Annuities for Retirees: Features, Benefits, and Drawbacks

By Cole Bruner, President of Buska Retirement Solutions and Buska Wealth Management

As retirement approaches, many individuals begin shifting their focus from growing wealth to preserving it and ensuring a reliable income stream. Annuities are one financial tool that could help achieve this goal. Designed to provide consistent payments over time, annuities could offer peace of mind—but they also come with trade-offs that retirees should consider.

Key Features of Annuities for Retirees

Annuities are contracts with insurance companies in which you contribute a lump sum or series of payments. In return, the insurer promises to pay you a regular income—either immediately or at a future date.

For retirees, the most relevant types include:

• Immediate Annuities: Begin providing income within a year of purchase, ideal for those who need income right away.

• Deferred Annuities: Start payments at a later date, giving your investment time to grow tax-deferred.

• Fixed Annuities: Offer predictable, stable payments, which could be especially comforting in retirement.

• Lifetime Annuities: Guarantee income for the rest of your life, helping you avoid the risk of outliving your savings.

Benefits for Retirees

1. Guaranteed Income for Life

One of the most attractive features for retirees is the promise of a stable income, often for life. This provides a financial safety net, ensuring that even if other savings run low, you'll still have money coming in.

2. Peace of Mind

The predictability of fixed annuities could ease financial anxiety. Unlike stocks or mutual funds, annuities aren’t affected by market volatility, so your payments remain steady.

3. Tax-Deferred Growth (for Deferred Annuities)

If you don’t need income right away, a deferred annuity allows your money to grow without immediate tax implications, preserving more for future use.

4. Customization Options

Many annuities allow you to add features (called riders) such as inflation protection, long-term care coverage, or benefits for a surviving spouse. This flexibility could help tailor your annuity to fit your retirement lifestyle.

Potential Drawbacks

1. High Fees and Charges

Some annuities, especially variable ones, come with substantial fees. These could erode your returns and reduce the overall benefit of the product. Always ask for a breakdown of all charges before buying.

2. Limited Access to Your Money

Annuities are not very liquid. Withdrawing money early could lead to surrender charges and tax penalties, especially if you're under age 59½ (for deferred annuities). Even in retirement, access could be restricted depending on the contract.

3. Inflation Risk

Fixed payments may lose purchasing power over time due to inflation. While inflation-adjusted annuities exist, they generally offer lower starting payouts and could cost more.

4. Complexity

The wide variety of annuity products and options can be confusing. It’s essential to fully understand what you're purchasing and how it fits into your broader retirement plan.

Final Thoughts

For retirees looking to create a reliable income stream and reduce financial uncertainty, annuities could be a valuable piece of the puzzle. However, they aren’t a one-size-fits-all solution. Take time to review your needs, compare options carefully, and consult with a financial services professional. When used wisely, annuities could help turn your retirement savings into a secure and lasting source of income.