Annuities Pros and Cons: Are they More Good than Bad?
There appear to be only two annuities camps: Those who love them, and those who hate them. It’s not that cut and dried, though. Any investment has its pros and cons. The same applies to annuities, and there might be one that suits your retirement plan perfectly.
If you’re thinking about expanding your retirement portfolio, there’s a lot to learn about annuities. Some of it’s good, some of it’s bad, but all of it deserves some consideration. For many, the peace of mind from dependable income is worth any drawbacks.
There’s No Single Type of Annuity
If you’re not familiar with annuities, you might think that there’s one kind, it will tie up your money for years, and you run the risk of never seeing anything in return. That’s not entirely true. You’ve got numerous annuity variations to choose from. And while the worst-case scenario is possible, the opposite can be true, too.
There are fixed immediate, fixed deferred, variable immediate, and variable deferred annuities. The differences are that fixed annuities pay a fixed interest rate or a set payout to you. You can rely on them to stay the same. And with variable annuities, your payout will be directly related to market performance. Forbes also explains that with variable annuities, your money compounds tax-free until you use it.
With immediate annuities, your payments begin immediately. And as the name implies, deferred annuities begin paying you some time down the road that you choose in advance. Motley Fool says, “Deferred annuities generally cost less” because the time between investment and payout gives the insurance company room to invest your money.
No Two Retirement Goals are Alike
Those aren’t the only differences among annuities. Within those four categories, lots of other options reside. You can purchase your annuity all at once in a lump sum, or make payments. With a lump sum, you can collect right away, but with payments you’ll have to wait.
You can buy a single annuity, or buy one jointly. With joint annuity, either surviving spouse can continue collecting if the other spouse dies. With joint annuities, payments stop, even if money remains in the annuity, at the death of the owner.
Motley Fool also explains that a joint annuity for a lower amount might be more cost effective in the long run. If one spouse dies, the only remaining payout is from the other single annuity, where the surviving spouse would still collect the same amount with a joint policy.
Annuities Pros and Cons
Annuities aren’t all good or bad. With a lifetime annuity, you get payments for life. Period. You can also skip over all of the investment limitations that IRAs and 401(k)s have. You can invest as much as you want. And if you arrange it in advance, you can own an annuity that automatically adjusts to keep up with inflation.
On the downside, annuities do hold your money hostage. Penalties for early withdrawal can be exorbitant. Beyond that, commissions from brokers who sell annuities can really take a chunk out of your retirement savings. These aren’t small percentages, but sometimes as high as 10 percent.
And perhaps one of the biggest drawbacks is the risk of never getting your money back. You could trade access to your money for the security of never running out of it. But what’s left won’t benefit anyone but the insurance company who issued the annuity.
The bottom line is that annuities aren’t for everyone, but they aren’t all bad, either. You can navigate your way around many of the drawbacks by choosing a different plan. For example, buying your annuity direct from the insurer means you’ll skip paying high commissions to a broker.
As with any part of your retirement portfolio, annuities are just another tool. They’re not intended to be your sole means of retirement income, any more than Social Security is intended to fully sustain you. Annuities are one more way to diversify. And if handled well, they can provide you with a layer of retirement security that other investment’s can’t.
NewRetirement is here to help you find your way through the sometimes confusing maze of investments and planning for your future. There’s no single best way to manage your money. But we can help show you options that make sense for your life, and the life that you want to live later.
Check out our annuity calculator to see whether this type of investment is right for you.