Are Annuities a Smart Investment?
Updated: Dec 10, 2021
Most Americans today can’t depend on a pension and their social security to fund their retirements. While Social Security checks may keep coming, those can’t afford your living expenses alone. Annuities can be an almost guaranteed way of regular income. With an annuity, you’ll pay a large sum to an investment or insurance company to receive payments over time.
However, there are many forms of annuities, and the process of purchasing one can be confusing. Fixed annuities can be a great alternative to a CD (certificate of deposit) at a bank, while a variable annuity can be a way to achieve long-term, tax-deferred growth. There are also immediate annuities that will divide your money over time, to ensure income over time.
In many cases, an annuity can be a good investment. It’s important to do your research and see how the money is being invested. Have a plan going into a meeting with an investment advisor, and you can make the right choice about annuities in your investment portfolio.
When You Should Invest in an Annuity
It’s important to remember that an annuity is an insurance product, which means you’re purchasing it to reduce your financial risk. There are some types of annuities that use stock and bond portfolios for investment (inside the insurance contract) while others are simple insurance without any investment component.
The best thing annuities do is a hedge against longevity risk—the problem that you may live far longer than you anticipate. While this might seem to be a good thing, your retirement funds can dry up, and you may only have Social Security to fall back on. Annuities are helpful in this instance, as many don’t expire until your death, even if you live until past 100 years old.
Annuities may be a great investment choice for you if you understand your retirement goals and comprehend the fees and restrictions that go along with your annuity. While annuities are tax-deferred, that means your income will be taxed when you start getting paid out. If you fully understand all these variables and determine an annuity is still a good choice, it’s worth investing in an annuity.
When Not to Invest in an Annuity
If someone’s trying to sell you an annuity without knowing your entire financial portfolio, you should be wary. Though annuity salespeople may be well-intentioned, they may not fully understand the product they’re selling. Make sure any consultant you’re working with can project tax implications and fit the annuity into your retirement goals.
High fees are common in annuity products, especially in variable annuities, and can make them not a worthwhile investment. While there are many types of annuities, you shouldn’t purchase one unless it fits into your retirement plan and budget. Annuities aren’t going anywhere, so you’ll be able to invest in one in the future if you so decide.
For help navigating different types of annuities, including fixed, variable, and immediate products, get in touch with Americans for Life specialists. They can help you determine which, if any, products are right for your retirement. Don’t finance an annuity without fully understanding all the variables, fees, and how it fits into the rest of your retirement investments.