Pros and Cons of Getting an Annuity

An annuity is a financial product designed to provide a steady income stream during retirement, acting as a supplement to other retirement accounts like 401(k)s and IRAs. It’s a contract with an insurance company where you make a lump sum or periodic payments, and in return, the company commits to making payments to you in the future. These payments can be structured in various ways, including monthly or annual payouts, or even as a lump sum.

Types of Annuities

Annuities come in three primary forms: fixed, variable, and indexed.

Fixed annuities offer a guaranteed return rate, while variable annuities allow for investment in funds, with returns dependent on their performance. This makes them the riskiest of all annuity types.

Indexed annuities combine features of both, providing returns based on a stock market index’s performance. There are certain limitations, like participation rates and rate caps to control their earnings, though.

Benefits of Annuities

Annuities offer advantages that retirees looking for stability may really value, such as:

The promise of regular payments to bolster long-term retirement income

Tax-deferred growth similar to 401(k)s and traditional IRAs

Guaranteed returns with fixed annuities

Death benefits, ensuring that your beneficiaries are financially protected in the event of your passing

Drawbacks of Annuities

However, annuities also have their disadvantages, like any financial product. These include:

Variable annuities can have high fees, potentially reducing your return on investment

Annuity returns might not match those from direct stock market investments due to various fees and caps

Exiting an annuity, especially an immediate annuity, can be challenging and may result in the loss of benefits or additional fees

Choosing an Annuity

The annuity for you depends on your individual retirement goals and timeline. Variable annuities may be suitable for those who are seeking growth and are further from retirement, while fixed annuities might appeal to those closer to retirement, who are seeking stability and guaranteed growth. Indexed annuities may offer a middle ground with limited risk and some more growth potential. Curious about annuities? Discover which type could work for your retirement. Click here to learn more.