What to know about purchasing annuities for retirement

When building a retirement plan or exploring how to add more income and growth opportunities to a current portfolio, an annuity may be a good option. Especially with lifespans growing longer, having enough savings to last throughout retirement is becoming a top priority for many Americans. To better understand how annuities work and the role they can play in supporting retirement income and long-term financial goals, here are important considerations and what to know about annuities before deciding if they’re a good fit for you.

Who should buy an annuity?

Annuities are generally a good option for individuals who want a reliable, guaranteed source of income in retirement, tax-deferred growth, and wish to protect a portion of their savings from market volatility. These solutions are often considered by people in their 50s, 60s, or early 70s who are approaching retirement or transitioning out of the workforce and looking to supplement income from Social Security, pensions, or other retirement savings.

When evaluating what to know about annuities, it’s important to consider your income needs, time horizon, and comfort with market risk. Purchasing an annuity for retirement income can be a way to diversify a financial portfolio and help close income gaps, creating greater financial confidence for the future.

What are the different annuity types

One of the key advantages of annuities is their dual role as both a way to help protect a portion of your savings from market loss and providing a source of guaranteed income in retirement. At its core, an annuity is a contract between an individual and an insurance company where they make a lump sum payment or series of payments in exchange for a future income stream. Depending on personal needs and goals, there are several types of annuities to choose from:

Immediate annuity

In exchange for a lump sum, an annuity will provide income payments for a set period. Typically, payments begin within a year or less of purchasing the contract.

Deferred annuity

With a one-time or recurring payment, you can purchase a deferred annuity that can begin providing an income stream at a later date. Common types of deferred annuities include: o Variable annuity - Value growth is linked to financial market performance, so there is a potential for higher growth but can also lose value if the market drops.¹ The value of a variable annuity can change over time based on the performance of the investments that are chosen.

• Fixed annuity - Value grows over time at a set interest rate. The premium and credited interest are never subject to market fluctuations.
• Fixed index annuity - A type of deferred annuity that offers growth potential based in part on the performance of a selected market index, while helping protect premium from direct market loss. The premium is not invested directly in the market or in the index itself. Some fixed index annuities may offer both a fixed interest crediting option and index-based crediting options, providing flexibility based on the purchaser’s goals. Interest is credited according to the terms of the contract, and growth may be limited by features such as caps, participation rates, or spreads.

Understanding the structure and purpose of these annuities for retirement income is a key part of deciding which type aligns with your long-term goals.

When to buy an annuity

Among the top annuity questions is determining when to buy. The ideal time for purchasing an annuity for retirement income depends on personal retirement goals and income needs but is commonly purchased between ages 50 and 70 when individuals are nearing or entering the next chapter and focused on creating guaranteed income. For those considering deferred annuities, purchasing earlier may also allow more time for growth opportunities before income begins.

Understanding the structure and purpose of these annuities for retirement income is a key part of deciding which type aligns with your long-term goals.

Where to buy an annuity

Annuities are typically purchased through licensed insurance agents who represent insurance companies, but they may also be available through financial advisors, banks, brokerage firms, and certain online platforms. Because annuities are insurance products, they are issued by insurance companies and sold by licensed professionals.

When purchasing an annuity for retirement income, it is important to work with a knowledgeable and reputable professional who understands long-term income planning and can help explain what to know about annuities, evaluate available options, and answer questions. As you discuss retirement goals and timeline, they can help ensure the product aligns with your broader financial strategy.

Why purchase an annuity: Advantages of annuities

Purchasing an annuity is primarily about creating a reliable, guaranteed income stream that cannot be outlived. Often described as a retirement paycheck, an annuity can supplement other income sources such as Social Security and employer-sponsored retirement plans. Here are some advantages of annuities and why they can be a valuable addition to a well-rounded income strategy.

Tax-deferred growth

Earnings within an annuity grow tax-deferred, meaning taxes are not owed until withdrawals are taken, which can support long-term accumulation.

Protection from market volatility

Certain annuities provide growth potential while helping protect a portion of retirement savings from market losses, offering a measure of security against downturns without exposing premiums to direct investment risk.

