The Role of Annuities in Retirement Planning

When planning for a secure and steady income in retirement, annuities often come up as a popular consideration/question with retirees. But are they really worth the investment? First, let’s break down what annuities are, how they work, and whether they fit into your overall financial strategy.

The Role of Annuities

An annuity is a financial product designed to turn a lump sum of money into a stream of income. Offered by insurance companies, annuities come in several varieties: fixed, variable, and indexed. Each has its own unique features, risks, and potential benefits.

• Fixed Annuities provide guaranteed payouts, making them a predictable option.
• Variable Annuities offer payments that fluctuate based on investment performance, which introduces both growth potential and risk.
• Indexed Annuities tie returns to a market index, like the S&P 500, providing a balance between fixed stability and variable growth.

What Annuities Claim to Offer

Steady Income: One of the biggest selling points of annuities is the promise of a steady income stream—often for life. This is particularly appealing for retirees worried about running out of money.

Tax Advantages: With annuities, your investment grows tax-deferred. You will not owe taxes on earnings until you start receiving payments.

Market Protection: For those who are risk-averse, certain types of annuities, like fixed or indexed options, indicate they can shield your money from market downturns while still offering some growth potential.

Potential Downsides of Annuities

Cost: Annuities often come with hefty fees, including administrative charges, mortality and expense risk fees, and investment management costs for variable annuities. These fees can eat into your returns.

Limited Access: Most annuities have surrender charges for early withdrawals, which means your money might not be as accessible as you would like.  In addition, under some withdrawal methods, you cannot increase the amount you receive from the investment.  Therefore, if you incur additional living expenses you may not be able to access more funds.

Complex and Lack of Flexibility: Annuities can be complicated. With so many options and fine print, it’s easy to feel overwhelmed without professional guidance.  They can be less flexible than other investment vehicles.

Type of Accounts: Many annuities are sold in IRA accounts as that is where the client has money to invest.  That may not make the most sense as you are investing into a tax-deferred investment in a tax-deferred account.

Are Annuities Right for You?

Deciding if an annuity makes sense for you comes down to your specific goals and circumstances. Here are a few questions to ask yourself:

• Do You Worry About Outliving Your Savings? If longevity risk is a concern, an annuity may provide peace of mind although you can technically create your own income stream from your investments with potentially better returns and lower costs.
• What Other Income Sources Do You Have? Think about if an annuity would fit alongside Social Security, pensions, or withdrawals from your investment portfolio.
• How Much Flexibility Do You Want? If having quick access to your money is important and flexibility for heirs, an annuity might not be the best fit.
• Consider the Costs versus the Returns. Make sure you look at the fine print and understand the full impact of the fees versus the potential return.

Weigh the pros and cons carefully and talk with a trusted financial advisor who can help you decide if an annuity aligns with your goals. Remember, the best retirement plan is one that provides confidence and security as you enter your golden years.

In most cases we see, you can do better investing with a trusted advisor that can build a financial plan and appropriate investments to create your own income stream.  If you would like more in-depth information, click here to download our guide on “Why do they keep trying to sell you that annuity?”

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