Annuities are often seen as a dependable way to generate stable income in retirement. They can be tax-deferred investment contracts that can offer predictable payments, either right away or in the future. Like any financial product, annuities come with risks and limitations — how safe annuities are depends on the type and specific contract terms. 

This article outlines the main annuity risks and steps you can take to minimize exposure.

What risks are associated with annuities?

There are several different types of annuities, including fixed, variable, and indexed. While fixed and indexed annuities are generally considered safer than many other investment vehicles, there are factors you should take into account before purchasing one. Here are some of the main risks associated with annuities.

Interest rate risk

Risks associated with rising or falling interest rates primarily affect fixed annuities, where the insurance company guarantees a set interest rate for a defined period. When market interest rates rise after you’ve purchased an annuity, you may miss out on the higher interest rate. This can lead to less growth than investments that respond to rate changes, but if rates fall, your annuity’s fixed rate can become more valuable. It’s important to consider timing and rate trends before committing to a long-term contract.

Inflation risk

Inflation risk is the potential erosion of your annuity’s purchasing power over time. This is more common in fixed annuities as well. The income amount provided typically remains flat in fixed annuities, even as the cost of living rises. Without built-in inflation protection, your future dollars may not stretch as far as you expect. There are some riders available to help combat this risk.

Longevity and mortality risk

One of the key advantages of annuities is protection against longevity risk — the possibility of outliving your savings. Lifetime income annuities can ensure a consistent payout for as long as you live, but they also carry mortality risk, which means you can lose money in an annuity. If you die early in the contract, your heirs may receive little or nothing. Choosing an annuity with a death benefit or period-certain option can help balance these risks. 

Market risk

The risks associated with variable annuities stem from returns being tied to market performance. This is also partially true of indexed annuities. Indexed annuities can offer a fixed growth portion as well as the option for growth to be linked to market performance with downside protections. While these products offer growth potential, variable annuities can also expose your principal or earnings to downturns. Unlike fixed annuities, which offer guaranteed returns, market-based annuities can require a higher risk tolerance. 

Issuer solvency risk

Annuities are only as strong as the company behind them. If the issuer faces financial trouble, your annuity could be at risk. Always research an insurer’s credit rating and financial health before signing a contract.

What is the safest annuity to buy?

The safest annuity for you depends on your risk tolerance and financial goals. For those seeking stability and guaranteed returns, fixed annuities can be the safest option. They function similarly to certificates of deposit, offering predictable interest over a set period while shielding your principal from market volatility. 

Variable annuities carry the highest risks of these three types due to their exposure to market performance. They offer greater growth potential but with no guarantees on returns and may not have downside protection. Fixed index annuities look to balance safety and growth, tying interest to a market index while still protecting your principal from losses. 

How to protect yourself when buying an annuity: 4 tips

To minimize risk and align an annuity with your retirement strategy, follow these four guidelines.

1. Choose a highly rated provider

You can only collect your annuity payouts if the insurance company remains solvent. Always choose a provider with high financial strength ratings from independent agencies like A.M. Best, Standard & Poor's, Moody's, and Fitch. Look for ratings in the “A-” range or higher — these can indicate a strong financial position and a higher likelihood that the firm will fulfill its obligations. 

2. Understand all fees and riders

Annuities have various fees and optional riders, such as administrative fees, surrender charges for early withdrawals, and fund management costs. Review all the costs carefully before signing a contract, as they can impact your net returns or overall growth. 

3. Match the annuity type to your goals

Start with a clear picture of your retirement needs. You might prioritize guaranteed income, capital preservation, or inflation protection. Each annuity type can serve different priorities, so selecting the right structure can help ensure your annuity supports your broader financial plan. 

4. Work with a fiduciary or shop digitally

A fiduciary financial advisor is legally bound to act in your best interest, helping you avoid high-commission products that may not suit your goals. For those comfortable with a more self-directed approach, digital platforms like Gainbridge allow you to compare and purchase annuities directly. This route can offer greater transparency and lower fees.

Explore tailored annuities from Gainbridge

If you’re looking for reliable retirement income, Gainbridge annuities can be a compelling option. With a 30-day free-look period and no hidden fees, Gainbridge has a range of products that can suit any preference. If you’re ready to secure your financial future, contact Gainbridge today.

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This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional.  The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes.