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Are Annuities A Good Choice for Retirement?
September 6, 2017
Many Americans consider annuities for retirement income because they are designed to provide regular infusions of cash to you automatically, but are annuities a good investment?
The answer is yes and no.
A good annuity is a great way to boost your retirement investment, but making mistakes when buying an annuity can diminish your financial security.
You need to understand the annuity options to decide what is right for you. There are several different kinds of annuities which include immediate or deferred. You can start by having your annuity paying you immediately or later when you're older. You can also select a fixed or variable annuity. A fixed will have specific payouts versus a variable which will have payouts tied to the performance of the market or part of the market. There is also lifetime or fixed-period annuities that you need to consider.
You need to be aware of some annuities, such as indexed annuities and many variable annuities. They can be problematic and unsuitable for many people due to the steep fees and they often also have restrictive terms. In addition, indexed annuities have major drawbacks such as capped returns. If your annuity bases its return on the S&P 500 and features a 4% cap, the S&P 500 might surge 20% in a given year, but you'll only get a 4% gain. In fact, the Securities and Exchange Commission has warned investors stating that it is safer and more advantageous to make the maximum allowable contributions to IRAs and 401(k) plans instead of investing in a variable annuity.
However, fixed annuities, whether immediate or deferred, are smart options for many retirees or those approaching retirement. You can pay an insurance company or financial investment company a lump sum (or installments), and in return, you receive payments. You can choose to receive the payments immediately or later. Most of the time these payments are often monthly, but can you can choose to have them quarterly, annually. The payments can last for a fixed number of years or for the rest of your life. You can also choose to pay a little extra or accept smaller checks to have your payouts last until your spouse's life ends. You can even have the payouts adjusted to keep up with inflation.
Another good option is a deferred annuity. A deferred annuity can prevented you from running out of money in retirement. These annuities do not payout immediately and are scheduled to start in the future. Most of the time these are scheduled later down the road when the investor believes they will retire or need it the most. The other benefit is that deferred annuities cost less than immediate annuities. The insurance company has longer to invest your money before they begin to pay you.
No matter what type of annuity you may be interested in, take the time to research the company you plan on purchasing your annuity. Your annuity is only good if the insurance or financial investment company you purchased the annuity from is solvent. Make sure the company is highly rated. Don’t go with someone that has poor reviews or could be at risk. In fact, you may want to diversify and divide your purchase money between a few companies in order to avoid losing everything. In the unlikely event that one runs into trouble, only a portion of your future income will be at risk.