Should an Annuity be in Your Retirement Plan?

Many people decide to include annuities as part of their retirement portfolio. These investments can often be a great way to complement other retirement income, such as pension plans and Social Security payments. But is an annuity right for you? It’s important to understand the advantages and disadvantages before investing.


Should you make annuities a part of your retirement plan? Read on to find out.


Advantages of Annuities

The biggest advantage of annuities is that you can save larger amounts of money and defer tax payments. Unlike 401(k)s and IRAs, there is no annual contribution limit, so you have the opportunity to put more money away. With the tax deferment, you are investing compounds each year without paying taxes, which means that your money continues to work for you. When you cash out your annuity, you have the choice to take a lump-sum payment or steady, guaranteed payments for a length of time.

Charles Schwab also suggests that annuities can be a good way for those who have difficulty sticking to their initial retirement plan because annuities help set a baseline for spending. Depending on the retirement portfolio, using an immediate annuity or a variable annuity can help those who are not confident that they will be able to maintain the necessary income in retirement.


Retirement plan
Annuities can help give you some peace of mind by providing regular income.


Disadvantages of Annuities

Like all investments, annuities are not perfect. One of the major drawbacks is that annuities require you to save money over a number of years. Withdrawing funds in the first five to seven years typically results in surrender charges that can be up to 7% of your investment. Like some other retirement investments, there is also an early withdrawal penalty of 10% if you make withdrawals before the age of 59 ½.

Annuities also have other fees that you should consider before investing. Since annuities are often sold by insurance brokers, there will often be a substantial commission fee, sometimes up to 10% of your investment. If you invest in a variable annuity, you should also anticipate high annual expenses. These fees include: annual insurance charges (1.25% or more), annual investment management fees (between 0.5% to more than 2%), and various fees for insurance riders (about 0.6% or more).

Is an Annuity Right for You?

Though annuities come with high fees and may not offer as much return as other investments, they do offer you the peace of mind of knowing that you will not outlive your income in retirement. Certified Financial Planner, Mark A. Cortazzo says, “The annuity is typically effective for risk transfer in a portfolio. It is usually a part of a multipronged approach to building a solution that is goal-oriented and it is typically there to satisfy the income need.”

Typically, you should consider annuities only after you have maxed out other tax-advantaged retirement investments like the 401(k) and IRA. If you are in a high-income tax bracket today, and you have additional money set aside for retirement, then an annuity with its tax-free growth can fit nicely into your retirement plan.


Retirement plan
For some, annuities can be a great part of the retirement savings mix.


When making a decision about annuities, it is important to consider whether this investment fits into your unique retirement plan. Before you invest, get a clear understanding of the fee structure and carefully review the annuity plan. Asking questions and surveying all of your options will allow you to make the choice that best helps you reach your individual retirement goals.

NewRetirement Planner

Do it yourself retirement planning: easy, comprehensive, reliable

NewRetirement Planner

Take financial wellness into your own hands and do it yourself retirement planning: easy, comprehensive, reliable.

Share this post:

Keep Reading

All Posts