A retirement annuity is a form of insurance that can become a significant part of your overall retirement strategy. Annuities are good options for people who want a steady, secure income once they retire. People who choose annuities over common stocks, mutual funds or other securities are often more interested in security than they are the potential returns of high-risk accounts. Annuities are favorable to people who want to ensure that their nest egg will be there when they need it. A retirement annuity is a safe, low-risk option that satisfies the desire for a reliable form of income after retiring.
A retirement annuity works like an insurance policy. Money you put into an annuity is invested until the annuity matures. You then receive secure payments with interest over specific periods of time, whether it's once a week, once a month or even in one lump sum. Investors can choose from two types of annuities, immediate or deferred. An immediate annuity is a good option if you have a large amount of money that you want to invest right before you retire, such as the profit on the sale of your home. This type of retirement annuity starts paying you within 12 months of your initial investment, so most people who choose these annuities know that they will retire soon.
A deferred retirement annuity starts with a contract between you and your insurance company for a prescribed length of time. Your annuity length could be a single year or several, depending on your current age and when you expect to start benefiting from your investment. A personal financial advisor can help you better understand the advantages and disadvantages of your particular contract so you can decide the best length of time for your accumulation phase. After your account has matured, you can either receive a lump sum or you can turn your deferred retirement annuity into an immediate annuity to receive regularly scheduled payments.
Deferred annuities can either be fixed or variable. Like a Certificate of Deposit, fixed annuities base your returns on a set interest rate. The benefits of fixed annuities are security and predictability, making these annuities good options for seniors with fixed incomes or people who are risk averse. Although interest rates can fluctuate mildly, they are stable compared to other returns and are often higher than rates offered by CDs. Variable retirement annuities are tied to the market, making them somewhat more volatile than their fixed counterpart. A certified financial advisor can help you determine what the market might look like in the near future and whether a fixed or variable annuity is best for you.
One of the biggest advantages of annuities are their tax benefits. As with a 401k or IRA, you can invest in a retirement annuity tax-free until you start to make withdrawals. Tax deferment allows your money to grow while you are employed, and you are often taxed at a lower bracket once you retire. This benefit goes for both fixed and variable annuities. Unlike a 401k or IRA, there is no maximum annual contribution tied to a retirement annuity. This is a great benefit if you come into a large sum of money such as an inheritance or a bonus that you would like to wisely invest for retirement. Finally, one of the most attractive features of annuities is the simple security that comes with a steady, stable income. For people seeking a safety net or a sound way to diversify their portfolio, annuities are often great choices.
Although retirement annuities offer many advantages, particularly for the risk adverse, they do have some cons that investors should consider before purchasing. Deferred annuities are not terribly liquid, often carrying high penalties for early withdrawal. Investors can sometimes sell annuities, but penalties may be involved. A financial planner can help you determine whether annuities are a good option for you, while showing you ways you can protect yourself from potential fees. You financial advisor can also show you alternatives to annuities and other low-risk accounts that might better fit your retirement goals.
Like all investment options for retirement, annuities have both pros and cons that investors need to consider carefully. If you have maxed out your 401 and IRA accounts and want a safe, reliable way to invest a large sum of money, a retirement annuity may be the perfect option for you. If there's a chance you'll need your funds sooner than your contracted date, you might want to consider other options. No matter what investments you choose, a financial advisor can help you critically examine the advantages and disadvantages of each option so you can make the best decision for your unique long-term goals.
Our specialists will conduct a custom search to find local planners and advisors who meet your specific requirements.
"Finance and investing are complicated subjects that I didn't know a whole lot about before I started using this site. Thanks to this site I was able to meet with an advisor who was incredibly helpful. Thank you!"
Marcus N, New York NY