Video - Is an Annuity right for You?

Whether you’re planning for retirement or retired, we all have our bucket list of things to pursue and accomplish in our next chapter of life. Whatever is on your list, most of it will involve spending some money.

That’s why millions of Americans use annuities to protect and receive retirement income to help cover their basic monthly expenses – things like a mortgage or rent, utilities, groceries, or transportation – so they have the peace of mind and freedom to live the retirement they want.

Annuities have protected the retirement of millions of Americans over the centuries. Benjamin Franklin saw the power of annuities by giving them to the cities of Philadelphia and Boston in his will. In 2007, then Federal Reserve Chairman Ben Bernanke disclosed that his largest financial assets are annuities.

In simple terms, an annuity is a contract between an individual (or married couple) and a life insurance company. Depending on the type of annuity, you purchase an annuity with a portion of your retirement savings in either a single payment or with multiple payments over time.

There are many annuity types available, but they basically fall into three main categories:

FIXED

An annuity that protects your principal from market downturns and offers a fixed rate of interest for growth with options for guaranteed monthly payments.

FIXED INDEX

An annuity that protects your principal from market downturns, while offering index and fixed growth rates with options for guaranteed monthly payments.

VARIABLE

An annuity that offers the potential to grow your money through various market investments, but with the potential for market loss, and the option of receiving guaranteed monthly income payments.

There are also two main types of payout options:

DEFERRED

You delay receiving monthly income payments to a future date, giving your money in the account time to grow.

IMMEDIATE

Monthly income payments begin shortly after purchasing the annuity.

Annuities didn’t exactly pop up yesterday. In fact, they have been around for thousands of years, providing guaranteed income to pensioners, families, and individuals when they need it most. What’s more, their guarantees can cover more than just lifetime income.

If you are wondering if annuities make sense for your retirement goals, a quick walkthrough of their history can give a good idea of their track record.

Here’s a look at how annuities have provided crucial security, stability, and promises to millions of people across thousands of years of human history.

Annuities and Guaranteed Income in the Roman Empire

There are many forms of annuities, and they have evolved over time into the modern contracts that we see today. The concept of an annuity harkens back to the Roman Empire.

During those times, this idea of a guaranteed income stream was known as an “annua,” which is Latin for annual stipends. In exchange for making a one-time payment, Roman citizens would receive lifetime payments each year from the annua.

The great Roman jurist Ulpian (170-228 AD) is credited with being one of the first dealers of annuity contracts in history. Not only that, he was reputed to have created one of the first actuarial life tables.

Just as U.S. government employees — and many other civil public employees across the globe, for that matter — are today, soldiers in the Roman Empire were given annuities as a form of compensation for their service.

Evolving Annuity Use in the Medieval Period

A form of annuities also saw use during the Middle Ages.

Tontines, which have also seen growing popularity in modern times for raising capital and distributing income streams over many people, were this annuity-like vehicle.

Kings and feudal lords used tontines to finance internal conflicts against one another, not to mention their overall war-going activity.

The Colonial Era

Annuities were used in the colonial era for the trade of goods between England and the Colonies.

A large number of annuity contracts were issued in England to benefit family members who still lived in England in return for raw goods that were shipped from the Colonies.

King Charles II used annuities to reward those who participated in the development of the Islands of Martinique and Grenada before there was a standard for money.

Brave New World, Same-Old Annuity Promises

Annuities continued their use from the Old World to the New World in North America.

In the United States, annuities came to light in the eighteenth century. In 1759, the Presbyterian Church started using annuities to provide a secure retirement for aging Presbyterian ministers and their families.

This financial protection was later extended to cover widows and orphans. In 1812, The Pennsylvania Company for Insurance on Lives and Granting Annuities was the first American company to offer annuities to the public-at-large.

Even Major U.S. Cities Owned Annuities

There are some other famous uses of annuities in American history. Ben Franklin, one of the most famous Founding Fathers, left two annuities in his will to the cities of Boston and Philadelphia.

