITS
Saving for retirement can feel like a marathon, and transitioning to spending can be daunting. Many struggle with the idea of depleting their principal, resulting in underspending, especially among women.
Fichtner notes, “Research indicates that people often spend less when solely drawing down their assets compared to when they have an annuity providing a fixed amount to spend annually.” This “budget constraint” can lead to more effective spending.
REASON 3: LONGEVITY
Women live longer, which amplifies concerns about outliving their savings. Data from the Society of Actuaries shows that a 65-year-old woman has a 65% chance of reaching 85 and nearly a 50% chance of reaching 90. In contrast, a 65-year-old man has lower probabilities. “It makes sense to allocate part of your retirement assets into something that will provide income for life, even if you exhaust your initial investment,” Ro emphasizes.
WHEN AND HOW TO PURCHASE AN ANNUITY
If you’re considering annuitizing a portion of your retirement savings, when should you start? “There’s no wrong time to research and understand the concept,” Ro advises. Their youngest client is 29, while the oldest is 92, with the average around 64.
How much should you invest? Ensure your guaranteed income or annuities cover your fixed expenses. Social Security contributes, but it typically only accounts for about 40% of pre-retirement income. An annuity can bridge the gap between Social Security and your anticipated expenses.
Once you decide an annuity fits your financial strategy, consult a financial advisor, check if your 401(k) includes annuity options, or purchase directly from providers like Gainbridge, which can help calculate your guaranteed lifetime income based on your investment.
