The Pros and Cons Of Annuities
First, some "Annuity" context
It's important to remember that annuities are simply tools for creating retirement income.
For some, Annuities are the perfect tool for securing a comfortable retirement with income that is guaranteed to never run out while keeping their money safe.
For others, Annuities don't provide enough growth potential to build the sizable nest egg they need for the retirement they want (although with the advent of things like Indexed Annuities, the potential for growth can definitely still be there).
In the first case, that individual is more concerned with keeping their money safe, protecting their nest egg, and having income for life.
The second case is more concerned with growth potential and actually building the nest egg (to likely later protect with Annuities), therefore is usually willing to sacrifice the safety an Annuity offers for more aggressive portfolio growth using things like a 401k or IRA.
In either case though, neither makes Annuities themselves good or bad per se.
They're just either a good fit for YOUR specific retirement goals and your current financial situation, or they're not.
This is why it's highly recommended to work with an Annuity Specialist when considering Annuities for your retirement to first determine if an Annuity is right for you, and then second, to determine which type of Annuity would be best for your goals.
So as you read the list of pros and cons below, keep this principle in mind when considering whether an Annuity is right for you or not.
The Pros of Annuities
This is of course one of the pros that makes Annuities so popular.
The concept of creating guaranteed income for life is very appealing for a lot of people, especially when they consider the rising costs of living expenses, the uncertainty of Social Security, and market volatility that can potentially diminish their retirement portfolio.
The amount you receive every payment varies depending on how much you put into it, as well as any interest you earned during the Accumulation Period (the time frame you are making contributions if you don't make a lump sum payment)
This provides a very nice supplemental income to things like your Social Security and withdraws you make from other investment accounts.
Pro #2: Fixed Annuities Offer Guaranteed Rates of Return
Guaranteed Rates of Return from Annuities can range from 1-4% on average, depending on the Annuity and the provider.
This means that the Insurance company will guarantee you a specific rate of return on your principal every year for your Annuity, while also keeping your money safe.
It's similar to a savings account or CD, except that the rate of return is often higher and it grows tax-deferred, which brings us to the next pro.
This offers a significant advantage over keeping money in low yield vehicles like savings accounts or CD's.
Not to mention that savings accounts or CD's don't offer guaranteed income for life or the ability to be passed on to heirs without going through probate (see Pro #4 below)!
Both your contributions and any interest you accrue grows tax-deferred, meaning you don't pay taxes on it until you start taking payments from your Annuity.
This allows your total Annuity value to achieve additional growth during the Accumulation Period.
Because Annuities are technically life insurance products, they are not subject to passing through probate like many others financial vehicles.
This means that you can name a beneficiary who will receive the remaining funds within your Annuity as either a lump sum or periodic payments when you pass.
It is still taxed as ordinary income but avoids the expensive and time-intensive process of probate, making Annuities a great legacy vehicle.
Many Annuities offer some type of bonus at the time of purchase.
With Indexed Annuities, this is often a Premium Bonus that is applied to your principal that can range from 2% all the way up to 10% of your principal.
As an example, if you put $100,000 into your Annuity, your principal would instantly become $110,000 with a 10% bonus.
Fixed Annuities that offer guaranteed rates of return will sometimes have a First Year Interest Rate Bonus where an additional percentage amount of interest is applied to your Annuity.
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The Cons of Annuities
It's important to distinguish that you do not pay an upfront fee for an Annuity, nor do you pay an Annuity Agent anything for their services. The insurance company pays any Annuity Agent you might work with.
The fees for Annuities come from the Insurance company itself and vary depending on the type of Annuity you purchase and the company you purchase it from.
There is typically an annual administrative fee that can be either a percentage of your Annuity value or a flat fee.
For Variable Annuities, the fees can be much higher since there is an actual investment portion of the Annuity contract.
Fees shouldn't keep you from purchasing an Annuity contract. But you do want to be aware of them and you should shop around to find an Annuity that meets your goals with minimum fees.
Check with your Annuity Specialist to explore different options.
Like anything in life, the higher the risk, the higher the return and vice versa.
Because of the safety and guarantee of lifetime income, the growth of your money may not match those of other investments.
Again, it goes back to the beginning of this article. It all depends on your individual goals, risk tolerance, current financial situation, etc.
If the Stock Market goes up 15%, but you have your money in an Indexed Annuity that caps your return at 6%, then you miss out on the additional 9%.
At the same time, if the Stock Market goes down 15%, you get 0% applied with an Indexed Annuity, but you also don't lose any of your principal.
It's give and take. So if you want the potential for higher returns and are willing to accept the risks, then Annuities may not be for you.
But if you're willing to sacrifice some potential upside for the safety and protection of your principal, then Annuities could be a very good fit.
If a situation came up where you needed to withdraw money early from your Annuity, there are usually pretty hefty fees and/or Surrender Charges to do so.
Some Annuity contracts allow you to withdraw up to 10% of your Annuity contract without penalties or fees.
Only in extreme cases such as terminal illness, do Annuity contracts allow for the early withdraw of funds without fees or penalties.
That's why it's important to have other emergency funds available just in case something does come up so you don't have to withdraw from your Annuity early and incur hefty fees.
Hopefully this article will help you way the pros and cons of Annuities for your particular situation.
Remember, whether an Annuity is right for you, as well as which type of Annuity is best, depends on multiple different factors that all need to be taken into consideration.
If you would like assistance determining whether or not an Annuity make sense for your retirement, click the button below to request a Free Custom Annuity Retirement Plan from one of our Annuity Specialists.