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Three Reasons To Buy An Annuity Product


In an article for Kiplinger, financial expert Lisa Brown gives three scenarios “When Buying Annuities Makes Sense.” She is one of many financial planners who used to be opposed to annuity products, but now sees value in the benefits they offer consumers. Too many people fall into the old myths about annuities that claim all products have high fees and low liquidity, two things which are not true. Brown said that people who don’t have pension plans from an employer to guarantee lifetime income need the guarantees from an annuity. They provide a peace of mind in retirement because people know that they have a reliable and steady source of income. Annuities can be complex and have a lot of moving parts, but Brown says that she’ll recommend the products to retirees who understand them and can benefit from the options they provide.

The first scenario where Brown recommends annuities is to account for the fact that Americans are living a very long life. You have to have a way to protect yourself from running out of money during your retirement, a retirement that can last decades for some people. The CDC found that men and women who live to age 65 are likely to live an additional 18 and 20.5 years, respectively. Your financial planner can help you assess your personal finances before you make the decision to retire. First you can estimate your life expectancy based on your health and your family history. You’ll determine how much guaranteed income you have from other sources and then you can use an annuity to help make up for any lack of guaranteed income. Annuities transfer your longevity risk to the insurance company so that you can live your long life without the fear of running out of money.

Annuities also protect you from spending down all of your assets while you are still living. Brown says that clients spending above their means is one of the biggest issues that financial planners face. When some of your money is put into an annuity and used to pay you monthly income, it protects that money from being spent frivolously. It’s hard for people to control their spending in retirement, especially when they have way more free time to spend money. Brown said that many clients take out more than the agreed upon spending amounts each quarter and others end up increasing their lifestyle and needing more income to cover their increased basics. This is hard to control when you know you have the money at your fingertips, but that money is not unlimited and often runs out. If you buy an annuity, it can help control your spending and give you the peace of mind to know that your expenses will be covered by your annuity payments for the rest of your life.

The final situation that Brown gives for buying an annuity is to protect against stock market fluctuations, especially for those who don’t like to take on a lot of risk. People who panic when the markets are down tend to sell off their investments and lose a lot of money. Most annuity products will protect you from stock market declines. That protection comes at a cost because you won’t get to take advantage of the entirety of potential market gains, but the peace of mind that people get from stock market protection is well worth it for some. While annuities are not right for everyone, you should consider an annuity product if you’re looking to protect yourself from longevity risk, overspending in retirement and fluctuating stock markets.

Written by Rachel Summit

Follow Rachel, aka Finance Mama, on Twitter and Google+


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