TL;DR: Annuities can provide stability and guaranteed income, but they’re not risk-free. Safety depends on the type, contract terms, and insurer strength.
Main points:
- Provide lifetime income and protection against market swings
- Risks: fees, penalties, inflation, weak insurers
- Fixed annuities = safer in recessions; variable annuities riskier
- Interest rates strongly impact payouts
- Work with fiduciary advisors to avoid pitfalls
During retirement, you want to relax and enjoy the years you have less. Many people hear “annuity” and instinctively wonder: Are annuities safe?
Some even believe they’re a scam. That skepticism is natural because no investment is totally risk-free. But the reality is more nuanced.
Annuities often emerge as a beacon for those seeking stability because it’s a guaranteed income stream in retirement. This blog tackles whether annuities are safe investments, when they shine or stumble, and what to watch out for.
What Does “Safe” Mean in Finance?
Before digging deep into annuities, let’s define safety. A “safe” investment generally means:
- Low chance of losing the principal
- Predictable or steady returns
- Backing from a credible issuer
- Reasonable fees that don’t erode your returns
When you ask, “are fixed annuities safe?” or “are annuities a safe investment?”, you’re really asking if they check most, if not all, of these boxes.
Why People Choose Annuities: Making the Case for Safety
Annuities offer some features that other investments seldom do and that’s their appeal. You get:
- A guaranteed income stream for life (or a fixed period)
- Protection against market swings (for non-variable types)
- Death or beneficiary benefits in some designs
- Predictability (you often know exactly what you’ll get)
With all these points in mind, it’s the answer to “are annuities safe?” is sometimes. It depends heavily on the type of annuity, the company backing it, and the fine print of the contract.
The Risky Side of Annuities
The problem with annuities is that they have a bad reputation because some people get sold a product that doesn’t help them. It’s a product that makes the issuer money and it’s pushed to unsuitable annuitants.
These are some of the reasons annuities get a bad reputation:
- If the company fails, even “safe” contracts may be at risk. A weak insurer or undercapitalization isn’t something to watch out for.
- Hidden fees, spreads, caps, riders chip away at your effective return.
- Surrender periods and penalties are restrictive. They lock you in and limit access to your funds (you won’t be as liquid, and you might want to be.)
- Inflation can erode your returns; a fixed sum may buy you less over time.
- Contract terms and language are complex, so real outcomes become messy and unclear. You might not be sure about what you’re buying into.
Avoiding All of These Risks
Don’t worry. There are ways you can avoid these risks and even choose safer annuities:
- Check the insurer’s credit rating. We always work with A-rated companies to give our clients the best experience.
- Look for annuities with principal protection and strong guarantees.
- Work with a professional who is a fiduciary to explain the fine print. You should understand the caps, spreads, fees, riders, withdrawal, rules, etc.
Are Annuities a Good Investment or Are they Just “Safe”?
When people are looking for something safe, they just want stability. “Safe doesn’t always equal “good.” An investment can be safe yet underwhelming. You’ll need it to find a balance between safety and return potential.
Balance often comes with some trade-offs:
- The company solvency matters. Even guaranteed contracts rely on the insurance company’s financial health.
- Imagine purchasing a contract with supposedly good terms. But external factors beyond your control cause the cost of living to drastically rise. This is a reality for many who buy annuities without considering their entire financial portfolio.
- There is always the opportunity cost to consider. You could miss out on potentially better investments that might be suitable for your situation and needs.
What Happens to Annuities During a Recession?
Broadly speaking, the average person may refer to an economic downturn as a “recession.” For most, economic turmoil or decline is labelled as a recession.
Are annuities safe in a recession? It depends:
- Type matters. Fixed and indexed annuities tend to fare better in a recession than variable ones.
- Contract guarantees. Some guarantee minimum payouts or principal protection even if markets crash.
- Issuer strength. Even if your contract says “guaranteed,” that guarantee is only as solid as the insurer’s finances.
- Interest rate climate. In recessions, rates might fall, which can reduce what new annuities offer.
What happens to an annuity during a recession depends on the exact contract terms and the type of annuity.
Are Variable Annuities Safe in a Recession?
Variable annuities can be a tricky investment option; their main “benefit” is the opportunity to get higher returns. They come with a higher degree of risk, especially during a recession. These link to market indexes or mutual funds. If markets plunge, your annuity balance might too.
Variable annuities are essentially mutual funds in an insurance wrapper with many of parasitic fees attached. If you're looking to invest in the market, it’s best to invest directly. You’ll avoid these extra costs that eat into your returns.
Annuities can come with conditions that manage volatility. Some companies may offer a 5% control to adjust positions during turbulent times. While the market saw significant growth last year, annuities with these controls couldn't fully capitalize on the upswing. When selecting an annuity, it's crucial to consider a flexible underlying index that can adapt to evolving market conditions.
Variable annuities can offer death benefits. But let's face it—you want your annuities to work for you while you're still alive. Guaranteeing value protections within the policy term ensures your investment serves you well throughout your lifetime. If you want security, a fixed annuity may be a better option for you.
Are Fixed Annuities Safe in a Recession?
Fixed annuities can provide a stable safety net during a recession because they offer a guaranteed interest rate. You can count on a consistent income stream no matter how the market behaves. This makes them an appealing choice for retirees who value security over high returns. They protect against the potential decrease in buying power that inflation can bring about, especially in an unstable economy.
Interest Rates and Annuities
Interest rates influence the payout of fixed annuities at the time of purchase. When interest rates are high, fixed annuity payments usually increase. It’s an enticing option during times when rates are on an upward trend. On the flip side, low interest rates cause payouts to decrease.
Consider this: when interest rates are low, you refinance your home, but when interest rates are high, you refinance your retirement.
If you're feeling the pinch of high-interest rates impacting your returns, it might not reflect your product's quality. If you purchased an annuity before a recession, you might experience meager gains. The issue could stem from purchasing during a period of low-interest rates. Now presents an opportune time to reassess your annuity contracts and consider transitioning to a new one.
Getting the Advice You Need About Annuities During a Recession
Your advisor should be proactive in assessing your financial situation and have your best interests in mind. You should get the most value for your money.
Demand more or seek out an advisor who is willing to go the extra mile for you. With proper guidance and attention to liquidity, annuities can be a secure investment option even in challenging economic times.
Should I Get an Annuity During a Recession?
During an economic downturn, the promise of a fixed annuity's guaranteed income becomes quite appealing. It is a buffer against market fluctuations, offering financial stability and peace of mind. Locking a long-term contract with a guaranteed fixed interest rate in today's high-interest environment can be smart.
By securing a safe and stable rate, you ensure better returns on your annuity over time. It's all about making your money work harder for you in the long run. The team at Asset Preservation Wealth & Tax can provide tailored guidance.
We can help you chart a course that aligns with your retirement aspirations and risk tolerance. We want to ensure your golden years are as secure and fulfilling as you've envisioned.
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Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products. They do not refer in any way to securities or investment advisory products. Fixed insurance and annuity product guarantees are subject to the claims paying ability of the issuing company; not guaranteed by any bank or the FDIC.
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD # 175083.
