If investing in annuities fits into your financial plan, they can be a solid addendum for retirement.
Why people invest in annuities
For some, there's a risk of outliving your retirement savings. Living on social security is tricky if not impossible. In that situation, an annuity payout can deliver a fixed income stream when you need it most. Usually, this means later in retirement.
You fund your annuities during the accumulation phase. Funding can be done in lumps or periodically. Once you start receiving income from the financial product, you are in the annuitization phase. Annuitization can last for a fixed period of time or for the remainder of the recipient's lifetime.
Different types of annuity insurance
Just like there isn't one single kind of retirement savings account, there isn't just one type of annuity insurance. You might elect survivorship benefits so your spouse can continue receiving payments.
Also, you can operate your investment in the following ways:
- Fixed: Payments are structured to roll out for a fixed period of time (i.e. 20 years) at regular intervals.
- Variable: You can base your payouts on the investment performance of the fund at the time. This means higher payments for more successful investments, and lower payments otherwise.
- Immediate: You receive the annuitization immediately after paying a lump sum.
- Deferred: You defer your payments until you reach a specified age, at which time the insurance company will send you payments.
Pros and cons of investing in annuities
At their best, annuities can set you up for a secure future. You receive a lifetime of income and don't run the risk of running out of savings before your time is up. They're also tax-deferred, which means you don't need to pay taxes until you withdraw. This can be a pro or a con for some. Also, fixed rates are guaranteed despite market performance.
Unfortunately, annuities are what experts call "illiquid," which just means you can't access them until the time allotted on your annuity contract. If you think you will require liquidity, annuity investments might not be right for you. The fees and tax rates could be too high to make it worthwhile for you (after all, annual annuity expenses can easily exceed 2 percent).
How to invest in annuities
You can invest in annuities through investment companies and life insurance companies. For example, Merrill Lynch, Morgan Stanley, Bank of America, Vanguard, T. Rowe Price, and Raymond James all offer annuity products.
You can also access annuities from independent financial advisers and brokers. Just keep in mind some key points when choosing your source. What are the surrender fees if you need to withdraw early? Are there high annual and administrative fees? What about the minimum guaranteed return? Don't forget to read plenty of online reviews, which could save you tons of hassle down the line.