By
Kimberly Lankford,
AARP
En español
Published May 21, 2020
/ Updated March 06, 2024
Social Security was never meant to cover all your expenses in retirement, and unless you work in the public sector, pensions are rare. Knowing there’s another payment coming in like clockwork every month, or that your investments have some protection from a volatile market, can ease worries about outliving your savings, especially at times of economic uncertainty.
That may help explain why annuities are booming. Annuity sales hit a record high of $385 billion in 2023, a 23 percent jump from the previous year, according to LIMRA, a research association serving life insurance and financial services companies.
Offered primarily by insurance companies (but sometimes sold on their behalf by brokers or advisers), annuities come in many forms, with widely varying purposes and costs. Some are intended to provide a stable income stream and nothing more; others are more like investment vehicles and can be considerably more complex. Here are five things you need to know if you’re considering an annuity.
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1. Annuities are simple — and complicated
The most basic type is an income annuity, and it’s easy to understand: You hand over a lump sum to an insurance company and they send you a set amount of money every month for the rest of your life, no matter how long you live. The most common type of income annuity is a single-premiumimmediate annuity, where the payouts start immediately.
Payment amounts are primarily based on age, gender and the interest rate when you buy the annuity. For example, according to ImmediateAnnuities.com, an online buyer’s guide for annuity shoppers:
- A 65-year-old man who invests $100,000 in an immediate annuity in February 2024 could get about $621 per month for life ($7,452 per year).
- A 65-year-old woman could get about $600 per month ($7,200 per year).
Monthly payouts are lower for women because they live longer than men, on average. Regardless of gender, the older you are when you buy the annuity, the higher the monthly payout.
Income annuities “can be useful for prospective retirees who lack meaningful streams of retirement income, like Social Security and pension, or for those whose tolerance for market risk is low enough to make them fearful of what has historically been the optimal inflation hedge — stocks,” says Tim Maurer, partner and chief advisory officer at Atlanta-based wealth management firm SignatureFD.
Timing matters: If you buy an immediate annuity when interest rates are low, you lock in lower payouts for life. “While you may avoid market risk with fixed annuities, you’re accepting interest-rate risk,” Maurer says. With the Federal Reserve raising interest rates 11 times in 2022 and 2023, recent annuity buyers are getting significantly higher payouts than those who purchased immediate annuities a few years ago.
Even with that wrinkle, income annuities are relatively straightforward: Pay in now to get monthly income for life. Other types, such as variable and fixed-index annuities, are geared more toward deferring taxes or protecting investors from stock market losses. The rules, fees and the role they play in your retirement plan can be very different too.
2. Annuities require a commitment
With an income annuity, you won’t be able to access your lump sum once you hand it over to the insurance company. You’ll get the largest monthly payouts with a life-only annuity, which continues to pay during your lifetime, no matter how long you live.
There are two important factors to consider before you take this option. First, the payouts stop when you die, whether that’s two years after you buy the annuity or 30 years. Second, the annuity covers only you. If a spouse survives you, they get nothing.
You could get a version of the annuity that guarantees payouts will continue for at least 10 years, even if you die before then. Another option is a joint annuity that continues to pay out for as long as either you or your spouse lives. But in both cases, the monthly payouts would be lower than for a life-only annuity. A couple that invests $100,000 in a joint-life immediate annuity when they’re both 65 would receive $543 per month for their lives.
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