Guaranteed income for retirement

Many annuities are designed to provide a reliable stream of income during retirement, with some offering payments that can continue for an individual’s entire life. This feature helps reduce the risk of outliving savings and ensures a predictable source of funds to help cover essential expenses.

Optional riders for added protection

Riders may be available for an additional cost to provide features such as enhanced income benefits, inflation considerations, or guaranteed minimum withdrawal benefits.

Death benefit options

Many annuities include a death benefit that allows remaining funds to pass to beneficiaries and can support legacy and estate planning goals.

How to purchase an annuity

Purchasing an annuity typically begins by connecting with a trusted financial professional, such as a licensed insurance agent, financial advisor, or representative at a bank or brokerage. This professional can review your financial goals, income needs, and risk tolerance while explaining the different types of annuities and how they may fit into an overall retirement plan.

Working with a professional also gives you the opportunity to discuss annuity dos and don’ts, ask detailed questions, and better understand contract features before making a commitment.

Annuity dos and don’ts

Before purchasing an annuity for retirement income, carefully evaluate how the product fits within your overall financial strategy. Reviewing key annuity dos and don’ts can help you avoid common missteps and make more informed decisions.

DON’T purchase an annuity if you require access to your funds

Annuities are designed primarily for long-term retirement income, so they typically do not provide flexible access to funds. Withdrawing money early, especially during the surrender charge period, can result in significant penalties, including surrender charges imposed by the insurance company.² In addition, withdrawals taken before age 59½ may be subject to IRS taxes and potential early withdrawal penalties. While some annuities offer withdrawals, they are generally not a good fit for anyone who needs quick or regular access to their money.

DO consider your risk tolerance

Understanding how different products align with your risk tolerance, which is how comfortable you are with market ups and downs, is a key part of navigating annuity dos and don’ts and building a more stable retirement strategy. Fixed or immediate annuities can provide protection from market volatility and ensure principal and guaranteed payments are protected from market downturns, while variable annuities carry market risk and potential for loss, including premium. Understanding the type of annuity that matches one’s comfort level, time horizon, and income needs can help create a more stable retirement plan. Also consider the financial strength of the issuing company, as guarantees are based on the insurance company’s ability to pay.

DON’T forget to designate a beneficiary

Many annuities include a death benefit, which is paid to a beneficiary when the owner passes away. Beneficiaries often have options for receiving the funds, such as a lump sum or payments spread over time, providing flexibility to meet their needs. Some annuity contracts also offer spousal continuance where your spouse can take over ownership and continue receiving payments. Naming a beneficiary ensures that the annuity can provide financial support to loved ones after the owner’s passing.

DO discuss follow-up questions with a financial professional

If you have annuity questions or need retirement planning guidance, it’s helpful to have a conversation with a financial professional. They can explain which options could support your goals, how different annuities work, and the features and fees. Preparing questions in advance can help make sure topics like risk management, insurance company stability, and contract details are addressed before making a decision. The following questions can serve as a good starting point for your discussion: 

• Are there optional riders available? What benefits do they provide, and what additional charges?
• What fees are associated with this annuity contract?
• What are the financial strength ratings of the issuing insurance company?
• How do you help clients manage different types of risk?
• How often do you recommend reviewing a retirement income plan or meeting with clients?
• How are you compensated when a contract is purchased?

Have more annuity questions? North American is here to help

When creating a diversified retirement plan, adding an annuity to your financial strategy can be a beneficial way to allow for growth potential and the ability to provide guaranteed income in retirement. Whether the goal is creating guaranteed income, leaving a legacy, or building additional financial flexibility, understanding what to know about annuities can help you move forward with clarity.

North American offers a range of annuity and life insurance products designed to meet your unique retirement needs. Contact a North American agent today to learn how these solutions can play an important role in building financial confidence for the future.

The term financial professional is not intended to imply engagement in an advisory business in which compensation is not related to sales. Financial professionals that are insurance licensed will be paid a commission on the sale of an insurance product.

Neither North American, nor any financial professionals acting on its behalf, should be viewed as providing legal, tax or investment advice. Please rely on your own qualified tax professional. ¹ Variable insurance products are subject to market risks and may lose value, including loss of premium. ²A surrender during the surrender charge period could result in a loss of premium. Surrender charge structure may vary by state.

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