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How to Determine if an Annuity Should Be in Your Retirement Plan


It’s refreshing to see annuities getting attention from larger news sources.  CNBC’s Jim Pavia recently asked “Do annuities fit into a retirement plan?”  Since annuities offer you peace of mind that you won’t be outliving your retirement savings, they can definitely be worth the fees that they charge.  Their returns are typically not as high as other investments when the economy is up, but their returns are greater in a down economy.  Other investments also do not guarantee lifetime income like annuities do.  Protection in down markets, tax-deferral until you withdraw your money, and products offering guaranteed returns are three of the reasons that annuities work well in many retirement plans.  But they do have surrender charges if you take your money out too soon and some recent policy changes are complicated.  The author interviewed a certified financial planner to further examine if annuities work in retirement plans.

When asked what types of annuities are available, he mentioned immediate and deferred annuities.  Deferred annuities come in the form of fixed, indexed and variable.  The tax benefits include tax deferral until you start making withdrawals from your annuity.  So if you are transferring money from emerging markets to stocks, you won’t have to worry about paying taxes on any gains you may have made.  The CFP was asked what types of investment options you can get with annuity products and said that the range is just “enormous.”  Any broad-based category of pooled investments, as well as some investments that are sector-specific, is available when purchasing an annuity.  Your options obviously depend on which annuity you choose.

The question that everyone is trying to answer is how a person knows that an annuity is right for them.  This answer differs from person to person because you have to first take a look at what you need from a retirement product.  Annuities are an effective way to transfer your risk over to an insurance company.  They are also a good way to manage your income need in retirement.  Most people who buy annuities are looking for added protection either in the form of guaranteed income or death benefits to pass onto their heirs.  You have to determine your goal before deciding what annuity would work in your specific retirement plan.  The author questioned whether annuities have a place in IRAs.  Although you might not think so, there are benefits to holding an annuity in your IRA.  IRAs should be used for income protection, not withdrawing large sums of money, and that benefit is what makes annuities strong products.  You are getting income protection from an annuity, so it may make sense to use one in your IRA.  Speak with an expert if you are looking at annuities for your retirement plan.

Written by Rachel Summit

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