Why buy a retirement annuity? For the income, of course. Consider your options carefully, though. The best annuities can serve you well, but some are a bad investment. Who should buy retirement annuities? Many older Americans. Are they good for retirement? You betcha.
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Sorting the best annuities from the bad investments
Let's first review just what retirement annuities are. They're contracts -- between you and an insurance or other financial services company. In exchange for a typically large sum of money, the company promises to pay you a certain lump sum at some point or, more often, a monthly sum of money.
Annuities come in different flavors. Here are the main distinctions: Annuities can be immediate or deferred (paying you immediately vs. starting at some point when you're older), fixed or variable (certain payouts vs. payouts tied to the performance of the market or part of the market), lifetime or fixed-period (paying until death or paying for a certain span of time), and so on.
Some annuities, such as indexed annuities and many variable annuities, are problematic and unsuitable for many people. They tend to charge steep fees and have restrictive terms. The Securities and Exchange Commission haswarned, "For most investors, it will be advantageous to make the maximum allowable contributions to IRAs and 401(k) plans before investing in a variable annuity." Indexed annuities, meanwhile, feature major drawbacks such as capped returns. If your annuity bases its return on the S&P 500 and features a 4% cap, the S&P 500 might surge 25% in a given year, but you'll only get a 4% gain.
As you might have guessed, fixed annuities, whether paying immediately or on a deferred basis, are preferable to variable annuities or indexed annuities.
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Why buy a retirement annuity?
So why might you buy an annuity? Well, the most obvious reason is simply for the money. Annuities also offer peace of mind, as they generate reliable income month after month during your retirement, a time when you're no longer working and financially vulnerable. On top of that, many people don't have the skills, interest, or time to manage their own money now or in retirement, and as they age and their cognitive skills decline, they're even less able to make sound financial decisions. Thus, an annuity can be a great boon.
Just how much income can you get from a fixed annuity? Here are some recentquotes, just to give you a rough idea:
You may have noticed that women are offered smaller monthly checks. That's because they tend to live longer than men.
A retirement annuity might also fit well in your plans because it can help keep you from running out of money in retirement and it can help you sleep better at night, too, with fewer financial worries.
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Explore your annuity options
As you plan what retirement annuity you should buy, here are some considerations to keep in mind:
- Remember to favor fixed annuities and to be wary of variable or indexed annuities.
- Be wary, too, of any salesperson pushing annuities on you, as they may not have your best interests at heart. Instead, find annuity vendors on your own, by looking into highly rated insurers and perhaps your brokerage. (Remember that payments are only guaranteed as long as the annuity company is solvent.)
- If you're married, look into getting a joint annuity that will keep paying until both spouses have died. Don't assume it's better to just get two separate annuities, one for each of you, because that will bring in more money. That's true, but when one of you expires, that income stream will drop sharply. The annuity based on both your lives can offer more money for longer.
- If you're willing to pay a little more or receive a little less, you might be able to have your annuity payouts adjusted for inflation.
- Consider deferred fixed annuities, too: If you think you have sufficient income for about 20 years, you might buy a deferred annuity today that will start paying you in 15 or 20 years. That way, you'll be assured of income later in life, too.(Deferred payouts are bigger, too, because the annuity company gets to keep and invest your money until it's time to start paying you.)
- Think twice before investing in annuities within an IRA. Yes, annuities let your investment grow on a tax-deferred basis, but an IRA is already a tax-deferred account. It's notthe craziest thing to do, though. If, for example, most of your retirement funds are in an IRA, you might want to buy an annuity with that money. Note that traditional IRAs have you subject to required minimum distributions once you hit age 70 1/2.
In short, who should buy a retirement annuity? Anyone who could use reliable income. Is it good for retirement? It's perfect for that, as once we stop working, our income options beyond Social Security are limited. An annuity may or may not be the right retirement investment for you, but at least consider it as part of your retirement plans. The best annuities can provide needed funds for the rest of our lives, on terms we choose.
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