Can you add multiple annuities to your retirement portfolio? 3 things to know

Retirement planning has always been challenging, and it has only gotten more complex in today’s unusual economic landscape. Between the ongoing issues with stock market volatility and sticky inflation, and the questions about Social Security’s long-term viability, many soon-to-be retirees are now looking for ways to create predictable income streams in their golden years. And, given these issues, it’s no wonder that annuities, which are financial products designed to provide guaranteed income, have become a more common option worth considering.

But as retirees dive deeper into their annuity research, they might find themselves wondering whether one annuity is really enough. After all, there are numerous types of annuities to choose from, with immediate annuities, deferred annuities, fixed annuities and variable annuities each serving different purposes. And, while diversification is a cornerstone of smart investing, in today’s unusual economic landscape, adding stability is also key. So, can retirees add multiple annuities to the mix right now, and if so, should they?

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Can you add multiple annuities to your retirement portfolio? 3 things to know

The short answer is yes, you can own multiple annuities. People often buy more than one annuity to take advantage of different features, such as guaranteed income, growth potential or flexible withdrawal options. Some retirees pair fixed annuities with variable or indexed annuities to balance predictable income with the opportunity for market-linked growth. 

However, owning multiple annuities also introduces additional fees, paperwork and complexity that should be carefully weighed. So before you get started on this strategy, make sure you understand the following: 

Liquidity planning requires extra coordination

One of the biggest considerations with any annuity is liquidity, meaning your ability to access your money when you need it. With multiple annuities, this planning becomes more intricate but also more flexible. After all, different annuities will have different surrender periods, withdrawal penalties and access provisions.

Smart planning means coordinating these features across your various contracts. You might structure your annuities so that different contracts become fully liquid at different times, ensuring you always have some accessible funds without paying surrender charges. This approach requires understanding each contract’s specific terms and timing your purchases accordingly, though.

You’ll also want to consider how multiple annuities fit into your broader emergency fund and liquidity strategy. While annuities shouldn’t replace easily accessible savings accounts, having multiple contracts with staggered surrender periods can provide more options when unexpected expenses arise.

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Multiple annuities can reduce risk but may increase complexity

By spreading your money across different insurance companies, you reduce the risk of being overly dependent on one company’s financial stability. This becomes especially important when you consider that annuities are backed by the insurance company’s ability to pay claims, not by government guarantees like FDIC insurance.

Different types of annuities can also serve different purposes in your retirement plan. For example, you might use an immediate annuity to cover essential expenses like housing and healthcare, while employing a deferred variable annuity for growth potential and future income needs. This approach allows you to match specific products to specific goals.

However, managing multiple annuities means dealing with more paperwork, different terms and conditions and varying fee structures. You’ll need to track multiple contracts, beneficiary designations and withdrawal schedules. This complexity can become overwhelming, especially as you age, so having a clear organizational system is crucial if you plan to take this route.

Tax timing becomes more nuanced with multiple contracts

The tax implications of multiple annuities also require careful planning. While annuities offer tax-deferred growth, the way you structure and time your purchases and withdrawals can significantly impact your overall tax burden. With multiple contracts, however, you have more flexibility in managing when and how you trigger taxable events.

For example, you could stagger the start dates of different annuities to spread income across multiple tax years, potentially keeping yourself in lower tax brackets. You might also use different funding sources — some annuities purchased with pre-tax dollars from traditional IRAs and others with after-tax dollars — to create more tax diversification in retirement.

The key to getting it right is understanding that each annuity contract is treated separately for tax purposes. This means you can’t offset gains in one contract against losses in another, and you’ll need to track the cost basis and earnings for each contract individually. This complexity makes it important to work with a tax professional when pursuing a multiple-annuity strategy.

The bottom line

Multiple annuities can be a powerful tool for retirement planning, offering diversification, tax flexibility and income security. But this strategy typically works best for people who have substantial retirement assets, can handle the increased complexity and have clear goals for each annuity purchase.

Before adding multiple annuities to your portfolio, you should carefully evaluate your overall retirement plan, understand the fees and terms of each product and consider working with a financial advisor who can help you coordinate the strategy effectively. Remember, the goal isn’t to collect annuities. It’s to create a retirement income plan that gives you confidence and peace of mind.