Pros and Cons of An Annuity

As with every retirement investment, annuities are perfectly suited for some investment strategies and not well suited for others.  A successful retirement strategy should include a number of investments with some designed to hedge against risk, some designed to provide reliable income, and some designed to provide accelerated growth potential.  Different kinds of annuities will fit into each of those categories in it’s own unique way.   Here are some general pros and cons of annuities to help you decide where annuities may fit into your strategy.

Pros

Cons

Lifetime Income – All types of fixed annuities can guarantee that you receive monthly payments for as long as you live. This monthly income can help supplement your other social security and pension payments. This lifetime guaranteed payment is also a great safety net if you are fortunate enough to outlive your original retirement plan.  Lifetime payments require a lump sum investment up front. The amount of your investment  will determine the amount of your monthly payment.  Your age will also factor into your monthly payment amount.  The older you are, the larger your monthly payment. Annuity Types – Fixed annuities are generally considered a safe investment and a strong option for providing guaranteed monthly payments.  There are, however, other annuity options such as variable annuities that can involve more risk and less guarantees.  You’ll also want to watch out for excessive fees and strict withdrawal limitations.  It is important that you work with a licensed annuity advisor who is an expert in selling a wide range of annuities from multiple insurance companies.
Guaranteed Principle – One of the best features of a fixed annuity is that you can guarantee your principle and interest earned. This means that your fixed annuity will be guaranteed to always be equal to the amount you invested, plus the minimum guarantee, or more.  This is a huge advantage over investments that are directly tied to the performance of the stock market.. Liquidity Limitations –  Annuities are generally considered a longer-term savings option.  Most annuity products feature a withdrawal fee for taking money out of the annuity before the annuity maturity date.  Typically, you will be able to withdrawal up to 10% after the first year, but withdraws above that may result in withdrawal fee. In virtually all cases, the withdrawal fee will be reduced to zero after the surrender period has ended.
Optional Inflation Protection – Some annuities offer an option that will adjust your monthly payments to adjust for inflation. This inflation option will be provided to you at an additional cost or can be structured in your payout schedule. Reasonable Returns – Fixed annuities are considered a safe, reliable, and steady investment.  They are not designed as high risk, high reward interments.  Expect to earn interest rates in the 6% to 10% range.
Tax Deferral Options – Annuities are a tax-deferred investment.  Meaning that you will not be charged tax on your interest earnings until you withdraw the money out of your annuity, provided you are at least 59.5 years old.  Annuities also can be used to roll IRA and 401K money into and avoid being taxed on that money. Tax Disadvantages – Annuities are taxed at your ordinary tax rate, they have a tax disadvantage to other investments like stocks and mutual funds because those investments are taxed as capital gains. However, since annuities are designed to be withdrawn after you retire, you ordinary tax rate is typically lower than when you are working.  In addition, the tax-deferred compounding interest often erases the capital gain taxed investments advantage.

 

To learn more about how annuities can fit into your retirement strategy and provide you lifetime monthly payments, it’s best to speak to a licensed annuity advisor.  Your advisor will explain how each insurance company’s offering differ, and which annuity product and features meet your specific needs.  To compare annuity products in your area, click here.