Annuities: A Key to Retirement That Many Americans Overlook

Annuities can play a vital role in retirement security, yet many Americans fail to understand or take advantage of them. Social Security provides a guaranteed income stream in retirement but often retirees find that to be their only guaranteed income source in retirement. Annuities can help to supplement social security and other pensions by providing additional income for life, yet they are often underutilized with only a small percentage of Americans owning one. We are going to dive deeper into annuities and how they can be a powerful tool for ensuring long-term financial stability. 

The Knowledge Gap Around Annuities 

Surveys reveal a striking lack of awareness about annuities. The American College of Financial Services found that older adults scored just 12% on an annuity literacy quiz, ranking their knowledge lower than Medicare, life insurance, and long-term care. Another study from the TIAA Institute and Stanford University asked participants how best to prevent outliving their savings. Only about half correctly identified purchasing an annuity as the solution. 

A major reason for this knowledge gap is the complexity of annuities. In fact, many Americans don’t even fully understand Social Security, which is a fundamental part of retirement income. This lack of understanding is the primary reason annuities, which can be complex, remain a mystery to many. While the concept is simple—receiving fixed payments over time—annuities come in multiple forms, including fixed, variable, and indexed options, each with different terms and conditions. This challenge of finding what will work best for you is often what discourages people from considering them as a viable retirement tool. 

Why Annuities Matter 

There are some specific differences that are important when considering annuities as part of your retirement plan. Fixed Indexed Annuities (FIAs) can offer financial security by providing growth potential without market risk while Variable Annuities can fluctuate based on market performance and are often fee heavy. Fixed Annuities provide a conservative “fixed” interest rate (usually with lower albeit steady growth for a specified period of time).  As a retirement tool, FIAs are often preferable because they are tied to an index, such as the S&P 500, so they give the owner the best of both worlds. Meaning, they provide a more reasonable rate of return over time than Fixed Annuities but still protect against losses, unlike Variable. Even if the market declines, an FIA ensures that your principal AND your year-over-year gains, all remains intact. 

Since FIAs provide a balance between growth and security this makes them an attractive alternative to traditional savings or investment accounts. Retirees can benefit from tax-deferred growth, and many FIAs also offer lifetime income, ensuring a steady stream of payments throughout retirement just like a pension would.

So why are annuities important? Well, the average Social Security benefit in early 2024 was $1,907 per month, while the average household run by someone 65 or older spends $4,345 per month. This gap can put some retirees at risk of outliving their savings if they are constantly having to pull from retirement accounts to close that gap. By using an annuity instead, you can fill that gap with another source of guaranteed monthly income and allow yourself to draw less from your other savings every year- making it last longer. Plus, in the annuity even if your balance hits zero, it will keep paying you the monthly income for the rest of your life, so you truly will never run out of money. 

Despite their benefits, annuities can be overlooked due to lack of understanding as we’ve described, but also due to a misperception of high costs, complexity, and even some mistrust. Some annuities, such as variable annuities, may come with hidden fees and lengthy contracts. Unfortunately, this can create an overall negative perception about ALL annuities, especially for a consumer that doesn’t understand the differences between Variable and FIA. Most FIA’s can be structured with little to no fees, for example. 

Unfavorable perceptions have also been reinforced by financial firms’ advertising and misrepresentation designed to paint annuities as lackluster financial products. Statements like, “the market outperforms everything” further feed this agenda. At the end of the day though, not all annuities are created equal. FIAs stand out because they do not typically include heavy fees, and they eliminate market risk while offering upside potential—a key advantage over other annuity options. Are annuities right for everyone? No. But can the right annuity be a good retirement tool for the right person based on their goals and objectives? Absolutely. 

The Shift Toward Annuities in Retirement Planning 



A step forward for annuities in the financial planning world has come about as recent policy changes aim to make annuities more accessible in employer-sponsored retirement plans. Legislation now allows 401(k) plans to include annuity options, helping retirees build their own lifetime income pool, as many employers are no longer offering pensions. Companies like BlackRock have introduced products that allow workers to allocate a portion of their 401(k) contributions into annuities, simplifying the purchasing process. This has been common for teachers and municipal employees for years but is becoming more mainstream for private sector employers more recently. These changes should help create awareness and ensure that people start learning about the way to effectively use annuities in their retirement planning, at a younger age. 

Additionally, as life expectancy increases the risk of outliving savings grows. In today’s world, financial experts stress the importance of planning ahead, especially for those within a decade of retirement. While annuities may not be the right fit for everyone, Fixed Indexed Annuities can provide a reliable option for those seeking principal protection with growth potential. Firms like Summerlin Benefits Consulting, a leader in retirement income protection, specialize in FIAs as a key strategy for bringing safety and guaranteed income into retirement portfolios. 

Conclusion 

Annuities are a crucial yet underutilized component of retirement planning. A lack of understanding, complexity, and historical mistrust contribute to their low adoption. However, with Social Security alone often being insufficient to support retirees, Fixed Indexed Annuities can play a key role in ensuring long-term financial security. Summerlin Benefits Consulting helps clients navigate FIA options to protect their financial future, ensuring they have a stable and secure retirement. As awareness grows and access improves, more Americans may begin to see FIAs as an essential part of their retirement strategy. Reach out today if you’d like to learn more about Fixed Index Annuities and how they can be beneficial for your retirement portfolio!