Why should you consider annuities as part of your retirement plan? They are an investment option that allows a person to receive tax-deferred payments over a set amount of time. Annuities can:
- Offer some significant benefits over other kinds of retirement vehicles without the risk of losing a portion of retirement savings
- Provide a guaranteed stream of income for as long as you live
- Provide monthly income that will keep pace with inflation (with the addition of inflation protection, which will cost more upfront or start with lower starting payments at the beginning of the pay out period)
- Be guaranteed to meet or exceed the amount invested, irregardless of the One of the best features of fixed and equity indexed annuities is that the value of the annuity can be guaranteed to be at or above the amount invested. You can guarantee that you (or your heirs) will receive back at least as much money as you invested in the annuity
- Save you money on taxes over taking a lump sum payment by purchasing an annuity with a 401(k) or IRA
Sounds great, right? But what are the drawbacks?
Because most annuities are set up to provide steady income over a period of time, they are not ideally suited to cover large unplanned expenses, such as sudden injury or illness. Also, there are different types of annuities, including:
A fixed annuity is an insurance contract whereby the insurance company guarantees both earnings and principal. They make fixed dollar payments to the purchaser for the term of the contract, which usually is until the purchaser dies.
A variable annuity is an insurance contract in which, at the end of the accumulation stage, the insurance company guarantees a minimum payment. The remaining income payments can vary depending on the performance of the managed portfolio.
A life annuity is an insurance product with a predetermined periodic payout amount until the purchaser’s death. These products are most frequently used to help retirees budget their money after retirement. Typically, the purchaser pays into the annuity on a periodic basis when he or she is still working. However, they may also buy the annuity product in one large purchase. When the purchaser retires, the annuity makes periodic (usually monthly) pay outs, providing a reliable source of income.
Discuss these options with a qualified financial advisor to see which are best for your lifestyle. Also ask about “surrender fees.” If you need money sooner than expected, these fees can add up quickly. Make sure you are aware of all of these types of fees so you can make a well informed decision when choosing an annuity.
Definitions source: Investopedia
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