Many investors, uneasy about the U.S. stock market and economy, are looking for guaranteed income in retirement.

A recent survey by American Century Investments found that more than half (54%) of investors are interested in guaranteed lifetime income options in or outside of workplace retirement plans.

In the past, retirement savers relied on: Social Security And pension For a steady stream of income. But with retirement plans declining and Social Security benefits expected to decline in the future, many investors are turning to annuities instead.

“A lot of people retiring today don’t have that option, so they have to take their savings and buy their own pension. “So that means using an annuity,” said Michael Resnick, Senior Wealth Advisor at Alera Group.

annual income It is a financial product, usually offered by an insurance company, that promises to pay a certain amount of money regularly over a certain period of time.

Annuity sales rose 20% to $216.6 billion in the first half of 2024 and are expected to surpass a record $400 billion by the end of the year, according to data from insurance industry trade association LIMRA.

Experts say that annuities may be available in some portfolios, but they are not for everyone.

When Do Annuities Be Meaningful?

For investors who are risk-averse and concerned about volatility, dedicating some of their retirement income to annuities can help them sleep at night, Resnick said.

He gives the example of a widowed client who was able to weather the great recession of 2008 because of the guaranteed income and capital protection he received from an annuity.

Market fluctuations are also on the minds of many investors; More than half (56%) of American Century Investments survey respondents think today’s market is so volatile that people their age should be more conservative with money.

“That’s money you can’t survive on,” Dawn Santoriello said. certified financial planner The founder and founder of DS Financial Strategies added that annuities are beneficial even though mis-selling of the product in the past has created a negative perception among those around him.

Len Nassi, a CFP, is a fan of: fixed indexed annuitiesIt offers returns tied to the performance of a specific stock market index, such as the S&P 500. With fixed index annuities, your downside risk is minimized, but your potential return is also limited.

“There’s always a ceiling, so if the S&P 500 does 20%, you can’t get 20%. But if it drops 10%, you won’t lose a penny,” Nassi said.

This diminishing return is due to participation rates and interest caps to which fixed indexed income is subject. Your contract will determine your participation rate; This means your return is limited to a fraction of the full return of the index. For example, if the participation rate is 75% and the index gains 10%, you will be given a 7.5% credit. Also, if there is a 6% interest cap on that annuity, you still can’t get 7.5%, you can only get up to 6%.

Who Should Avoid Annuities?

One of the biggest problems with annuities in general is that they are complex products, so investors may need to read the fine print to figure out whether it’s a worthwhile investment.

Nearly half (48%) of annuity customers surveyed by J.D. Power said they don’t fully understand the costs and fees associated with their annuity.

When you purchase an annuity, you typically pay a significant commission to the agent who sold you the product, as well as administrative expenses such as underwriting costs and fund management fees. No money is deposited towards these expenses.

Santoriello also said annuities may not be a great choice for younger investors (those under 50) or those who think they’ll need their money before the delivery plan or contract expires.

If you need money before then, facing penalties From the annuity provider and the IRS. The insurance company that sells you the annuity may charge taxes surrender costs To you for withdrawing your money early. If you are under age 59½, you may face a 10% tax penalty from the IRS for withdrawing your annuity early.