What is an Annuity? It’s the Defensive Line for Your Retirement Plan

Annuities are like a good defensive squad for your retirement plan.
Annuities are like a good defensive squad for your retirement plan.

When it comes to preparing for retirement, most Americans are all about saving, saving, saving. But in financial planning — as in sports — playing defense is just as important as playing offense.  And annuities can provide a good defense.

Still, more than half of Americans (55%) do not believe that protecting their assets is as important as growing them, according to the MetLife Financial Planning Perspectives Poll.

“There has to be a paradigm shift,” says Tom Hegna, a retirement expert, speaker and bestselling author. “Our whole lives we’ve been taught to save more money and make our retirement savings pile bigger, but the ultimate success to retirement is not about assets.”

Instead, he says, it’s about finding the most efficient way to generate income that you’ll never outlive. The key? Annuities.

“The No. 1 risk in retirement is longevity risk,” says Hegna, a public TV host. “If you want to retire successfully, you must take longevity risk off the table. Only some form of an annuity can do that.”

However, the poll — which surveyed 250 adults with investable assets ranging from $100,000 to $1 million — shows that only 37% of Americans have invested in annuities, which begs the question: What is an annuity and why are annuities often overlooked as ways to protect retirement plans?

What is an Annuity?

While nearly three-quarters of MetLife survey respondents are participating in savings and 401(k) plans, a much smaller percentage has invested in protection products such as annuities.

What is an annuity?:  An annuity is an insurance product that enables you to buy income.  You put in a lump sum of money and — in return — get income.  The income you get can be for a specific period of time or for as long as you live.  It can start now or at some date in the future.  It can be guaranteed that you will get out at least as much as you put in.

Unlike most investments, there is usually no guess work with an annuity.  You know exactly what you are going to get out of the deal and you have so many different options.  The annuity can be customized to your exact needs.

An annuity is like a sport team’s defensive line because an annuity can guarantee that you will have adequate income to protect your desired quality of life.

Why Do Americans Overlook Annuities?

Annuities confuse people.  They can be a complex product and there are so many different kinds of annuities.  And some really are not good.  However, many are.

Some of the common reasons avoid annuities include:

High Fees — There are many reasons annuities often get overlooked, including a common misconception of the fee structures attached to them.

“The No. 1 reason is: People think they have high fees,” Hegna says. “Some do — but some don’t.”

Annuities are not one-size-fits-all, and in fact there is a spectrum of annuities, which come with both benefits and drawbacks. While higher fees may be associated with certain products, it’s important to first research the breadth of options available and how each fee structure works.

Lack of Education — Additionally, a majority of Americans don’t understand the importance of a balanced approach to retirement planning, according to the MetLife findings.

Roughly two thirds of those surveyed don’t know exactly how much coverage they should have in place when it comes to protection products like life insurance, annuities and disability insurance.

“There has to be more training, and not just on the product but on longevity risk,” Hegna says.

Negative Press — Finally, like some other financial products, annuities have gotten a bad reputation over the years, which leads many Americans to overlook them as a retirement planning tool.

“They hear something bad about them and assume all annuities are bad,” Hegna says. “They don’t understand the products.”

But understanding annuities — and including them in your retirement toolkit — can provide big benefits in your post-career days.

Want a Happy Retirement? Buy an Annuity!

Not only can annuities provide lifetime income, but they also can make you happier and more confident, Hegna says.

“When you really study retirement, if you’ve got this guaranteed income for life, you’re going to be happier, more confident and you’re never going to run out of money,” he says.

In fact, research has found that among retirees with similar wealth and health characteristics, those with annuitized incomes are happiest.

And it makes sense. Having guaranteed income “gives you the license to spend your money,” Hegna says. “Most people in retirement aren’t fully enjoying their retirement, because they’re worried about their assets.”

If you are not sure about annuites, working with a financial advisor can be a good way to understand them and how they might fit into your retirement plan.

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