Retirement annuities tend to draw an exceptionally wide range of both positive and negative responses. They offer both an upside – primarily, the potential for a guaranteed stream of income in retirement – and they also have their downsides.
Depending on your financial situation and retirement goals, annuities can be a good, stable way to supplement your income during retirement. On the other hand, they might not be right for you.
To determine whether a retirement annuity is right for you, you’ll need to consider your goals for investing in addition to considering how your age, income, retirement timeline, lifestyle, risk tolerance, and other factors will ultimately influence and affect your goals and investment choices.
What Are Retirement Annuities?
Before considering whether or not purchasing an annuity is the right choice for your retirement plan, you should have an understanding of what they actually are.
Annuities are not true investments; they are insurance products.
That’s right. A retirement annuity is an insurance product that you purchase either by paying the entire cost outright or by making payments over time.
Once you reach retirement age, you can begin receiving monthly payments out of your annuity, as long as the principal balance of your annuity has been paid in full. These payments start coming in when you retire and continue until the end of your life – no matter how long you live.
The Benefits of Annuities for Retirement
Stable Retirement Income
The stable, reliable payments are, perhaps, the greatest benefit of including annuities in your retirement plan. These payments can be used to cover your fixed monthly costs, supplement your lifestyle, cover the costs of travel, pay for the home renovation you’ve always wanted, or even help you cover medical expenses that tend to increase with age.
No matter what happens, you can count on your retirement annuity payments to help you enjoy your retirement years the way you want to.
Retirement annuities also provide you a way to leave a guaranteed legacy for your heirs. In most cases, when you pass away, funds remaining in your annuity are not legally part of your estate and cannot be used to cover any outstanding debts you might still owe.
Diversification Can Offer Less Risk
Depending on whether you choose a variable or fixed annuity, they can be a great way to diversify your retirement planning by portioning off part of your nest egg into a much less risky investment, as compared to investing in the stock market or bonds.
Fixed annuities offer a guaranteed fixed rate return on the principal of your annuity. Whereas, variable annuities fluctuate with the market, meaning you could lose part of your principal balance if the market drops off. Fixed indexed annuities fall in the middle of these two. They offer potential for greater growth than traditional fixed annuities as they track an index and provide interest based on that index’s returns, but also provide a 0% floor in order to protect your principal.
Annuities offer the same tax-deferral benefits as traditional IRAs and 401(k) plans, allowing you to put your money into them before you pay taxes on the income. As a result, you can invest more into your annuity upfront, paying for it more quickly.
When You Might Think Twice About an Annuity
One of the primary reasons people choose not to purchase an annuity is usually the high upfront cost and the timing of their retirement timeline. Retirement annuities for an individual tend to start at around $50,000 – $100,000, a significant upfront contribution.
If you’re planning to retire soon and cannot afford to pay the principal, then you won’t be able to start receiving payments right away. Typically, annuities do not start paying out until 13 months after the principal has been paid in full.
Additionally, they might not be right for individuals who want to take on the risk of betting on the growth of the stock market. Although you can benefit from market growth in a variable annuity, you take on the same risk as with stocks and lose some of your liquidity to possible withdrawal restrictions. Also, variable annuities tend to come with more administrative fees, riders, and potential penalties.
How to Know What’s Right for Your Retirement Plan
When it comes to planning for your own retirement, it’s best to have a good, diverse portfolio complete with high-risk-high-reward investments and a selection of more stable investments like bonds in addition to retirement accounts. Plus, annuities are well worth considering seriously.
If you’re thinking about adding an annuity to your retirement plan, we encourage you to talk with an independent financial professional who has experience and knowledge in how they are structured and can work with a variety of insurance companies to find the right product for you.. Since annuities aren’t technically investments and are insurance products, you’ll receive a more balanced perspective from someone who can evaluate your portfolio, financial goals, and lifestyle to provide you with an objective opinion on whether or not annuities might be right for you.