What Are the Benefits of Deferred Annuities for Retirement?

What Are the Benefits of Deferred Annuities for Retirement?

If you are about to retire or are in retirement, you likely have real concerns about how you can live comfortably during your golden years. Putting together the financial puzzle pieces so you don't outlive your nest egg is a real concern.

The good news is that there are products available that can guarantee an income you can’t outlive.

Annuities are financial products that are designed to help you accumulate money prior to retirement, then distribute it to create a foundation of income in retirement.

Let's explore annuities further to see if adding this product to your financial plan makes sense.

What is a Deferred Annuity?

In general, annuities are products issued by insurance companies that can help you build money before retirement, then distribute it safely once you retire. The money you put into an annuity now is tax-deferred and can be redeemed as a regular paycheck later in retirement. How quickly you begin to receive these income payments will depend on if you have an immediate or deferred annuity.

How Does a Deferred Annuity Work?

With a deferred annuity, payments are delayed to a later date to allow more time for your premium to earn interest. It is important to note that annuities are the only financial product available that guarantees a steady stream of income will be paid to you when you retire.

There are two phases to deferred annuities, the accumulation phase and the payout phase.

When you are interested in accumulating money prior to retirement, you pay a premium to the insurance company and your money grows on a tax-deferred basis. During this accumulation period, you can fund your annuity in a single lump-sum payment, or via periodic premium payments (a flexible premium annuity).

When you are ready to begin receiving monthly payments, you start the payout phase of the annuity.

This is also called "annuitizing," essentially creating a stream of income payments. When you annuitize, you can choose the length of time you'd like to receive your payments (for a lifetime or for 10 years, for example) and whether someone else will receive payment if you die before the end of the guarantee period. More on that late

What Are the Types of Deferred Annuities?

Deferred annuities allow you to conservatively, or aggressively, build a nest egg prior to retirement.

As such, they come in a few varieties based on how and where your money is invested. There are three broad types of deferred annuities, fixed, fixed indexed and variable annuities.

Fixed: The most conservative type of annuity with guaranteed rates of return and are usually provided for three, five or seven years. Fixed annuities also have a guaranteed rate floor, usually above 0%. The issuing insurance company invests the money on your behalf, usually in conservative vehicles like bonds.

Fixed indexed: This annuity type provides more upside potential than fixed annuities because returns are linked to an index like the S&P 500. Returns are not guaranteed, however, and can go as low as 0%, but you generally cannot lose money.

Variable: Provides the most upside growth potential of all annuities, with returns linked to stock market funds that you choose. While returns can be better than the other two varieties, you can also lose money with this type of annuity.

Key Benefits of  Deferred Annuities

Lifetime Income

One of the core benefits of annuities is that they can provide guaranteed income for life.

While this is certainly true, it’s not the only option for receiving income payments. The decision about how long payments will last depends on you. The period of time you choose to receive payments is called the payout period.

You have the choice of receiving payments for life, or for a specific period of time that you choose. This can be advantageous, especially if you are anticipating higher expenses in the years immediately after you retire (travel and leisure activities, for example).

The most popular payout options include:

Life only: receive payments for as long as you live, but when you die, the payments stop. This option is best for very healthy people or single people.

Life with period certain: the payout amount is less than the life only option, but payments are guaranteed to be paid for a specific period of time, whether you are living or not. Let's say you had a lifetime annuity with a 10-year "period certain" provision. The insurance company promises to pay out for the rest of your life, but no less than 10 years.

Tax Benefits

Annuities and other financial products offer different tax benefits. It's important to consider them when evaluating your investment options. Here are some tax advantages of annuities compared to other financial instruments:

Tax-Deferred Growth: One of the key benefits of annuities is their ability to grow on a tax-deferred basis. This means that the earnings are not subject to income tax until you withdraw the funds. This allows your money to compound over time, potentially leading to higher overall returns. You only pay taxes when you begin to distribute money in retirement and the tax rate will likely be lower than it would have been pre-retirement.

No Contribution Limits: Unlike many other retirement accounts, annuities generally have no contribution limits. This makes annuities attractive to individuals who have already maximized their contributions to other tax-advantaged accounts like IRAs and 401(k)s.

Guaranteed Income Options: As we mentioned, annuities can provide guaranteed income options via periodic payments. When you receive these payments from a non-qualified annuity (money that has already been taxed) only a portion of each payment is considered taxable income, as it is typically based on the exclusion ratio. This simply means that a part of the income you receive is a return of your original investment and is not subject to tax.

Estate Planning Benefits: Annuities offer certain advantages for estate planning. At the end of your life, the funds can pass directly to your beneficiaries without going through probate. This can help streamline the movement of assets and potentially reduce legal costs.

Protection from Market Volatility

Fixed annuities are unique because they can shield a portion of your nest egg from the ebbs and flows of the stock market. Returns are guaranteed by the insurance company that issues the annuity.

Allocating part of your retirement funds to a fixed annuity can make sense if you are seeking to create a foundation for your retirement income plan that can provide a base of income that you cannot outlive.

Risks and Considerations with Annuities

For many people, annuities can fill very specific roles for a well-rounded investment strategy. But it is also important to be aware of the potential risks associated with these financial products. Here are a few key items to be aware of:

Suitability: When it comes to creating a retirement portfolio, it is important to diversify the products that make up your portfolio and decide what role each can play to help you create enough income to live comfortably. Some annuity types may not be suitable for you based on your need for security or, conversely, your desire for growth.

Lack of Liquidity: Deferred annuities are generally long-term investments and usually come with surrender charges or withdrawal restrictions during the early years of the contract. If you need immediate access to your funds, annuities may not provide the desired liquidity.

