Are Annuities a Good Investment?

This is one of the most common questions we get asked from both new clients and existing clients: are annuities a good investment?

For those that are extremely skeptical, it’s usually because a financial planner or advisor has told you to steer clear of annuities, or maybe you’ve even heard about a friend’s bad experience with one.

However, many of our clients have and love their fixed or fixed index annuities. They can be one of the best ways to earn safe interest on your retirement savings.

We wanted to dedicate an article to fully answer the question "Are annuities a good investment?"

Originally published July 24, 2018. Updated June 15, 2021.

Variable Annuities – Not the Best for Age 65+

When a financial advisor is telling you to stay far away from annuities, they’re usually referring to variable annuities.

Variable annuities are tied to the stock market performance, and they have hefty fees involved. The fees can end up being higher than any interest you earn, which means you actually lose money!

The whole point of an annuity in retirement is to preserve and grow your hard-earned money, so the idea that you could potentially lose money with an annuity is both risky and scary.

So, are variable annuities a good investment? Since we’re making recommendations for the senior audience, we’d say that variable annuities are not a good or safe place to put your money.

However, variable annuities are just one type of annuity, and we’ve found that most of our clients didn’t know this!

There are other kinds of annuities that can be absolutely wonderful for those aged 65+, and we’d like to take a little bit of time to explain how those can be safe and how they can quickly and predictably grow your savings.

Fixed Annuities – Safe and Predictable

When you enter retirement, your outlook on money will shift from the accumulation stage to the preservation stage. Your focus is no longer on making money – it’s about preserving it and making it last as long as possible.

This is where fixed annuities shine. A fixed annuity is a very straight-forward contract. You are guaranteed a specific interest rate, and that rate is locked in for a certain period of time. For example, you're guaranteed 3% interest, and it's locked in for 5 years.

If you started with a $50,000 deposit, here's how that annuity would perform:

It’s very predictable – you know exactly how much your money will grow every single year – plus, you’ve made nearly $8,000 by the end your contract! You can also see how compound interest helps you grow your deposit over time.

Many fixed annuity products also include an option to withdrawal some of your account value. The earned interest – or up to 10% of the account value – is fairly common. Rest assured that you can access some of your money if the need arises. It’s not all locked up like many people think.

We come across a lot of individuals who have money saved up, perhaps in a savings account or a CD, and they simply didn’t know that there was a safe way to earn a much higher interest rate on their money.

Alternatively, many individuals have their savings in the stock market, and while they may be making better interest rates right now, we all know how volatile the market can be.

At this stage in life, it’s much easier to sleep at night knowing your life’s work is being preserved and cared for in a safe place like a fixed annuity.

Fixed Index Annuity Options – Potential to Earn More

If participating in the stock market is a must-have for you, there is a type of annuity that might interest you. This is called a Fixed Index Annuity (FIA), and in sum, you get to participate in the gains of the stock market while avoiding all of the losses.

Let's say your annuity is based on the performance of the S&P 500. If the S&P 500 goes up 12% that year, your annuity may be capped at 6%. But if the S&P 500 goes down 12%, you stay at 0. The insurance company takes on the risk, but you do give up some of the gains in exchange for safety and no risk of losing your principal.

That's right – even in a negative year, the worst you can do is stay the same. Your account will never lose value.

Here's an example of how a FIA works from our friends at SILAC Insurance Company:

Many clients like the indexing option where they have the chance to join the party when the stock market is doing well. But if their friends are losing money when the stock market tanks, they can stay comfortable knowing they aren’t losing anything.

Is An Annuity Right For You?

Annuities aren’t for everyone, so we’ve reviewed all of the scenarios we’ve come across and have compiled a list for you. If any of these situations apply to you, an annuity can be a great addition to your retirement portfolio:

• Do you have a 401(k) or IRA that you are no longer contributing to?
• Do you have money sitting in a savings or checking account that isn’t being used?
• Do you have money in a CD that’s earning a very low interest rate?
• Do you have money in a Money Market that’s earning a very low interest rate?
• If you have money in the stock market, would you be financially devastated if it tanked overnight?
• Do you have any money that isn’t being used and that you don’t plan to use in the future?

If you answered “yes” to any of these questions, an annuity is a fantastic solution for you.

Our clients are over the moon when they realize the potential of an annuity – many individuals simply don’t know what they don’t know. Schedule an appointment right on our agents' calendars to learn more about how an annuity can work for you.