Are Annuities A Good Investment? What They Are And Why Women Should Consider Them

When we think about our financial fears, one tops the list: Running out of money before we run out of time. According to GoBankingRates, 66% of Americans fear that they will run out of money during retirement, and that fear is not unwarranted. Half of all US households are at risk of not having enough income to maintain their standard of living in retirement, according to the Center for Retirement Research at Boston College.

The bottom line is that Americans have a problem and we know it. Unless we do something, something big, something different, many of us are going to blow through the money we’ve stashed away for retirement long before we run out of time.   

The good news is that we have the ability to fix this problem in our own individual lives, with tools we already have access to today. They’re called annuities, and more people are interested in, and buying annuities, than in years past. In 2023, sales of annuities hit a record high, with 2023 fixed-rate deferred annuities totaling $164.9 billion, up 46% from annuity sales in 2022.  But what are they — and are annuities a good investment?  Let’s break it down.

WHAT IS AN ANNUITY?

In essence, an annuity is “a financial contract between you and an insurance company,” says Minji Ro, Chief Strategy Officer at Gainbridge. “They’re primarily  retirement-focused, they give you a steady stream of income during retirement, and they are the only product that pays a guaranteed stream of income for life, even if you eat into the entirety of your investment.”

Here’s how annuities work: You give the insurance company a lump sum of money or a stream of payments over time, and, in return, the insurance company promises to pay you a certain amount of money on a regular basis. The payments that you receive can last for a defined number of years or for the rest of your life.  They can also be based not just on your own lifespan but yours and a spouse’s.

Sounds complex, but stay with us. Some annuities are simpler than others. That’s true in other markets as well, Ro notes, in terms of features and pricing. Take cars for example. Do you just need something to get you back and forth to work? Or are you looking for an upscale driving experience?  “Do you care about safety, or do you care about the 0 to 60 speed?” Ro asks. “With annuities, we’d ask, ‘Do you want some level of protection? Do you want to make sure that you don’t outlive your income and do you want some sort of certainty?’ [Some] people want the ability to receive a guaranteed paycheck for life.”

The notion of lifetime income is particularly appealing to many women, notes Jason Fichtner, Chief Economist at the Bipartisan Policy Center. Why? We earn less than men throughout our lifetimes, stash less away in our retirement accounts, and then go on to outlive our partners and spouses by a good half-decade.  If someone is going to be left without a net, chances are it’s the woman.

Here are three reasons women may want to consider annuities as a tool to make their money last. 

REASON 1: RISK TOLERANCE

As women, our risk tolerance is often lower than that of men. Our attachment to safety and security shows up in the fact that, compared to men, women keep a greater percentage of our money in cash. Annuities can help make up for that because they can be structured to provide a guaranteed lifetime payout. 

“Economists like annuities, because you are offloading some of the risk of the individual onto an insurance company,” Fichtner says.  You can think of them as akin to the bond component of your portfolio. Having that locked down actually allows you to take greater risk with the assets that remain invested in the markets. He also notes that when people have guaranteed income, they can let their other assets sit and recover, should there be a market downturn.

REASON 2: THE ABILITY OR WILLINGNESS TO SPEND MORE

Saving for retirement is a long slog — a decades-long slog in fact. So it’s understandable that by the time we’re done  accumulating money for retirement and it’s time to start the process of what experts call “decumulating,” or using that money, it isn’t easy to do.  Why?  Because when you’re trained to save, save, save, spending can be scary. That’s why you often hear people talking about how they don’t want to spend their principal. The result is that many people — even those who don’t have plans to try to leave a particular amount to their heirs — underspend in retirement, Fichtner explains.  And again, many of those people are women.

“What we find is that people spend more than they would if they’re just drawing down their assets on their own,” he says, referencing a paper called License to Spend by researchers David Blanchett and Michael Finke. “[They] show that someone who might have, say, $500,000 of wealth or assets will draw that down less and spend less than if they converted to an annuity and had a [guaranteed amount] to spend each year. Economists call that a budget constraint.” 

REASON 3: LONGEVITY

It’s just a fact, women live longer which means we are very concerned about outliving our money. According to information from the Society of Actuaries, if you are a 65-year-old woman today, you have a 65 percent probability of reaching the age of 85 and close to a 50 percent chance that you are going to reach 90. For a 65-year-old man, that percentage drops to a 55 percent probability of living to age 85 and a 35 percent chance of living until 90. “It would make sense that a portion of your retirement assets are in something that will pay you for as long as you are alive, even if you eat into everything that you’ve invested in,” Ro says.

WHEN AND HOW TO BUY AN ANNUITY

So, if you’re interested in annuitizing part of your retirement stash, when is the right age to do it?  “It’s never too early to start doing research and getting your arms around the concept,” Ro says. “If I look at our own client base, our youngest client is 29 and our oldest client is 92. The average and the median is somewhere around 64 and 65.” 

As for how much to consider investing in this way? Think about making sure that you have enough in guaranteed income or annuities to cover what you expect your fixed expenses to be. Remember, Social Security will represent a chunk of that, but on average it only covers about 40 percent of a person’s pre-retirement income. The gap between Social Security and your expected fixed expenses is where an annuity might neatly fit.    

From there, once you’ve made the decision that an annuity is the right choice for your portfolio, you can work with a financial advisor, consider whether your 401(k) or other work-based retirement plan has added annuities as an option or buy them directly from places like Gainbridge, where you can also calculate your guaranteed lifetime income based on your initial investment.

This story is in partnership with Gainbridge. Women are more likely to outlive their retirement savings than men. It’s why Gainbridge® created ParityFlex™, a multi-year guaranteed annuity* that caters to women’s unique retirement needs. With a Guaranteed Lifetime Withdrawal Benefit and flexible withdrawals, it’s like having a paycheck for life. Plus, you’ll get guaranteed returns at 5.95% APY. Learn more here.

*Withdrawals are taxed as ordinary income and, if taken prior to age 591⁄2, there may be a 10% federal tax penalty. Withdrawals may result in a surrender charge or a market value adjustment (MVA) and excess withdrawals may result in a reduction of future payments under the guaranteed lifetime withdrawal benefit. Guaranteed Lifetime Withdrawal Benefit provided so long as your account value hasn’t gone to $0 due to excess withdrawals. Annual Percentage Yield (APY) rates are subject to change at any time, and the rate mentioned may no longer be current. Please visit Gainbridge.io for current rates, full product disclosures and disclaimer. ParityFlexTM, a multi-year guaranteed annuity, is issued by Gainbridge Life Insurance Company in Zionsville, Indiana.

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