In fact, Boston continued to get payments from Franklin’s annuity contract until the early 1990s. Boston then chose to end the contract and collect the remaining lump-sum in the contract.

Continuing Use in Military Service and Business

During the Civil War, the Union often used annuities to reward military officers for their service in lieu of a gift of land. President Lincoln supported the use of annuities as a means of supporting soldiers that were injured or disabled from battle.

In 1905, Andrew Carnegie began the Teacher’s Pension Fund, which gradually became the TIAA-CREF investment management company that many Americans know today.

A Growing Source of Protection and Stability

Growth in annuity sales picked up in the 1930s, when the American public was worried about financial stability and well-being in the Great Depression.

Many Americans also turned to annuities as a source of financial protection in the wake of World War I. Countless people were also concerned about overall financial markets’ performance, prompting them to look at annuities as a place for financial safety.

Babe Ruth was another famous figure who invested in annuities. In fact, all of his money was in annuities, because, as he said, “I may take risks in life, but I will never risk my money, I use annuities, and I never have to worry about my money.”

An Expanding Annuity Presence in America

TIAA-CREF unveiled the first variable annuity in 1952. And like Franklin, many other Americans continued to use annuities for different financial roles during the 20th century.

Babe Ruth relied upon annuities to avoid losses in the Great Depression. Celebrities and business owners used the legally-advantaged status of annuities to protect their assets and income from lawsuits as well as creditors.

Even Ben Bernanke, former Fed Chairman, holds two annuities from his earlier career days in education.

Variable annuities have evolved considerably since their introduction by TIAA-CREF.

Many new features have been introduced since then, such as guaranteed income riders and death benefit riders.

Variable annuity owners now also have a wider selection of investment choices and dollar-cost averaging and portfolio rebalancing strategies. The mutual fund subaccounts that are used within variable contracts are now classified as separate securities.

Fixed Index Annuities Arrive on the Scene

Keyport, which became Sun Life of today, unveiled the first fixed index annuity in 1995, as an alternative to fixed-interest assets.

The fixed indexed annuity market has grown tremendously since then, as many retirement savers seeking higher growth without risking their principal found out about these instruments.

New Annuity Benefits for a Modern Era

Fixed indexed contracts themselves have also quickly evolved over time to become much more competitive. Many fixed indexed products available today have many features that were not available in the early contracts.

Income riders that you can turn on and off, and a much wider array of options for calculating how your annuity money earns interest, are among the benefits that can only be found in the current marketplace.

Do Annuities Make Sense for Your Situation?

Annuities have had a long and varied history throughout the passages of time. Their historical record is rich, long, and proven. They have provided financial stability and protection for millions of people over the centuries, and they continue to do so to this day.

So, does an annuity make sense for your financial situation? Are you thinking of how a financial product that has provided financial protection and assurances for over two thousand years might fit into your financial picture?

Ultimately, any annuity should have a clearly defined role in your financial plan, just as other asset holdings do in your plan.

Does the annuity solve for an income need? Provide guaranteed growth to counterbalance other growth-oriented holdings that have risk of loss and uncertain results?

Help protect your money so that you can use those savings for later goals or just have them handy? Will it enable you to leave a legacy to your loved ones when you are no longer here?

Planning for a Secure Financial Future

The annuity should solve a certain problem, or certain problems, in your existing strategy. Of course, problem-solving can mean more than just covering a gap in your plan.

It can also include improving someone’s chances of good financial outcomes. That might mean helping you stay retired once you have left your full-time career and not having to go back to work unless you want to do so.

Or it might involve maximizing the lifetime income over your entire retirement that you generate from your portfolio, so you can enjoy a comfortable lifestyle.

All of these questions are good to ask and explore. An experienced and independent financial professional can help you walk through these “what-ifs,” prioritize what is meaningful to you, and build strategies that let you accomplish those goals.