Quick Guide to Annuities for Seniors

As a senior citizen, financial security may be weighing heavy on your mind. Many retirees worry about their finances, particularly when your income is no longer increasing to keep up with inflation or higher prices due to supply and demand issues. Social Security payouts are also likely to decrease by the year 2037, which can be a source of significant anxiety. So, it helps to have other income streams besides retirement income and Social Security. Here, we’ll discuss one reliable income stream for seniors: annuities. We hope you find this guide to annuities for seniors helpful!


What is an Annuity?


Annuities are a reliable, long-term income option for retired seniors. An annuity is a type of insurance contract between an individual and a financial entity (typically an insurance company). Essentially, it’s a future income source that can help give you financial security after you retire. Before you can draw from an annuity, you’ll make regular payments into the fund for a period of time. This is called a deferred annuity. During this time, the insurance company will invest your payments. Typically, you’ll then have a surrender period, where you can’t make withdrawals from this fund without incurring a fee. This period of time can last from 2 years to more than 10. 


After this phase, you enter the annuitization phase, where you receive payments from your annuity. These payments can continue either for a period of time or for the rest of your life, depending on the terms of your contact.


You can also make one (large) lump-sum payment instead, if, for example, you have a financial windfall that you want to safely invest for the future. This would be called an immediate annuity. An immediate annuity typically does not have a surrender period, and you start receiving payments soon after.


Types of Annuities

There are a few different types of annuities.

  • A fixed annuity provides a guaranteed minimum rate of interest and fixed periodic payments. 
  • A variable annuity gives you larger future payments if the annuity fund investments do well, and smaller ones if they do poorly. It’s less stable than a fixed annuity, but could also give you a larger overall payout if the investments get strong returns. 
  • An indexed annuity is linked to the performance of a market index, like the S&P 500. This offers potential for higher payments, but still provides protection from investment volatility.
  • A hybrid fixed-variable annuity is a variable annuity that is dependent on investment returns, but contains riders which still guarantee a minimum payment.


Pros of Annuities

  • One of the benefits of annuities is that they are tax-deferred. This means you won’t pay income tax on the money you pay into the annuity until you begin receiving payments. If you are in a higher tax bracket, this might be a financial benefit.
  • Annuities provide a guaranteed income stream for the future.
  • Additional income streams can give you peace of mind for your retirement.
  • Fixed and indexed annuities are a safer investment than other types, and help protect you from market volatility.


Cons of Annuities

While an annuity is a guaranteed income stream, there are some caveats. 

  • The main one for most seniors is the need to pay into it for a period of time before you can draw. If you’re already later retired, it may be too late for this to be a good choice for you. If you are still working, and have extra income that you don’t need to be liquid, it might still be a good option. 
  • An annuity takes liquid funds and makes them illiquid. This means if you need short-term access to your funds, you may have to pay a penalty.
  • Some annuities may include fees and surcharges.
  • Fixed annuities don’t take into account inflation, which could be a problem depending on the future economy.


Choosing the Right Annuity

If you’ve decided to use an annuity as an income stream for the future, here are some considerations that you’ll want to take into account. Many insurance companies offer a wide variety of types of annuities. Make sure to consider these important details.

  • Retirement Income Needs. How much income will you need when you retire or in the future? Will your retirement savings and any employer retirement benefits be enough to maintain your quality of life? Consider inflation when you calculate how much income you’ll need. How much additional income will this annuity give you?
  • Fees and Surcharges. What are the fees and surcharges associated with the annuity? 
  • Potential Risk. How risky is this annuity? How safe will your money be? If you have a low tolerance for risk, choose a fixed or hybrid annuity. If you’re okay with taking on more risk in favor of a larger payout, consider a variable annuity.
  • Timing. Are you too close to retirement, or already retired, for an annuity to be a good choice? At what age will you need to draw from this annuity? You may pay additional taxes on the annuity if you draw payments before the age of 59.


The Bottom Line


There are pros and cons to annuities as a potential income stream for seniors. If you feel like an annuity might be a good choice for you, make sure to consult a financial advisor to help choose the best annuity. Annuities are fairly complex, with a lot of factors, tax considerations, rules, and requirements. It’s best to get professional advice when making this choice. Stellar Living hopes this quick guide to annuities for seniors helps you get started with annuities as additional income streams.