Surging inflation, rising interest rates, and wild stock swings can make you wonder whether your retirement savings will last.

When that happens, you may look for a more secure spot for part of your nest egg, which is exactly what annuities offer. They promise a steady income stream, month after month, regardless of market fluctuations.

In this article, you’ll discover why annuities gain steam when financial turbulence strikes and how they can give you a reliable floor for your essential living costs. 

Why Annuities Shine in Uncertain Times

Annuities typically guarantee a set payment schedule, so even if your investments dip, you’ll still receive income you can count on.

If you’re at (or near) retirement, a steep market drop can hit your savings hard just as you start drawing from them. An annuity can act like a “floor” for your plan, covering essentials no matter how deep the downturn. That steady influx of funds can prevent you from having to sell assets at a loss.

For instance, fixed annuities can offer stability by keeping your income stream intact through economic disruptions. Fixed indexed annuities add a chance for gains linked to market indexes while shielding your principal from loss — you get to share in market upsides without the risk of full exposure to downturns.

When a recession negatively impacts the economy and even the stock market, it doesn’t necessarily have to impact one’s retirement lifestyle, says financial expert Ty Young, CEO of Ty J. Young Wealth Management. He argues that using an annuity correctly can enable one to live their desired retirement lifestyle without a recession ruining those plans. 

That blend of guaranteed income and loss protection explains why more people turn to annuities in periods of uncertainty.

The following are some of the primary advantages of annuities: 

Tax-Deferred Growth

Annuities offer tax advantages similar to retirement accounts. Any interest, dividends, or investment growth within the annuity isn’t taxed until you withdraw money, meaning your money can compound more efficiently over time. As such, you can strategically time your withdrawals in retirement to manage your tax bracket.

Legacy and Other Benefits

Depending on the contract, annuities can be set up to provide for a spouse or beneficiary. Joint-and-survivor annuities, for example, continue payments to a surviving spouse.

Some annuities include optional features for nursing home care or inflation adjustments (though these often cost extra). The myriad options allow for customization to meet personal needs, but it’s essential to remember that more features typically come with higher fees.

Downsides of Annuities

Annuities aren’t entirely without drawbacks. Here are some key points to consider:

Complexity

Annuity contracts can be complex and potentially confusing. They often come with a thick booklet of terms, conditions, and options. There may be various riders (add-ons) for features such as long-term care benefits, guaranteed minimum withdrawal benefits, or other nuances, making the product more complex to understand.

High Fees and Commissions

Annuities (especially variable ones) generally come with a high degree of expense. There are often multiple layers of fees, including insurance mortality charges, administrative fees, investment management fees for sub-accounts, and fees for any riders or guarantees you add.

Illiquidity (Surrender Charges)

When you put money into an annuity, you’re typically committing it for a set term, known as the surrender period. During this time frame — which might be anywhere from three years to 10 years or more, depending on the contract — you can’t withdraw more than a small portion without incurring surrender fees. 

Striking the Right Balance

Annuities have a somewhat mixed perception. Some laud their security, while others criticize their costs. The good news is that you don’t have to put all your money into an annuity to benefit from it.

Some retirees will annuitize just enough to cover their essential expenses, leaving the rest of their portfolio invested in stocks and bonds for growth and flexibility. That way, they have a safety net of guaranteed income and liquidity for discretionary spending or legacy goals. 

Whether an annuity is right for you will ultimately depend on your individual situation, especially how comfortable you are with risk, and what other resources you have at your disposal.