What Is the Primary Reason for Buying an Annuity?

When it comes to retirement planning, few financial products spark as much debate as the annuity. While they are often praised for their stability, they are also critiqued for their complexity. However, for most investors, the decision to purchase one boils down to a single, powerful motivation.

The Primary Reason: Eliminating Longevity Risk

The primary reason for buying an annuity is to ensure a guaranteed stream of income that you cannot outlive. In financial circles, this is known as managing longevity risk—the very real possibility that a retiree might live longer than their savings last.

Unlike a traditional 401(k) or IRA, which acts as a bucket of money that can eventually run dry, an annuity functions more like a personal pension.By entering into a contract with an insurance company, you exchange a lump sum (or a series of payments) for a promise: a "paycheck" delivered at regular intervals for the rest of your life, regardless of whether you live to be 85 or 105.

As noted by District Capital Management, this stability provides a predictable floor for your retirement budget that remains unaffected by market volatility.

Secondary Benefits of Buying an Annuity

While lifetime income is the "headline" reason, several secondary factors often tip the scales for savvy investors:

1. Tax-Deferred Growth

Annuities offer a unique tax advantage: your investment gains (interest, dividends, and capital gains) are not taxed until you begin making withdrawals.This allows your money to compound more efficiently over time.Annuity.org highlights that this is particularly beneficial for high earners who have already maxed out their contributions to other tax-advantaged accounts like 401(k)s.

2. Protection from Market Volatility

For those nearing retirement, a sudden market crash can be devastating—a phenomenon known as sequence of returns risk. Fixed and fixed-indexed annuities provide a "floor," protecting your principal from market downturns. As explained by Fidelity, this allows retirees to cover their essential expenses without worrying about the daily performance of the S&P 500.

3. No Contribution Limits

Unlike IRAs and 401(k)s, which have strict annual limits set by the IRS, annuities generally have no cap on how much you can invest. This makes them an attractive vehicle for individuals who receive a large windfall, such as an inheritance or the sale of a business, and want to shelter it from immediate taxes while securing future income.

4. Customization via Riders

Modern annuities are highly modular. Through "riders," you can customize your contract to include:

• Cost-of-Living Adjustments (COLA): To protect your purchasing power against inflation.

• Death Benefits: Ensuring that if you pass away early, a portion of the remaining value goes to your heirs.

• Long-Term Care Riders: Providing extra income if you require nursing home or in-home care.

Who Should (and Shouldn't) Consider an Annuity?

An annuity is not a "one-size-fits-all" product. It is a tool designed for a specific purpose: certainty.

According to Northwestern Mutual, annuities work best when they represent a portion of a portfolio, covering "must-pay" expenses while other liquid investments provide flexibility and growth.

Summary: The Peace of Mind Factor

Ultimately, the primary reason people buy an annuity is peace of mind. It shifts the burden of investment management and life-expectancy math from the individual to the insurance company. In an era where corporate pensions are disappearing, an annuity allows retirees to recreate that "paycheck" security, ensuring that the "golden years" remain financially stable.