Are annuities a safe investment this August? 5 things to know now

As inflationary pressures continue to impact household budgets and volatility persists within the financial markets, many seniors, retirees and soon-to-be retirees are looking for ways to safeguard their nest eggs. And, while there are any number of ways to do that, annuities have long been used to guarantee that retirees have a predictable income stream after they stop working. 

But while annuities are considered a reliable way to ensure financial security in retirement, the economic landscape we’re facing currently brings with it new considerations. After all, today’s issues with high interest rates, inflation and stock market volatility could influence how safe an annuity truly is as an investment. 

Understanding these dynamics is crucial for anyone considering annuities, whether they’re seeking guaranteed income, tax-deferred growth or just peace of mind in terms of market risk. So, with economic uncertainty swirling, is this really the right time to consider an annuity? That’s what we’ll analyze below.

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Are annuities a safe investment this August?

When evaluating annuity safety, you’re essentially asking two questions: Will the insurance company be around to make good on its promises, and will those promises actually protect your purchasing power over time? With that in mind, here are a few important things you should know about the safety of annuities right now:

Your safety depends on the insurance company’s financial strength

Unlike bank deposits, annuities aren’t backed by the Federal Deposit Insurance Corporation (FDIC). Your safety instead relies entirely on the financial stability of the insurance company issuing the contract. This makes it critical to research the insurer’s credit and customer service ratings. 

As you consider your options, look for companies with ratings of A or better from agencies like A.M. Best, Moody’s or Standard & Poor’s. These ratings reflect the company’s ability to meet its financial obligations, including annuity payments, even during economic downturns. After all, a company with a strong balance sheet and conservative investment practices is far more likely to honor its commitments decades down the road.

Learn more about the annuity options available to you here.

State guarantee associations provide a safety net, but with limits

If your insurance company does fail, there are state guarantee associations that may step in to protect annuity holders, but this protection has significant limitations. Coverage typically caps at $250,000 to $300,000 per person per company, though this varies by state. Perhaps more importantly, though, these associations don’t prevent all losses; they simply aim to minimize them. If you’re considering putting a large portion of your retirement savings into annuities, spreading your investments across multiple highly-rated insurers can help you stay within these protection limits while reducing concentration risk.

Different annuity types carry vastly different risk profiles

Not all annuities are created equal when it comes to safety. Fixed annuities offer the most predictable returns, with the insurance company guaranteeing a specific interest rate for a set period. If safety is your primary concern, fixed annuities generally offer the most straightforward protection, though they may struggle to keep pace with inflation over long periods.

Variable annuities, on the other hand, tie your returns to underlying investment performance, which means your principal can fluctuate significantly. Indexed annuities fall somewhere in between, offering some market upside potential while typically protecting against losses. 

The current interest rate environment affects your safety margin

When you purchase an annuity, the interest rate environment significantly impacts both your returns and your safety. So, understanding where rates stand and where they might be heading can help you time your annuity purchase more strategically or choose products with more conservative guarantees. In higher-rate environments, insurance companies can invest your premiums more aggressively while still meeting their guaranteed obligations, creating a larger safety cushion. When rates are low, that margin shrinks, potentially forcing insurers to take on more risk to generate adequate returns. 

Inflation poses the biggest long-term threat to annuity safety

The greatest risk to annuity holders generally isn’t company failure. It’s the slow erosion of purchasing power through inflation. A fixed annuity that pays $1,000 per month might seem safe today, but if inflation averages 3% annually, that same payment will have significantly less buying power in 20 years. Some annuities offer inflation protection features or cost-of-living adjustments, but these typically come at the cost of lower initial payments. So, as you’re evaluating annuity safety, you may want to consider whether the product protects not just your principal, but your lifestyle.

The bottom line

Annuities can be a safe component of a retirement strategy, but their safety isn’t automatic. It depends on careful product selection and realistic expectations about what they can and cannot do. So, rather than viewing annuities as either completely safe or completely risky, think of them as tools that can eliminate longevity risk, which is the risk that you’ll outlive your money. To ensure you’re making the safest bet possible, though, you’ll need to choose the right type of annuity for your specific needs and timeline while keeping realistic expectations about what any single financial product can accomplish, especially in an uncertain economic environment.