What Residents of The Villages Might Want to Know if their Knowledge of Annuities is Limited

It makes sense that today’s baby boomer generation – mostly now retirees or soon-to-be retirees – have invested in record numbers of annuities three years in a row. Tens of millions have good reason to be curious about them. And why not? At this juncture, many have no guaranteed income in retirement outside of Social Security.

Moreover, Social Security may fall short of its current payouts – by more than 20% in 2033 — if Congress does not meaningfully enhance the Social Security trust fund, an issue that has cropped up unsuccessfully in multiple years in the past. It suggests that Social Security may not be nearly as lucrative in the long run.

It’s not that Washington doesn’t agree this should be done. Rather, it’s ongoing disagreements between political parties. Democrats strongly favor raising taxes to strengthen Social Security and Republicans tend to want to trim benefits down the road. Either way, politicians who win the upper hand would face huge voter dissent and very possibly be pushed out of Congress, which is why strengthening the trust fund chronically fails.

For now, many baby boomers need a financial tool that can help turn decades of savings into lifetime income streams. Annuities, when used wisely, fit the bill.  Annuity sales are exploding because annuities do what no other investment can do. They provide guaranteed income for the rest of your life, thereby helping ensure you don’t outlive their savings. In addition, some annuities, such as Athene, Nassau Financial, Allianz and MassMutual Ascend, also offer bonuses.

Annuities are extremely popular these days. According to LIMRA, the largest U.S. trade association supporting the insurance and related financial services industry, total annuity sales in 2024 were $434 billion, a 13% increase over $385 billion in 2023.

Nonetheless, annuities are commonly misunderstood and often misused.

Partly, it’s because too many buyers don’t purchase an annuity from the proper bank, insurance company or wealth management firm. It takes a bit of poking around and asking some questions to get it right. In addition, there are more than a thousand distinct annuity products in America. They mostly serve a sizeable array of different versions of about a half dozen major annuity types, dissimilar enough that they can easily be confusing if the interested buyer doesn’t examine the annuity world before making a purchase.   

There are so many types of annuities that to say “you hate annuities is like saying you hate all restaurants,” says Stan Haithcock, a prominent and veteran annuity agent licensed in all 50 states. The trouble is annuities are often sold and not bought.  Buyers frequently purchase ill-fitting products because that is what their broker is selling that month.  Again, it’s important to be an educated consumer before making a purchase.

While there are near countless annuity products, most combined with riders, they generally fall into handful of categories. Here they are:

• Immediate annuity: Often considered one of the simplest and most straightforward products, this is designed to provide a guaranteed stream that starts very soon after you pay for it. The amount of each payment and the duration of the payments are fixed at the time you purchase the annuity, based on factors such as age, current interest rates and the amount of the premium. The primary benefit is predictable, reliable income you can count on, regardless of market fluctuations.

• Multi-year guaranteed annuity (MYGAs): Also a simple product, the insurance guarantees a fixed interest rate for a specific number of years, typically three, five and seven years.  It mostly competes with bank CDs and is far more generous. This offers the same key benefit of an immediate annuity – you will know exactly how much your money will grow.

• Fixed indexed annuities (FIAs): These offer growth potential linked to the performance of a market index, such as the S&P 500. It stands out because it provides 100% protection in down markets, This attraction, in turn, caps or limits returns through so-called “participation rates.” So FIAs gain access to markets without risk, in exchange for limited returns.

• Structured annuities. These are linked to an index such as the S&P 500, but unlike FIAs, they offer some downside risk, a so-called buffer. Like FIAs, they also often have caps or limits, albeit more generous than those in FIAs.

On all annuities, annuity buyers should know that annuities require a commitment.  Many annuities offer a 10% annual withdrawal without penalty, but that’s it. Once a buyer pays for an annuity and receives annuity documents, he or she cannot make  a withdrawal beyond 10% annually.  If they do, they face so-called surrender charges, which typically last for seven to ten years. In the early years of the annuity contract, surrender charges are particularly steep. 

Prospective annuity buyers also need to know that while the vast majority of annuities are safe – hundreds of banks went bust in the Great Depression in the 1930s but only a tiny handful of annuities went bankrupt – some are still safer than others. To this end, prospective buyers should not purchase annuities rated lower than B+ and probably should limit purchases to a rating of at least A-. Highly regarded rating agencies include A.M. Best, Moody’s and Fitch.

Also important to know: When a buyer purchases an annuity, he or she has a free-look period, managed by state laws, that allow the cancellation of a purchase and a full refund ranging from 10 to 30 days after the annuity contract is received.  

To sure, annuities aren’t for everyone.  Those not worried about running out of income and have enough money from Social Security and other retirement assets may have no need for one.  Likewise, those who don’t expect to reach their life expectancy often don’t need an annuity unless they want to provide for their spouse.

And, predictively, those who do warm up to annuities should make a point to not purchase annuities beyond half of their investments – because, again, they are constricted. People need liquidity in the event that a huge bill of any number of things arise and must be addressed.

Lastly, on the bright side, ask yourself a question many folks would like to know.  Is this a good time to buy select annuities? The answer, indisputably, is yes. The level of interest rates determine how much annuity payments are paid to buyers. So it mostly depends upon the level of rates, which have declined somewhat but are still among the highest ratings since the 2000s. Most likely, they will decline by 2026, if not sooner.

Accordingly, if near-retirees and retirees haven’t done so already, now is an excellent time to take a good look at annuities at a reputable financial firm and open the door to heightened financial security.