Americans Increasingly Turn to Annuities for Guaranteed Retirement Income

Recent industry data reveals a notable trend in American retirement planning, with U.S. individual annuity considerations increasing by 21.5 percent in 2023 to approximately $347.7 billion. This shift away from sole dependence on Social Security or traditional 401(k)s toward annuities reflects growing concerns about market volatility, the fear of outliving savings, and diminishing confidence in Social Security's long-term viability. Many retirees are leveraging home equity by downsizing and redirecting proceeds into annuities, addressing worries about insufficient guaranteed lifetime income, as nearly half of retirees express such concerns.

Annuities function by requiring a premium payment, either as a lump sum or through periodic contributions, in exchange for the insurance company's commitment to provide regular payments for life, potentially extending to a spouse. These payments, which can start immediately or be deferred, offer predictability due to the insurer's portfolio backing and mortality pooling. According to Gary Jensen, CFP® and Chief Analyst at Annuityverse, advance planning with tools like deferred income annuities, ideally funded in one's 50s, can establish an income baseline alongside Social Security, providing a foundation for financial security amid unexpected life events such as layoffs.

Tax advantages further bolster the appeal of annuities, as certain structures allow for tax-deferred growth of earnings until payout, reducing tax drag during accumulation. Upon receiving payments, they are taxed at ordinary rates, but a portion may be tax-free as a return of principal, depending on the contract. This contrasts with withdrawals from distressed 401(k)s or savings, which can trigger ordinary income tax and penalties. The ability of annuities to provide lifelong income transfers longevity risk—the risk of outliving savings—to the insurer, offering a guaranteed "floor" to cover basic retirement needs, especially as interest rates have risen and market volatility has increased.

Market dynamics show strong growth in fixed-rate deferred annuities and fixed-indexed annuities in 2023, with the latter linking credited interest to market index performance, such as the S&P 500®, while offering protection from losses through caps and floors. In fixed annuities, a stated interest crediting rate, typically 3-5 percent, compounds annually during accumulation, with payout calculations based on accumulated principal, interest, payout options, and actuarial assumptions. Higher interest rates and longer payout periods generally result in larger periodic payments, making annuities an increasingly strategic component in diversified retirement portfolios aimed at ensuring financial stability.