Who Should (& Shouldn’t) Buy an Annuity for Retirement (2024)

Key Takeaways:

If you’re approaching retirement age and worry that you’ll run out of money in retirement, you may be well-suited for buying an annuity.

When you purchase an annuity contract, you buy it with a lump sum payment or by making a series of payments over time, similar to how you pay into other types of retirement savings accounts over a period.

Once you retire (or later in your retirement years when you need it), the annuity converts into a steady stream of monthly payments that act as a source of income.

One major benefit of annuities is that these payments can last the rest of your life, even if the total amount that gets paid out to you eventually exceeds the amount you paid to purchase it. Because of this, annuities are a good way to ensure that you never completely run out of money in retirement, even if you exhaust retirement funds in a 401(k) or an individual retirement account (IRA).

It’s important to remember that annuities can make an excellent supplement to your retirement planning, but they are often paired with other strategies. For example, it may not make sense to use an annuity in place of a 401(k) or IRA. Annuities are typically used in addition to these products as a supplement to the rest of your retirement portfolio.

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While annuities can be a source of additional income in retirement, they won’t make sense for everyone. There are certain groups of people who may not see much benefit from adding an annuity to their retirement plan.

You may not be a good candidate for purchasing an annuity if you already have enough money saved up for retirement. If there’s simply no risk that you’ll run out of cash in retirement, an annuity won’t provide much benefit, and it will only tie up your savings in the meantime.

On the other hand, you should only consider buying an annuity contract if you have enough money in your nest egg to comfortably do so.

You may not be the best fit for an annuity if:

There are many prudent reasons to consider making an annuity a part of your retirement strategy. The first and most obvious reason is the ability of these types of insurance products to supply you with lifelong income. Even if you exhaust your main retirement savings, an annuity can continue to provide you with periodic payments for the rest of your life.

You’re not alone if you worry about the possibility of running out of money in retirement. According to an Allspring Global Investments study, only 31% of retirees feel very confident that their savings will last them all the way through their retirement years.

Annuities also provide certain tax benefits. Unlike a 401(k) or IRA, annuities aren’t capped at a maximum contribution amount, so you can put as much money into it as you’d like (and can afford).

The payments you make to purchase an annuity are also tax-deferred, which helps to lower your taxable income and lets you potentially take advantage of a lower tax bracket when you retire.

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It’s important to make the distinction that annuities are not financial investments like an IRA or 401(k), though they offer the benefit of tax-deferral.

An IRA or 401(k) is a collection of investments and assets that can build up value, while an annuity is a type of insurance product. While a 401(k) plan can benefit from employer-matching contributions, an annuity is something you purchase on your own.

Traditional investment options like IRAs and 401(k)s typically include contribution limits, but there is no limit to the amount you can put into an annuity.

And, notably, 401(k) funds aren’t guaranteed to last through your retirement years. You can exhaust them like any other financial account funds. This differs from annuity payments, which can be structured to continue paying out for the rest of your life.

Buying an annuity won’t make sense for every retirement plan. If you’re wondering if you should buy an annuity for retirement, there are important questions you should ask yourself first.

First, does your health and projected lifespan match the benefits of an annuity? Since annuities can pay out until the end of your life, the value of an annuity increases the longer you live.

If you don’t expect to have a long retirement, it may not make sense to set aside a significant chunk of your retirement savings in order to get an extended period of long-term payments.

Next, do you have a plan in place to ensure you don’t run out of money in retirement? If you’re not sure that your savings will last you through retirement, an annuity could help lessen that risk.

It’s also important to consider whether your finances will allow you to purchase an annuity in the first place. It may not make sense to purchase one if you think you’ll need the annuity payments to start sooner than later.

Finally, you’ll need to decide how you want to purchase the annuity. Do you want to pay into an annuity contract over time, or purchase one with a lump sum payment? There are distinct advantages to each buying strategy.

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4 Cited Research Articles