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Thinking About an Annuity? Consider This…


If you’re preparing to retire in the coming years, and are looking for a way to generate consistent income, you might be considering an annuity. An annuity product is basically a contract between you and an insurance company, where in exchange for a sum of money, you are provided a set amount of income over a predetermined period of time. Annuities are not for everyone, and they do have some disadvantages. They are usually accompanied by some fairly complex rules and can carry significant fees, but they do also offer several benefits. If you’re considering an annuity for your retirement portfolio, consider these four points, from the financial experts at The Motley Fool, when making your decision.

Predictable income

With a traditional retirement plan, like an IRA or 401(k), your retirement income is generally determined by the performance of your investments. Given the ebbs and flows of the stock market, you could end up with less income than expected as your retirement nears. With a fixed annuity product, you’re guaranteed a specific amount of income each month, regardless of how the market is doing. From this standpoint, your risk is nonexistent, providing you with comfortable peace of mind.

Tax-free growth

For those who can stomach some ups and downs, payments from a variable annuity are based on the performance of your account’s investments. While you can’t fund a variable annuity with pre-tax money, it does grow on a tax-deferred basis once it’s in your account. This means that you don’t pay taxes on investment gains until you begin to take withdrawals. Annuities are similar to IRAs and 401(k)s in this fashion. The major difference is that while your distributions are always taxable from traditional IRA and 401(k) plans, there comes a point when you are no longer required to pay taxes on your annuity withdrawals. Annuities are typically taxed on a last-in, first-out basis, meaning that the money that comes out initially is considered taxable earnings.  But once the value of your annuity falls below the amount you contributed to it, your withdrawals will no longer be taxed.

No annual contribution limits

There are several benefits available through IRAs and 401(k)s, but one of the biggest limitations is that you’re only allowed to contribute a set amount each year. Currently, employees under 50 can put up to $5,500 a year into an IRA and $18,000 into a 401(k). Those who are 50 and older can contribute up to $6,500 a year to an IRA and $24,000 to a 401(k). While these are more than generous for some, those who want to save more are out of luck. Annuities, on the other hand, do not impose an annual limit on contributions. If you’ve already maxed out an IRA or 401(k) but have more money you want to invest, an annuity can be a great solution.

Protection from outliving your savings

A recent Allianz survey found that 60% of baby boomers admitted to being more afraid of outliving their savings than of actually dying. If this is you, then an annuity may be just what you need. If you purchase a deferred-income annuity, you will be guaranteed a set monthly income for the rest of your life. For example, if you plan to retire at 65 but are terrified that your income will run out by the time you’re 85, you can set up your annuity to pick up where your savings leaves off. There’s that peace of mind benefit again.

These annuity benefits make them a great choice for some people, but it’s important to realize that annuities aren’t for everyone. In addition to complexity and expensive fees, many come with long surrender periods, often 10+ years, meaning that if your withdrawal any of your money during this time, you will be subject to substantial financial penalties.

If you have any questions about annuities, or would like to find out if they are right for you, contact one of the advisors at  Annuity FYI by calling 888-451-3438,  or send us an email.

Written by Rachel Summit

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