10 Reasons an Annuity May Be Right for Your Retirement
Annuities are part insurance product and part investment. In exchange for buying an annuity from an insurance company, the purchaser gets a guaranteed income stream or lump-sum payout later on. Annuities sometimes get a bad rap, because insurance companies or brokers may charge commissions; some have high ongoing fees; and there may be penalties for withdrawing money early. But annuities can be a valuable part of a retirement plan for certain people, especially those who don't want to worry about where and how to invest. Here are 10 reasons buying an annuity may make sense.
People worried about stock market fluctuations can rest assured that an annuity's principal will not lose value. This can benefit those close to retirement or already retired, who don't have time to recover from a downswing in the markets. Because annuities are sold by insurance companies, though, there is a risk that a company that runs into trouble will not be able to make its payments. Look for annuities sold by a reputable company.
Some people use an annuity as a steady and guaranteed monthly, quarterly, or annual pension supplement or replacement. Investors may be able to include a guaranteed income stream in their annuity that either starts to pay out immediately or can be turned on later. Sometimes holding out increases the income.
Depending on the contract, annuity owners may be able to withdraw money as a lump sum, determine a withdrawal rate, or let the insurance company determine monthly payouts based on life expectancy. With the latter option, some annuities guarantee payouts through the end of life -- an attractive option for people worried about outliving their savings.
Some annuities can be structured as a "joint lifetime benefit" that keeps paying out to a family or spouse after the death of the primary beneficiary. The payments may continue until a guaranteed payout period ends, or until the surviving beneficiary dies, depending on the type of annuity.
Annuities can also include a death benefit that that gives surviving beneficiaries a lump sum payment -- good for people who are unable to buy life insurance because of a pre-existing health condition. The amount paid out depends on the type of annuity and riders on the policy.
Annuities can offer guaranteed returns to investors, either at a fixed rate or a variable rate with a guaranteed minimum. The return may be low compared with some other investments, but the security of knowing there's definitely money coming in may be worth the opportunity cost.
After doing the research to decide which type of annuity is best, ongoing management can be minimal. Unlike with other types of investments, there is no need to worry about rebalancing investments or altering the asset allocation as the years pass.
An annuity may not pay out as much as long-term care insurance, but can be an option for avoiding expensive insurance premiums. Some of these products double expected payouts for the time spent in long-term care, while others basically convert to a long-term-care policy during that time.
Annuities grow tax-deferred, similar to investments in a 401(k) or traditional IRA. When withdrawing money from an annuity, the earnings are taxed as regular income and the principal is not taxed at all (because the money was taxed before it was deposited).
Even for those investing directly in stocks, bonds, or other securities, an annuity can be a good addition to a portfolio. Diversification among asset classes may decrease risk and help keep retirees from running out of savings.