Pros and Cons of Annuities – How to Evaluate Annuities for Your Retirement

Skype April 20, 2018 Planning Retirement Leave a comment 437 Views

If you are worried about paying for retirement, it is worth evaluating the pros and cons of annuities.

An annuity is an insurance product that pays out income. You make an investment in the annuity and then it makes payments to you, giving you a dependable income stream during retirement.

pros and cons of annuities

Pros of Annuities

Annuities offer some considerable benefits over other kinds of retirement investments, especially for those not able or willing to risk losing a portion of their retirement savings.

Pros of annuities include:

Lifetime Income – With an immediate lifetime annuity contract, you are guaranteed periodic payments for as long as you live. The “risk” of you living a long and happy life is borne by the insurance company providing the annuity.

So, What are the Cons of Annuities?

Despite the many advantages of annuities, they do have some downsides.

Not All Annuities Are Created Equal – The financial planning community views some annuities – particularly fixed annuities – as being the ideal solution to a retiree’s need for guaranteed income. Fixed annuities have a very good reputation. However, other annuity products are viewed as “snake oil” – an unnecessary and expensive product. It is very important that you understand the various features and terms that are applied to annuities.

Lower Returns on Your Investment – In return for the retirement income certainty provided by fixed annuities or equity indexed annuities you forgo the opportunity to make bigger returns by investing your money in assets that fluctuate in value, like stocks. A fixed annuity is considered to be a safe and conservative investment but this means that you will not see the possible gains (and losses) of a riskier investment – like the stock market.

High Costs: Sales commissions and management fees are a common complaint about annuities. And, sometimes costs are definitely too high. When purchasing an annuity, it is recommended that you shop around and really know exactly what you are paying for.

Inflexible – Annuities are also typically less flexible than other retirement options – once you purchase an annuity contract your capital is tied up in the annuity, so you don’t have access to that lump of money.

Some retirement financial planners recommend that people reserve at least 40 percent of their retirement assets for unforeseen circumstances. Because most annuities are designed to provide steady income over time, they are not ideally suited to cover large unplanned expenses.

(However, although undesirable, if circumstances require it, there are third party companies that will exchange a lump sum payment for your fixed income payments. In this situation you will likely end up receiving less than the amount you paid for the annuity.)

What Are the Annuity Benefits for YOU and YOUR Retirement?

So, what do you think about the pros and cons of annuities for your retirement? Use an annuity calculator to estimate exactly how much income you can buy. Or, better yet, see how an annuity fits into your overall retirement plan by using the NewRetirement Retirement Planning Calculator.

This detailed tool will let you model an annuity in the context of your overall retirement finances. You can even try all kinds of different scenarios. What happens if you: