A look inside why more Americans are turning to lifetime income.
Annuities can provide a guaranteed lifetime income stream in retirement, no matter how long you live. They thrive under high interest rate environments and are currently offering the highest payouts seen in years.
Recent market trends have led to a surge in their popularity. The cause – which resulted in record total U.S. retail annuity sales of $385.4 billion in 2023 and $106.7 billion in the first quarter of 2024 – can be traced back to the COVID-19 pandemic. Just before that, the market had reached its all-time peak. Then the after-effects brought about record-high inflation, rumors of impending recession and unprecedented market volatility.
For many the thought of losing a substantial portion of their retirement savings made them willing to trade the possibility of gains for the promise of safety. And with the Fed raising interest rates to the highest levels in 15 years, the stage was set for products like annuities. And take center stage they did.
Guaranteed income for life
The word “guarantee” doesn’t come up very often in conversations about investing and retirement planning. But in the case of annuities, that’s exactly what you can get: guaranteed income, at a guaranteed amount for a guaranteed duration, as long as you live.
When you purchase an annuity, you enter into a contract with the insurance company. There’s no health screening required to buy an annuity, just a simple calculation an actuary performs to determine the amount you’ll be paid based on your life expectancy, the date you choose to start taking payments, the amount you put in and the interest rate environment. The higher interest rates, the more you can receive.
Lifetime income through annuities
Fixed income annuities
With an immediate income annuity, you put in a lump sum and earn a fixed payment for the rest of your life. You’ll receive income within 12 months of your purchase—one month after you buy your annuity for monthly payments. While monthly income payments are most common, you can also choose to receive quarterly, semiannual or annual payouts. Your payment amount is determined by your life expectancy from the date of purchase and the amount you put in. If you select an annuity with a “cash refund” death benefit and die before your income payments equal the full amount of your annuity purchase price, your beneficiary will receive the difference. And should you outlive your initial investment, you‘ll continue receiving payments. A great option for retirees looking for a guaranteed income stream, an immediate income annuity gives you a steady monthly check in retirement, just like Social Security.
If you’ve got some time before you retire, a deferred income annuity gives you the opportunity to grow your money tax-deferred for a period of time and unlike immediate annuities, you can convert this money into guaranteed income payments at a later date. Typically, the longer you delay your start date the higher your income payments will be.
Whether you invest in an immediate or deferred annuity, both options provide the advantage of a guaranteed income stream throughout retirement. However, this benefit does come with the trade-off of having limited control over these assets. It’s also worth noting that once your policy is in place and the income start date is set, you’ll have little flexibility to change this date, if possible.
