Annuities are financial instruments that allow you to turn a lump sum of cash into a consistent reliable income stream that can provide you with cash flow during retirement. They can also be used as a way to convert a large sum of cash into monthly payments for people who won a big cash prize like the lottery.
If you’re looking into different retirement options that can provide you with income while you enjoy your golden years, annuities could be a great option. With minimal fees, guaranteed payments, and the ability to grow your overall savings, annuities have some tremendous benefits. However, every investment carries risk and there can also be some downsides to investing in an annuity product.
In this post, we will take a look at the various pros and cons of annuities to help you make your own informed decision regarding whether an annuity is right for you.
The Pros of Annuities
Guaranteed Income: Annuities are the only retirement plans that offer guaranteed income for the rest of your life. Because annuities are contracts that offer you income in exchange for a lump sum investment, they are specifically designed to provide you with the income you need to live out the rest of your life in retirement.
Long Term Care Payment Assistance: In addition to annuities being the only guaranteed retirement income plan, they can also assist you in paying for long-term care expenses. This includes nursing homes, assisted living, and in-home care expenses.
Enhanced Death Benefits: Annuities offer enhanced death benefits that avoid the underwriting process. This could save your family members from having to go to probate court to settle your estate.
Increased Savings: Many policy owners can grow their retirement savings exponentially through the compound interest gained on their investment.
Higher Interest Returns: Fixed annuities and multi-year-guaranteed annuities offer higher rates of return than a certificate of deposit investment. They are also not subject to annual taxes.
Cost of Living Adjustments: A lifetime income rider can often help offset the inflation of higher living costs.
Less Risky: Compared to the stock market, most deferred annuities excluding variable annuities can give the contract owner tremendous peace of mind knowing that their investment is safe from any stock market volatility.
Low Fees: The fees associated with annuity accounts are very minimal, and sometimes non-existent.
Locked in Gains: Compared to the stock market, annuities allow their owners to lock in their gains for a set amount that isn’t dependent on the performance of the market indices.
The Cons of Annuities
Long-Term Commitment: Because most annuities are long-term investments with the shortest contract only being two years in length, it gives the owner less flexibility in being able to withdraw funds. This can be seen as a negative if you’re the type of person looking for an investment you can get in and out of within a short time frame.
Annuitizing Your Contract is Irreversible: Policy owners who decide to annuitize their contract will no longer have the ability to turn off the annuitization. Luckily policy owners can add a lifetime income rider to avoid this.
Limited Liquidity: Unfortunately, many policy owners can only access up to 10 percent of the contract’s value each year until the contract expires. This limited liquidity makes it difficult for annuitants to withdraw a significant portion of their investment during the contract period.
Greater Return Potential in Traditional Markets: Over the long-term, this is certainly true, however, depending on what stage you’re at in your life, career, or retirement, an annuity could be a great shorter-term option for those looking for guaranteed retirement income.
Market Volatility: While most annuities protect you against market volatility, variable and registered-index linked annuities are directly tied to the market’s performance making these potentially risky investments.
Not FDIC insured: Unfortunately, annuity investments are not FDIC insured or backed by the insurance company providing them. Thankfully, all insurance companies have a State Guaranty association to protect annuity holders in case the insurance provider becomes insolvent.
Final Thoughts
Having gone over the potential advantages and disadvantages of annuity investments, you can now better determine if investing in an annuity is right for you. Overall, there are many benefits to buying an annuity and can be a great vehicle for retirees to receive guaranteed retirement income.
With low fees, limited risk, and the ability to help your savings grow over time, annuities can be the perfect option for seniors looking to live out their last years without having to worry about how they can make ends meet on a limited social security payment.
While there are many great things about annuities that can help create greater financial stability for people of retirement age, there are also some downsides. If you’re not retired yet, an annuity might not be your best option because it is a long-term commitment that isn’t liquid. Tying up too much of your funds into an annuity can prevent you from making shorter-term investments.
In addition, if you’re still working on your career, you’re probably better off keeping your money in a market index fund that can grow faster over time than an annuity. It is also important to note that some annuities are not one hundred percent safe and are tied to the performance of the stock market. These particular annuities might not be suitable for seniors who are more risk-averse.
Overall, annuities can present a very appealing income stream for those in retirement. While they aren’t suitable for all investors, contacting a financial professional who is knowledgeable about the different types of annuities available can be a great first step if you’re interested in seeing how an annuity can help you. With their expertise, you can pick a plan that makes sense for you and your family, and have greater peace of mind in an investment that is stable and can provide you with guaranteed income for the rest of your life.