High inflation and rising interest rates have some experts saying it’s a great time to consider annuities.1
Not everyone knows what annuities are, how they work, and what they can offer.
There are some surprising attributes of annuities that could help you meet your financial goals.
Between 2000 and 2021, the average variable annuity investor had better investment performance than the average mutual fund investor 15 out of 22 years.2 (Past performance is not a guarantee of future results.)
High inflation and rising interest rates have some experts saying it’s a great time to think about getting an annuity. 1But not everyone knows the facts when it comes to annuities, and some of them may surprise you.
What is an annuity?
Let’s start with a few basics. An annuity is a long-term insurance contract. You pay an insurance company to invest your money and any growth is tax-deferred. When you retire, you can use that money to provide an income stream for a set number of years, or even the rest of your life. There are different types of annuities available, including fixed, variable, and indexed. One of the main differences between them is how the rate of return is determined. Fixed provides a fixed rate, variable varies with the market, and indexed offers capped growth linked to an index.3
Another difference is the upside potential of each, or how much you can make from your investments. Fixed annuities typically have the lowest, variable annuities have the highest, and indexed annuities are in the middle because of their capped growth. The reason for those differences in upside potential is the downside risk of each one. The lower the risk, the lower the potential for growth. It’s a trade-off. So, it’s not surprising that fixed annuities have no downside risk, variable has the highest risk, including the risk of possible loss of principal, and indexed has limited or no risk.4
Now that you know the basics, let’s go over four facts about annuities that just might surprise you.
Fact Number 1: They provide opportunities to grow your money.
For example, who would you think had better investment performance between 2000 and 2021 — the average variable annuity investor or the average mutual fund investor? Between 2000 and 2021, the average variable annuity investor outperformed an average mutual fund investor 15 out of 22 years.2 But let’s look at the most recent numbers. Who would you guess had higher returns in 2021? This one goes to annuities again, with the average variable annuity investor earning 21.89%.2
Why the difference in performance? It may be because the average variable annuity investor tends to hold on to their investment, and the average mutual fund investor tends to trade more frequently.2
Fact Number 2: They may have lower fees than you thought.
In fact, some annuities have NO fees. That’s 0%. It doesn’t get much lower than that. And the average annual fees on a variable annuity are 2.3%. In general, the simpler the annuity, the lower the fees. Adding riders, or special enhancements, to your annuity contract can add fees. But they may also help you meet specific financial goals like lifetime income payouts, death benefits, or long-term care insurance.5
Fact Number 3: They can help you leave a legacy.
Annuities with a death benefit let the owner select beneficiaries for the remaining money in the annuity or a guaranteed minimum. Owners can specify how it’s paid out in the contract, typically in a lump sum or spread out into payments over time.6
Fact Number 4: They’re more liquid than you think.
The fact is annuities typically have withdrawal options that don’t require surrender charges — you can withdraw your money when you need it.7 That said, most annuities do have some surrender charges. Which means you may have to wait a few years to withdraw money without paying charges, although a percent of premium may be available to withdraw without fees.5
As always, it can help to consult a financial professional to determine the best approach for you.
Things to consider
Some annuities have no fees and others have low fees. Fees are often tied to optional riders that can help you meet specific financial goals.5
Annuities can help reduce the tax burden on your beneficiaries.6
Consult a financial professional to determine the best approach for you.
Any guarantees are backed by the claims-paying ability of the issuing insurance company.
Neither Transamerica nor its agents or representatives may provide tax, investment or legal advice. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely on their own independent tax and legal professionals and financial professional regarding their particular situation and the concepts presented herein.
Transamerica Resources, Inc. is an Aegon company and is affiliated with various companies which include, but are not limited to, insurance companies and broker dealers. Transamerica Resources, Inc. does not offer insurance products or securities. The information provided is for educational purposes only and should not be construed as insurance, securities, ERISA, tax, investment, legal, medical or financial advice or guidance. Please consult your personal independent professionals for answers to your specific questions.
