How a Classic Tool Can Protect Your Retirement

Understanding Annuities and Their Role in Protecting Retirement Savings

Many people spend a significant portion of their working years planning for retirement, creating financial strategies to support the lifestyle they desire. However, an increasing number of older adults are facing a different challenge: protecting their hard-earned savings from scammers. According to the FBI, $3.4 billion was lost to financial fraud targeting Americans over 60 in 2023, and this trend is growing with the rise of artificial intelligence.

When reporting on how to prepare for retirement in the Bay Area, Terry Odean, a professor of finance at UC Berkeley, highlighted a unique strategy: allocating part of retirement funds into an annuity that cannot be sold or transferred. This approach makes it harder for scammers to access those funds.

Annuities may not be as exciting as other investments, but they function more like insurance than traditional investments. Gal Wettstein, associate director of health and insurance at the Center for Retirement Research at Boston College, explains that annuities offer guaranteed payments for life, making them an effective tool in safeguarding retirement savings.

In 2024, U.S. annuity sales reached a record high of $432.4 billion, showing their growing popularity. Here’s how they work and what experts recommend when considering one.

Annuities 101

Annuities operate similarly to Social Security, where you pay a lump sum upfront and receive regular payments for life. The initial amount can vary widely, from a few thousand dollars to millions. The typical range is between $200,000 and $1 million, according to industry experts.

Once you pay the premium, you begin receiving guaranteed payments, which can be monthly, quarterly, or annually. The size of these payments depends on your age, gender, and the amount invested. The AARP offers a fixed annuity calculator to estimate potential payouts based on your investment.

Payments typically remain fixed, though some plans include annual increases. However, none currently adjust for inflation like Social Security does. Some annuities also factor in interest earned on the initial deposit, which can affect payment amounts.

If you live longer than expected, you could receive more from your annuity than you paid in. However, if you pass away earlier, you might not recoup your investment. Joint annuities allow a surviving spouse to continue receiving payments, and some have death benefits for heirs, though this often means lower payments.

How Annuities Help Prevent Scams

While older adults are not necessarily more likely to fall for scams, factors like loneliness, wealth, and cognitive changes make them vulnerable. Amy Nofziger, a fraud expert at AARP, notes that loneliness is a major risk factor. Older adults also hold more wealth and have less time to recover if it’s stolen.

Scammers exploit these vulnerabilities by convincing victims to transfer funds to fake accounts. With defined contribution plans like 401(k)s and IRAs becoming more common, retirees have more control over their money — and more opportunities to make costly mistakes.

Social Security provides a form of protection, as it’s “the best annuity money can’t buy,” says Christine Benz, director of personal finance at Morningstar. Unlike annuities, you can't buy into Social Security unless you've contributed to it.

Annuities offer similar security by providing a guaranteed income stream. If structured properly, they can’t be sold, transferred, or cashed out, making them inaccessible to scammers. Studies show that people who annuitize a portion of their savings report better mental health and tend to live longer.

However, there are downsides. Once you invest in an annuity, the money is locked in. There’s no guarantee of returns, and no annuity product currently adjusts for inflation. Experts advise not fully annuitizing your savings, but using a portion to cover essential expenses.

What to Look for in an Annuity

The most common type is the single-premium immediate annuity, where you pay a lump sum and start receiving payments right away. Deferred annuities allow you to delay payments for a set period. Some annuities include survivor benefits or guaranteed payout periods, but these often come with lower payments.

From a scam prevention perspective, look for annuities with no real cash value and no associated account you can withdraw from. These ensure the money is protected from both external threats and your own potential missteps.

Other Ways to Protect Your Money

Beyond annuities, there are several steps to protect your finances:

• Enable two-factor authentication on email and bank accounts to block over 99% of automated cyberattacks.
• Review bank and credit card statements monthly to spot unauthorized transactions.
• Avoid calls and texts from unknown numbers, and never click on suspicious links.
• Discuss major financial decisions with a trusted confidant, such as a family member, lawyer, or financial adviser.

By combining these strategies with a well-structured annuity, retirees can significantly reduce their risk of falling victim to scams while securing their financial future.