An annuity contract can help you save for retirement or turn your savings into a stream of retirement income. Annuities work by converting a lump-sum premium into a stream of income that a person can’t outlive. Many retirees need more income than just Social Security and their investment savings to provide for their daily needs.
One of the key benefits of an annuity is that it allows the investor to save money without paying taxes on the interest until a later date. Annuities have no contribution limits, unlike 401(k)s and IRAs. Another significant benefit of annuities is the creation of a predictable income stream to fund retirement. This is a major advantage in the post-pension age. Your reasons for investing in an annuity should align with your unique lifestyle and financial situation.
1. Tax-Deferred Growth
You save money without paying taxes on the interest until a later date.
2. No Contribution Limits
Unlike 401(k)s and IRAs, you set the dollar amount you invest.
3. Fund Your Retirement
Annuities create predictable income streams for life.
4. Provide for Your Family
Death benefit riders allow you to transfer your money to your loved ones.
Finding the right financial solution is essential; it wouldn’t be wise to invest in a product that doesn’t align with your needs. When evaluating annuities, it’s important to consider several factors:
- Commissions and Fees: Annuities often come with various charges and commissions.
- Complexity: Annuities can be intricate and challenging to understand fully.
- Conservative Returns: Compared to some investment products, annuities often have a capped rate of return.
- Opportunity Cost: This refers to the potential gains you might miss out on by choosing an annuity over other investment options. For younger investors with a long-time horizon, this could be a significant consideration, as they might benefit more from a riskier, growth-oriented strategy.
For older investors and retirees, the opportunity cost might be less of a concern. They should focus more on stability and guaranteed income, which annuities can provide.
Reduce Your Opportunity Cost
A common concern with annuities is the risk of not having access to your funds during the length of their contract. This could be problematic if you need to cover unexpected expenses or if higher interest rates or better investment opportunities arise.
This is where your understanding of a long-term investment time horizon comes in. Your decision to purchase – or sell – an annuity should be in alignment with your goals, and you should be comfortable with having your money in the surrender term for a exchange for guaranteed lifetime income.
To mitigate this risk, you might consider making a partial investment in an annuity. This approach allows you to keep some of your savings accessible for emergencies or to take advantage of future financial opportunities, while still benefiting from the guaranteed income that an annuity can offer.
Disclosure: Although it is possible to have guaranteed income for life with a fixed annuity, there is no assurance that this income will keep up with inflation. There is a surrender charge imposed generally during the first 5 to 7 years or during the rate guarantee period. Any guarantees offered are backed by the financial strength of the insurance company, not an outside entity.