Purchasing Power: With some types of annuities, such as fixed ones without inflation protection, there is a risk of your income not keeping pace with inflation over time. This means your annuity payments may not provide enough income to maintain your desired lifestyle in retirement.

Insurance Company Financial Stability: Annuities are typically offered by insurance companies, and the financial strength of the issuing company can affect their reliability. If the insurance company becomes financially unstable or goes bankrupt, there is a risk that the payments or death benefits may be impacted.

Fees and Expenses: Annuities, especially variable and fixed-indexed varieties, often come with fees and expenses, such as administrative fees, mortality and expense fees, investment management fees, and surrender charges. These costs can reduce your overall returns and limit the growth potential of your annuity.

Early Withdrawal Penalties: Deferred annuities typically have surrender periods during which early withdrawals are subject to penalties. If you need to access your funds before the surrender period ends, you may face fees or charges that can significantly impact your balances.

Unique Benefits of Fixed Annuities

Guaranteed Rate of Return

Earlier we mentioned that there are three types of deferred annuities based on growth potential and risk.

The least risky of the three varieties are fixed annuities. Fixed annuities offer a competitive rate of return that is guaranteed for the period of time you choose (usually three, five or seven years in duration).

Since fixed annuities are not linked to the stock market, there is little volatility.

The insurance companies that offer these products guarantee the rate, in return for you keeping the money in the annuity for the period of time selected. The ability to pay the promised interest rate is supported by the financial strength of the issuing company.

In the current market environment, fixed annuities offer vastly superior rates compared to traditional bank products like savings accounts and CDs.

Low Risk

Fixed annuity returns are driven by the issuing insurance company's investment strategy, which is usually very conservative.

This means that little or no part of your annuity deposit is linked to stock market performance. The rate that is guaranteed by the company is the rate that will be paid — period.

Flexibility in Payout Options

When it is time for you to begin distributing money from your fixed annuity, you have options.

These include receiving the balance in a lump sum (there are likely tax ramifications with this strategy, so you may want to consult with a tax specialist before choosing this option), systematic withdrawals, or annuitization.

These flexible options can fit the needs of most people entering retirement who are looking to create a solid foundation of retirement income.

Death Benefits and Other Policy Riders

Some annuities offer optional riders that can provide additional benefits, including a death benefit.

Let's take a look at death benefit riders and explore a few other common riders available for annuities.

Death Benefit Rider: A death benefit rider is typically available as an additional rider and provides a payout to designated beneficiaries upon the death of the annuity owner. The death benefit can be available in many forms including return of the initial premium, a guaranteed minimum amount stipulated in the contract, or the entire accumulated contract value. If the annuity owner passes away before receiving the full value of their annuity, their spouse or other beneficiaries will receive a benefit.

Guaranteed Minimum Income Benefit (GMIB) Rider: This "income rider" is typically available on variable annuities and guarantees a minimum level of income in the future, regardless of investment performance. It ensures that the annuity owner will receive a specific income stream for a predetermined period, even if the annuity's actual investment returns are lower. It comes with a cost, reflected in an annual charge against your account, 1% for instance.

Long-Term Care (LTC) Rider: This rider provides coverage for long-term care expenses if the annuity owner requires care due to illness, disability, or cognitive issues. It allows the annuity owner to access a portion of their annuity's value to pay for qualified long-term care expenses (these impairments are usually spelled out in the rider language.) An LTC rider provides an additional layer of financial security by addressing potential healthcare costs.

Annuities vs. Other Retirement Strategies

Annuities are unique in their ability to provide a guaranteed source of income that you cannot outlive.

These payments can help cover living expenses throughout your retirement years. But some annuities have limited liquidity, fees and potential surrender charges. That's why a well-rounded retirement income strategy is often the best approach.

Here are other ways to drive income in retirement:

• Withdraw Money from Investment Portfolios: This strategy involves relying on distributions from your investment portfolio usually composed of stocks, bonds, mutual funds, or exchange-traded funds (ETFs), to fund retirement expenses. This can offer flexibility and potential for higher returns compared to annuities. But it also exposes you to market volatility, and your ability to sustain a level of income depends on the performance of the investments. It's best to find a competent investment manager to help you manage an investment portfolio because ongoing monitoring and buying and selling of holdings is necessary to maximize returns.
• Real Estate: Real estate investing involves purchasing properties directly or investing via real estate investment groups (REIGs) with the aim of generating income or capital appreciation. Real estate can diversify a retirement portfolio and provide potential income streams but may require significant management of properties and upfront capital. Additionally, liquidity can be limited depending on the type of real estate investments you choose
• Part-time employment: Many retirees use part-time work to boost income and stay active in their community while also having hour flexibility to enjoy their retirement.

Summarizing the Pros and Cons of Annuities

To recap the key pros and cons of making a deferred annuity part of your retirement strategy:

Final Thoughts

Building a plan for income in retirement is like assembling a puzzle. Each piece is meaningful and must fit together to present the best picture for a comfortable retirement. Annuities can be an important piece of this puzzle.

If you are looking to grow money conservatively, then guarantee a flow of money once you are retired, then fixed annuities can be an important part of your plan.

Guaranteed rates of return for fixed annuities are currently exceptional compared to more traditional savings products like CDs and bank savings accounts. Canvas Annuity has fixed annuities available in three, five or seven year guarantee periods and feature some of the most competitive rates in the country!

Because your time is valuable, you can buy directly from the website or through helpful agents over the phone, avoiding meetings with salespeople.

The information in this article is accurate as of 11.25.25. Please visit our site for the most up-to-date information.