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Should Your Retirement Plan Include an Annuity?


Most people who have started to think about their retirement plan realize that a pension or Social Security alone will not be enough. It’s important to pan and save using an array of strategies. Some of your funds will likely come from Social Security and some from personal savings. If you don’t have a pension to rely on, you might want to consider buying an immediate annuity to help guarantee you’ll have some monthly income throughout your lifetime.

Annuities are basically contracts with insurance companies that are purchased for a lump sum of money. Regular payments begin immediately or in the future and usually last the rest of your life. There are several different kinds, including immediate, deferred, fixed, variable and indexed. These products can be complex and are not suitable for everyone. It is important to do your homework and discuss options thoroughly with a trusted financial advisor.

As of May 2017, the average Social Security benefit was $1,368 a month, or about $16,000 a year, according to a recent article from the Motley Fool. Obviously this is not enough to income for many people. You can check out an estimate of your expected Social Security benefits by setting up a my Social Security account at ssa.gov. If it looks like you’ll end up short on money in retirement, you should start building and planning for other income sources.

If you already have sufficient income streams in place, setting up an additional one with an immediate annuity is likely not necessary. But if you’re worried about running out of money late in life, an annuity product could be the right solution. If you purchase a deferred annuity, you will likely receive bigger payouts because the insurance company gets your money early and can invest it. If inflation concerns you, an annuity can help address that risk too. If you spend a little extra, or accept a little less income, you can be sure your payments are adjusted over time to keep up with inflation.

It’s also important to acknowledge that dividend-paying investment and retirement accounts, while having some advantages, also have drawbacks. For example, if the economy goes through some tough times, you’re likely going to feel it. And while any given dividend-paying company might run into financial distress and eliminate payouts, annuity income is guaranteed as long as the insurance company is solvent. They just aren’t always as reliable.

Cognitive abilities, especially mathematical and financial skills, can begin to decline later in life, making it exceptionally important to have a retirement plan in place early on. According to a 2010 study from the Center for Retirement Research at Boston College, “Individuals make the most effective financial decisions in middle age, resulting in lower fees and interest rates on credit and loan transactions.” Annuity income, just like Social Security, can keep paying you for the rest of your life, with little to no input required from you.

It’s smart to include Social Security as part of your retirement plan, but it’s not likely to be enough to support you. An immediate annuity may be the right retirement investment for you. If you are considering adding an annuity to your strategy, consult with a trusted financial advisor and explore all the available options to find the one that suits your unique needs.

Written by Rachel Summit

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