Pros and Cons of An Annuity

As with every retirement investment, Annuities are perfectly suited for some investment strategies and not well suited for others. A successful retirement strategy should include a number of investments with some designed to hedge against risk, some designed to provide reliable income, and some designed to provide accelerated growth potential. Different kinds of Annuities will fit into each of those categories in their own unique way. Here are some general pros and cons of an Annuity to help you decide where Annuities may fit into your financial strategy.

Pros

Lifetime Income – All types of Fixed Annuities can guarantee that you receive monthly payments for as long as you live. This monthly income can help supplement your other social security and pension payments. If you are fortunate enough to outlive your original retirement plan the lifetime guaranteed payment is also a great safety net. Lifetime payments require a lump sum investment up front. The amount of your investment will determine the amount of your monthly payment. Your age will also factor in your monthly payment amount. The older you are, the larger your monthly payment.

Guaranteed Principal – One of the best features of a Fixed Annuity is that you can guarantee your principal and interest earned. This means that your Fixed Annuity will always be guaranteed to be equal to the amount you invested, plus the minimum guarantee, or more. This is a huge advantage over investments that are directly tied to the performance of the stock market.

Optional Inflation Protection– Some Annuities offer an option that will adjust your monthly payments to adjust for inflation. This inflation option will be provided to you at an additional cost or can be structured in your payout schedule.

Tax Deferral Options –Annuities are a tax-deferred instrument. Meaning that you will not be charged tax on your interest earnings until you withdraw the money out of your annuity and provided you are at least 59 1/2 years old. Annuities also can be used to roll IRA and 401k money into and avoid being taxed on that money.

Cons

Annuity Types – Fixed Annuities are generally considered a safe investment and a strong option for providing guaranteed monthly payments. There are, however, other annuity options such as Variable Annuities that can involve more risk and fewer guarantees. You’ll also want to watch out for excessive fees and strict withdrawal limitations. It is important that you work with a licensed Annuity Advisor who is an expert in selling a wide range of Annuities from multiple insurance companies.

Liquidity Limitations – Annuities are generally considered a longer-term savings option. Most annuity products feature a withdrawal fee for taking money out of the Annuity before the Annuity maturity date. Typically, you will be able to withdrawal up to 10% after the first year, but withdraws above that may result in withdrawal fee. In virtually all cases, the withdrawal fee will be reduced to zero after the surrender period has ended.

Reasonable Returns– Fixed Index Annuities are considered a safe, reliable, and steady investment. They are not designed as high risk, high reward investments. Expect to earn interest rates generally in the 3% to 6% range. However, gains between 11% and 19% have been achieved in great years like 2017. Note: Do NOT expect those returns to be commonplace. Annuities are not designed to make you rich. They’re designed to keep your money safe. It is a move of safety and guarantees. It is not a move of generating wealth.

Tax Disadvantages– Annuities are taxed at your ordinary tax rate; they have a tax disadvantage to other investments like stocks and mutual funds because those investments are taxed as capital gains. However, since Annuities are designed to be withdrawn after you retire, your ordinary tax rate is typically lower than when you are working. Also, the tax-deferred compounding interest often erases the capital gain taxed investments advantage.

To learn more about how Annuities can fit into your retirement strategy and provide you lifetime monthly payments, it’s best to speak to a licensed Annuity advisor. Your advisor will explain how each insurance company’s offering differ, and which annuity product and features meet your specific needs. Compare annuity products in your area now!