Most financial advisors either love them or hate them.
Are annuities the right retirement option for you?
Are you planning for retirement?
If so, you may be thinking, “How do I convert that money I set aside during my years of work into ongoing income?” The financial industry does not suffer from a lack of choices when it comes to investments and, quite often, annuities can be an appropriate option in retirement.
Yet probably no product in existence generates so many reactions as annuities.
Before you invest in them, however, there are many different things to consider. Keep reading to learn more about what annuities are, the types of annuities, and how to determine if it’s a good investment for your future.
What are Annuities?
First, you must understand exactly what an annuity is.
Annuities are contracts between you and an insurance company. When you buy an annuity, the insurance company agrees to pay you a certain amount of money now, promises to pay you a certain amount in the future, or guarantees to grow your money at a certain return over time. These benefits can make annuities an attractive option in retirement.
You can purchase an annuity for a single, lump-sum payment, or you can make smaller payments over time. The insurance company can also pay you in one payment or small payments.
What are the Different Types of Annuities?
As you’re deciding if annuities will be a good investment for your future, it’s important to understand that there are different types before making your purchase. This is where many people get confused, but we can help break it down for you. There are three types of annuities that you’ll likely consider in your retirement planning process:
1. Variable Annuity
Variable annuities are aptly named because the returns and income they generate will vary.
This type of annuity is tied to the stock market. Typically, variable annuities have an accumulation phase (a period of time when the money you invested grows) followed by a phase where the insurer must make regular payments to you based on your account value.
Before you invest in variable annuities, you should know that fees are generally very high and you are still investing in the stock market, so your account value will fluctuate over time and can be less than your original investment. We usually recommend steering away from Variable Annuities as we feel they offer very little benefit due to fees and risk.
2. Fixed Annuity
Fixed annuities are typically more simple than variable annuities.
Fixed annuities offer a fixed guaranteed return for a specific time, much like a certificate of deposit (CD). In addition, an investor can also select a fixed set of income payments which will not fluctuate like those of a variable annuity.
3. Deferred Income Annuity
While you can immediately receive income from an annuity, there is another type of annuity, the deferred income annuity (DIA), that will pay you a guaranteed income after a set amount of time.
Deferred income annuities are good for those looking for more peace of mind in retirement. For example, you can buy a DIA in retirement and know that, after a specific time, you and/or your spouse will receive a guaranteed income stream for life. This can be a very powerful tool to counter the effects of longevity and the possibility of draining your retirement accounts.
Are Annuities a Good Investment?
You might have heard pundits such as Suze Orman or Dave Ramsey pointing out the bad with annuities, but there are some annuities that are used (and relied on) every day: namely, social security and pension plans.
You might not like the word “annuity,” yet no one has ever not taken their social security payments or pension (not even the pundits).
No investment is right for everyone. However, annuities can be a prudent and secure investment in retirement. If you purchase an annuity with good terms, it can help you receive tax-deferred growth, a guaranteed return, income for life, and possibly a death benefit for your beneficiary.
It’s a good idea to meet with a financial professional who can help you review your unique situation and decide whether annuities are right for you. Contact us today to schedule a consultation and start saving for retirement.