There are a multitude of reasons that annuities are good for your financial future. In “5 Reasons To Include Annuities In Your Estate Planning,” the Financial Samurai Sam Dogen says that people aren’t buying annuities because they don’t know much about them. Include annuities in your estate planning not only for the income they provide, but also for the money they can leave to beneficiaries. Guaranteed income is likely the most popular reason that people buy annuities. Annuities protect you from longevity by insuring that you don’t run out of money in your lifetime. As we live longer, more people are running out of money during their retirement. Both of my Grandmothers outlived my Grandfathers and their life savings. Annuities can be set up so that your income lasts over your lifetime, includes a spouse’s lifetime as well, or even pays out beneficiaries until your money runs out.
The second reason that the Financial Samurai gives for purchasing annuities is their safety. No matter what type of annuity you purchase, your principal is safe from changes in the economy. Fixed annuities will continue to increase in value no matter what happens in the economy, while indexed and variable increases are dependent on the markets. The fact that your principal is safe is crucial to the importance of annuities. Payments are based on the insurance company staying around, so choose a reputable insurer with high financial strength ratings. Most states have a guaranty fund that would continue to pay you in case of an emergency with the insurance company, but finding a solid company is key.
Your money grows faster in annuities than it does in other investments like CDs. This is because of the third annuity benefit, tax deferral. While your money is accumulating in an annuity during the growth period, you do not pay taxes. Once you start receiving money from your annuity as income, you will be taxed at ordinary rates. This is usually after you have retired, so your income is less, therefore your tax rate is less anyways. Privacy is the fourth listed benefit of annuity products. When you die, any death benefit for your heirs will be transferred without going through probate or being listed on a will. This saves both time and taxes for your grieving heirs. Finally, despite some public opinion, liquidity is actually a benefit of most annuities. People have a misunderstanding that once they put money into an annuity, they lose all access to it. Most annuities do have a surrender charge period, where you cannot take your money out without a penalty. But you can usually take out up to 10% of your money each year without a penalty and once the surrender charge period is up, you have full access.
While there is liquidity with annuities, keeping the money in your annuity so that you can use it for lifetime income is often in your best interest. Take advantage of the Financial Samurai’s top reason for buying an annuity, guaranteed income. Use annuities for their guaranteed income, safety, tax deferral, privacy, and even for their liquidity. Annuity FYI would be happy to answer any questions you have about annuities to expand the overall understanding of these important financial products.
Written by Rachel Summit