Annuities are a mixed bag. For some, they are a useful tool, but they aren’t for everyone. Be certain that your advisor is making recommendations based on your specific needs, and not a product line. The differences between annuities are very broad, and you’ll want one that is correct for you.
Annuity sales are on the rise, as Baby Boomers age and shift investments to financial products focused on preservation and moving away from risk. A recent article in Kiplinger, “4 Questions to Ask Before Adding an Annuity to Your Retirement Plan,” explores the different types of annuities and what they can—and cannot—do for savers.
Investments and insurance policies aren’t “one size fits all.” This is especially true with annuities. These products can be structured in different ways. Immediate annuities are annuity contracts purchased with a single lump sum, with payments beginning almost immediately. They guarantee an income stream that you can’t outlive. Fixed annuities are like certificates of deposit, but without FDIC insurance and with higher penalties. They blend safety of principal with returns tied to an external market index. Variable annuities offer the full growth potential of the market with the full downside potential. To be sure you’re getting the annuity that can help you best with your retirement goals, work with an independent adviser.
Here are the pros and cons of an annuity. The cons:
- You’ll potentially make less than if you’d invested directly in the S&P 500.
- You’ll have limited annual withdrawal privileges.
- There can be high penalties for distributions above your free withdrawal privileges.
- The terms (surrender charges) are extensive, usually from five to 15 years.
The pros include the following:
- The long-term average accumulation rate is currently better than that of other conservative financial vehicles, like CDs and investment-grade bonds of similar maturity.
- Your principal is protected from market losses by an insurance carrier.
- Riders can be added for a guaranteed death and long-term care benefits, regardless of insurability.
- Riders can be added to generate guaranteed lifetime income that’s usually at a higher rate than an immediate annuity without losing total control of your contract.
If your chief concern is protecting your retirement savings, annuities may be the right choice for you. The right product, structured correctly, can provide a steady stream of income for retirees. The fact that your annuity principal is protected, may give you the flexibility to increase your exposure in equities and growth in the rest of your investment portfolio.
Reference: Kiplinger (November 2017) “4 Questions to Ask Before Adding an Annuity to Your Retirement Plan.”