When most people think about their finances beyond monthly budgeting, they’re thinking about retirement and how best to save for it. With market volatility and the potential losses that can come with it on the back of everyone’s mind, most people are looking for a more stable way to diversify their retirement plan while creating a more secure future for life after the daily grind.
A retirement annuity might be a good solution for you to strengthen your retirement savings. Annuities can offer several benefits over traditional investments, but they also have a few drawbacks. Anyone considering investing in a retirement annuity should carefully consider both sides of the coin.
What Is a Retirement Annuity?
The idea of a retirement annuity can seem complicated at first but put into plain language, it is actually fairly simple to understand the way they work.
Retirement annuities are purchased from an insurance company. They can be purchased all at once or with regular payments or investments made throughout the years leading up to retirement. The insurance company places the money you pay into investments, such as mutual funds. Eventually, when you retire, the dividends will usually be paid out to you in regular payments. However, your annuity could also be paid out in a single lump sum.
Pros of Retirement Annuities
Retirement Income You Can Count On
As long as you don’t take the money out as a lump sum, a retirement annuity will provide a consistent monthly income throughout your retirement that you can either use to cover fixed expenses or to support living your continued preferred lifestyle.
The cost of your annuity, your age at retirement, and your gender are all factors in determining the payout amount to you.These payments begin when you retire and continue until death.
Simplified Money Management
When it comes to financing your retirement, there are several unknown variables such as your monthly cost of living, the potential for medical bills, the desire to travel or renovate, and your lifespan. All of these factors and more can make it challenging to determine the exact amount of savings you need to retire comfortably.
With a retirement annuity, you’re guaranteed steady income no matter how much you spend early on in retirement or how many medical bills you incur – even if you live to be 150.
Some types of retirement annuities come with riders that allow you to leave any remaining balance to your heirs after you pass away.
Plus, the remaining balance on a retirement annuity is not legally considered to be a part of your estate. So in most cases, if you are also leaving behind outstanding debts, your heirs will still receive the remaining balance of your annuity, instead of it having to go to pay off creditors.
Like contributing to a traditional IRA account, the money you put into a retirement annuity is tax-deferred, meaning you don’t need to pay taxes on the funds until you begin taking it out in payments during retirement. This allows you to contribute more up-front to increase potential earnings over time.
Potential Death Benefit
Certain variable annuities come with a death benefit that pays out the amount you paid for your retirement annuity to a specified beneficiary upon your passing. So, if you paid $200,000 for your annuity, your heir will receive the full $200,000 – even if you’ve drawn down the balance during your retirement.
While this is a great benefit, variable annuities come with inherent risks, and life insurance policies can offer the same type of payout without the same type of risk.
Cons of Retirement Annuities
The Overall Cost
Most retirement annuities for an individual have a minimum dollar amount that must be paid. The price can be paid in full or by making payments over time. However, you cannot start receiving payments until the annuity has been fully paid. Depending on how early you decide to purchase an annuity, it might not be worth the upfront cost and payout you receive.
Possible Fees and Restrictions
Most retirement annuities come with some fees such as administrative, riders, risk, and mortality fees. Variable annuities tend to have more fees than fixed annuities. There might also be restrictions or costs associated with taking early withdrawals.
Every retirement annuity product is a little different, so it’s important to read your entire agreement before deciding to purchase. It is also important to make sure you are working with a financial professional that understands the costs and fees structure and can help explain those details to you.
There Are Higher Risks With Immediate and Variable Annuities
Variable annuities earn a variable rate, which means you’re at risk of losing money – just like you would be in the stock market.
Additionally, immediate annuities (annuities that begin paying out right away) can also be risky. Despite the name, they don’t actually begin paying out until 13 months after they are paid in full. So, depending on timing, you might not be able to make the most of the retirement annuity by the time you’ve finished covering the cost.
Deciding If a Retirement Annuity Is Right for You
To decide whether a retirement annuity is the right investment choice for you and your retirement plans. When determining which types of retirement accounts are right for you, you should consider the larger picture of your finances, tax planning, savings, and goals for retirement.
For an educated, experienced, and objective perspective, it’s best to talk with a trusted financial professional who is knowledgeable about insurance products, like retirement annuities, as well as other types of retirement accounts and investments such as IRAs and 401(k)s.