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FAQ: Understanding the Shift to Annuities for Retirement Income
TL;DR
Annuities offer a strategic advantage by providing guaranteed lifetime income, protecting against market volatility and outliving savings to secure financial stability in retirement.
An annuity works by paying a premium to an insurer who then provides regular lifetime payments, using mortality pooling and portfolio backing for predictable income.
Annuities help retirees transform home equity into reliable lifetime income, reducing financial anxiety and creating a better foundation for secure retirement years.
Fixed-indexed annuities can tie interest to market indexes like the S&P 500 with caps and floors, offering some upside while protecting against losses.
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More Americans are moving away from relying solely on Social Security or traditional 401(k)s and instead using annuities to secure guaranteed lifetime income for retirement.
Key factors include escalating concern about market volatility, fear of outliving savings, waning confidence in Social Security's long-term sustainability, and the desire for predictable income.
You pay a premium (lump-sum or periodic payments) to an insurance company, which then agrees to make regular payments to you for life (and potentially your spouse), with payments beginning immediately or at a later date.
Certain annuity structures allow tax-deferral of interest accumulation until payout, reducing tax drag during accumulation, and a portion of each payment may be treated as tax-free return-of-principal depending on contract type.
Many retirees are selling larger homes, moving into smaller residences, and using the unlocked home equity to purchase annuities, converting that one-time event into predictable lifetime income.
Longevity risk is the risk of living longer than expected and running out of money; annuities transfer this risk to the insurer by providing income that continues until death.
According to Gary Jensen, CFP® and Chief Analyst at Annuityverse, a deferred income annuity should ideally be funded in your 50s to provide an income baseline along with Social Security.
According to industry data, U.S. individual annuity considerations jumped 21.5% in 2023, reaching approximately $347.7 billion.
Gary Jensen states that a deferred income annuity, along with Social Security, creates a foundation of income that provides lifetime income guarantees and flexibility to adjust when unexpected life events occur.
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