Invest in Annuities for Retirement?

Dear Dr. Don,Are annuities a good place to invest your retirement money?-- Debbie Dependable

Dear Debbie,It's complicated. If you're investing for your future retirement, and you're doing it inside of a tax-advantaged retirement account, then I'd argue against investing in annuities, largely because you don't need their tax-deferral feature and the added drag on earnings from the M&E (mortality and expense) fees of an annuity contract isn't worth it while you're building wealth over your career. If you've maxed out on your employer's plan and IRA options, then investing in a tax-deferred annuity contract can make sense.

In retirement, annuities can help manage longevity risk, which is the risk of outliving your income. The Bankrate feature, "Guaranteed income for life -- at a price," provides a nice primer on the different types of annuity contracts and some of the riders (options) you can add to the contract. For more depth on variable annuities, I'd suggest reading the Securities and Exchange Commission publication, "Variable Annuities -- What you should know."

I like to remind people that Social Security retirement benefits are annuity payments. They're also indexed to inflation. An inflation rider on an insurance company's annuity contract, in contrast, will shave quite a bit off the annuity payments -- at least in the early years.

If you're lucky enough to have a pension plan at your work, that can serve as an annuity income stream, too. If you have a pension and Social Security benefits, then a large portion of your retirement income is already annuitized and you should consider not annuitizing your other retirement savings.

For some retirees, it can make more sense to postpone taking Social Security until age 70, and then use retirement savings to fund the early years of retirement. Delaying taking Social Security maximizes the size of your inflation-indexed retirement benefit. The controversial aspect of this approach is whether you break even by waiting until age 70 to claim benefits, and the availability of spousal benefits could influence that decision. The Social Security Administration electronic fact sheet, "When To Start Receiving Retirement Benefits," can help you with that decision.