Reduce Your Retirement Risk With a Fixed Annuity

It can be comforting to dream about a life of leisure in retirement, but financial difficulties can disrupt the dream. Indeed, retirees commonly face risks that challenge their ability to meet expenses for the remainder of their years. Fortunately, there are ways to prevent, or at least lessen, the severity of such challenges. With that in mind, let’s discuss how you might reduce your retirement risk with a fixed annuity.

What Is Retirement Risk?

retirement risk

Retirement risk is any financial challenge that a retiree could face. Some of the most common risks in retirement are:


Longevity risk is the danger of outliving your savings. It can happen even to the most prudent retirement planners. Perhaps they had arranged their portfolio based on the belief they would live only to a particular age but exceeded it by many years, even decades. Their savings may have been sufficient for the original time frame, but now they have to finance a much longer one.


Retirees do have income sources, but the question is whether the income they receive is sufficient for their needs. Particularly if they live past their expected life span, they may find their expenses racking up while their supply of money stagnates or dwindles.


AARP reports that health care is the number one biggest expense for retirees. The cost is likely to increase with greater longevity because additional health concerns tend to arise with advanced age. Medicare can help cover some medical expenses, but it doesn’t cover everything. For example, eye exams for prescription glasses, hearing aids and exams, routine physical exams, dentures, and most dental care are outside of Medicare’s coverage purview, though older retirees are likely to need such services to live comfortably.

What Is a Fixed Annuity?

A fixed annuity is both a retirement product and a contract that one enters with an insurance company. The insurance company determines a fixed rate of return, guaranteed to be credited to your account every year of the contract’s term. You fund the account in either a lump sum or a series of contributions. You might transfer the funds directly from your checking account or roll them over from another retirement account, such as your 401(k).

The insurance company uses your money to fund an investment portfolio, which is how the account grows. It grows tax-deferred, too, maximizing the potential of compound interest. At the end of the term, you can annuitize the account, which means converting to a regular income stream that lasts either for a specific time frame or for the rest of your life.

How Can a Fixed Annuity Mitigate Retirement Risk?

A fixed annuity can mitigate retirement risk by providing you with guaranteed money during a time when your income sources may be limited. The reliable stream of income you receive post-annuitization directly or indirectly alleviates the retirement risks mentioned above. It supplements other income streams such as Social Security, can help you pay for medical expenses, and, should you opt for lifetime distributions, serves as a means of funding your standard of living no matter how long you live.

A Case Study

  1. Smith is nearing retirement at 67 years old. She has total savings of $900,000. In retirement, she plans to reduce her yearly spending to $35,000 per year.

At 57, concerned about outliving her savings in retirement, she used part of her savings to purchase a $200,000 fixed annuity. She chose a lifetime fixed annuity, which would pay distributions for the remainder of her life. The insurance company determined a fixed rate of 5%. By her calculation, the annuity should have a value exceeding $325,770 by the end of its term, growing the initial sum of her contribution by more than $125,000. In addition to her savings, that money would help her to fund her retirement for 30 years.

Key Factors To Consider

If you are thinking of purchasing a fixed annuity to reduce your retirement risk, consider these factors first:

  • Penalties: The money in a fixed annuity is fairly illiquid. You may be able to withdraw from the account before the contract ends but only to a limited extent — typically 10% per year — before penalties apply. The Internal Revenue Service also levies a tax penalty on those who withdraw from annuities before the age of 59.5.
  • Limited Returns: Fixed annuities are probably most useful for generating supplemental income, not large volumes of money. Higher-risk investments like stocks are more impactful in terms of large returns.
  • Beneficiary: You can add optional enhancements called riders to your fixed annuity. One type of rider would transfer the distributions to a beneficiary of your choosing in the event that you pass while money remains in the account.

To learn more about how a fixed annuity can reduce your retirement risk, speak with a financial adviser. They can guide you through additional riders, explain how to find preferred interest rates, and more.