leverage annuities
Financial Planning

How to Leverage Annuities for Your Retirement Plan

Annuities can be a powerful tool for your retirement plan.

The goal of every retirement plan is to generate enough money to maintain a certain standard of living after leaving the workforce. As you design a personalized scheme for retirement, you’ll find multiple pathways for achieving that goal. One common characteristic within all retirement plans is diversification. Diversification is where you make sure your portfolio contains various asset types with different levels of risk and reward. Aside from stocks, bonds, liquid assets, and other commodities, diversified retirement portfolios often include annuities. To help you build the ideal portfolio for your needs, let’s examine how to leverage annuities for your retirement plan.

How do Annuities Work?

Annuities are long-term retirement contracts purchased through insurance companies. There are several types of annuities, each with its own characteristics:

Fixed Annuities

As their name suggests, fixed annuities guarantee a fixed rate of return. This rate is determined by the insurance company at the time of purchase.

Variable Annuities

Variable annuities offer fluctuating return rates that depend on the performance of an underlying investment portfolio. Years of strong market performance yield higher rates, while those of poor performance yield lower. 

Indexed Annuities

Rather than an investment portfolio, indexed annuities are linked to an underlying market index, such as the S&P 500. Rates are higher when the index does well and lower when it doesn’t. However, there are thresholds in place that both protect your principal and limit growth potential.

Aside from their characteristic differences, the various annuity types generally work in similar ways. You fund the account in either a lump sum or periodic contributions. The insurer then invests your money. This allows your contributions to grow, tax-deferred, during what is known as the accumulation phase. At the end of the annuity’s term, you can choose to annuitize the contract. Annuitizing the contracts means to convert it into a regular stream of income that lasts for the rest of your life or a specified length of time.

The Advantages of Annuities

Annuities, like any financial product, offer a range of benefits to the account holder. Here are some advantage of annuities which may convince you to leverage annuities in your retirement plan.

Tax-deferred Growth

You owe no tax on annuity gains during the accumulation phase. This effectively maximizing the amount of money in your account and optimizing the compounding effect of the interest it accrues. Not until you begin receiving distributions will you begin to pay taxes on each withdrawal. 

No Contribution Limits

Retirement vehicles like individual retirement arrangements and 401(k)s have contribution limits to help equalize growth potential among account holders. Annuities, however, do not, so you can maximize your growth by maximizing the starting account value.

Guaranteed Retirement Income

The end goal of an annuity is to provide you with regular distributions of cash in retirement. This can supplement other income streams such as Social Security and helping to ensure you don’t run out of money.

Downside Protection

Except with variable annuities, whose growth is tied to an underlying investment portfolio, you can rest assured that you won’t lose money when you purchase an annuity. Fixed annuities guarantee a fixed rate throughout the life of the contract. Indexed annuities never sink below 0% interest, and they too may offer a guaranteed rate of return.

The Limitations of Annuities

Annuities do have their limitations, however. The chief disadvantages are as follows.


When money is liquid, it’s readily accessible, like the cash in your checking account. Illiquidity is the opposite state. The money in an annuity account is moderately illiquid because most of it is untouchable for the life of the contract. If you withdraw from the account before the age of 59.5, or you do so past a certain annual threshold (usually 10%), you may face penalties. 


The penalty for withdrawing past the annual threshold, called a surrender charge, is a percentage of the account’s total value. The penalty for withdrawing before 59.5 years old may be a 10% federal income tax. Either one can eat into your savings and, therefore, your retirement plan.

Modest or Fluctuating Returns

Though annuities can be excellent for supplementing your retirement income, they generally aren’t advisable for generating tremendous volumes of money. Assets like stocks, bonds, and real estate are typically better for gaining larger and faster yields. In the case of a variable or indexed annuity, your returns will also fluctuate, as the yearly interest rates depend, to differing degrees, on market performance.

How to Leverage Annuities for a Retirement Plan

Given the above pros and cons, you can leverage annuities for your retirement plan by using them as complements to the other assets in your portfolio. They can provide greater certainty of retirement income than riskier investments while offering higher returns than some of the lower-risk assets. So while the future value of your stocks may be unpredictable, and stable savings vehicles like certificates of deposit are likely to yield smaller returns, annuities occupy a middle area that ensures that you continue to receive a steady flow of cash in retirement, thereby bolstering your financial security.

You can also implement a couple of annuity-based strategies to maximize your advantages. One is to apply diversification principles by purchasing a variety of annuity types, which would allow you to realize both the predictable gains of a fixed annuity and the potentially higher rewards of the variable and indexed varieties. 

Another strategy is laddering, by which you purchase multiple annuities with varying maturity dates — typically staggered one or two years from one another. With an annuity ladder, you can take advantage of different term lengths and interest rates, allowing you to yield higher returns while spreading your risk across several accounts. 

Annuities in a Retirement Plan: A Case Study

Along with consulting reliable online resources, regard the following case study to help you better understand how to leverage annuities for your retirement plan:

Ana Rodriguez is a 55-year-old who has been building her investment portfolio since her early 30s. She plans to retire at 65. She currently spends around $3,000 per month and expects to reduce expenditures by 30% in retirement, for a monthly budget of $2,100.

With savings from her job as a data analyst, she purchased her first piece of real estate at 34, which she sold 10 years later at a large profit. The money from the sale allowed her to purchase two more properties at 45, which she sold at profits a decade later. Meanwhile, she had also been investing in some bonds and numerous dividend-bearing stocks. Altogether, her assets have yielded a nest egg of $400,000, which is above the average.

Recently, however, Ms. Rodriguez has been concerned about the health of her investments. With most of her portfolio now tied up in stocks, market fluctuations could shrink some of her potential returns by the time she sells her shares, which could, in turn, diminish her ability to fund her desired standard of living in retirement.

Then, from a colleague, she learns of annuities. The prospect of guaranteed monthly payments appeals to her because it would help to offset possible devaluations of her assets. To maximize her risk mitigation, she chooses to purchase a 10-year fixed annuity with an investment amount of $200,000, a guaranteed fixed rate of 5.5%, and a specific payout phase of 20 years. By the end of her contract term, the annuity will have grown to $341,629, which equates to a monthly check of over $1,400 in retirement. With that money, she can more easily meet her expected standard of living.

Why You Should Leverage Annuities for Your Retirement Plan

There’s no one-size-fits-all approach to retirement planning. Speak with a financial adviser to take stock of your resources, capabilities, and needs and to discover how annuities might fit into your blueprint for financial security.

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