|January 2016 Volume 9, Number 1|
When to Buy an Annuity…or Not
When you buy an annuity, you pay premiums to an insurer. In exchange, you’ll receive a steady stream of income for a specified period of time, which could be your entire life. Should you buy an annuity?
The right answer to that question depends on your unique circumstances and financial needs.
You Want to Protect Your Principle
Equity-based investments fluctuate in value. As people reach retirement, their ability to recoup investment losses will diminish, making it harder to withstand loss of principle amounts due to changes in the market.
You Want Guaranteed Investment Returns
When you buy an annuity, the insurer makes regular payments of a predetermined amount, no matter how long you receive them. With a fixed annuity, you know what your final payout will be when you buy it. With a variable annuity, your final payout varies…as the name implies. Variable annuities allow you to invest a portion of your savings in equities, usually a selection of mutual funds. This allows your investment to increase when the market increases. However, it can also decrease when the market drops. The good news is that even these riskier investments can provide a guaranteed minimum return. You can plan your retirement based on the minimum payout, and enjoy higher returns whenever they come in!
You Want a Retirement Plan
If you want guaranteed monthly paychecks during your retirement and you don’t have a pension plan, annuities might fit the bill.
You Can’t Get Approved for Life Insurance
Having a health-related condition can make buying life insurance impossible or exorbitantly costly. If this is your case, annuities can provide some of the benefits of a life insurance policy. Both whole life insurance and deferred annuities allow you to build savings over time. Some annuities will also pay a death benefit to a beneficiary, although it’s not as much as you can obtain through life insurance.
You Want an Alternative to Long-Term Care Insurance
Given the rising premium costs for traditional long-term care policies, many people opt out of buying long-term care insurance and decide to pay long-term care costs out of pocket.
You Want to Protect Yourself from Poor Financial Decisions
Some people find managing money challenging. They’re either not good at it or they don’t want to spend their retirement stressing over how they will budget their remaining money. As a long-term contract that portions out how much money you receive over a period of time, an annuity prevents you from burning through your retirement funds. If you’re a good money manager, an annuity might not be your best choice. It will simply lock away your money, preventing you from making other investment choices. (Note that taking money out of annuities before they expire results in surrender charges up to 20 percent.)
You Don’t Want to Pay Additional Fees for Your Investments
Here’s a reason not to buy annuities. Unlike mutual funds, which offer low-load and no load funds with no or low investment fees, annuities have several associated fees. Variable annuities have annual maintenance fees; in addition you might find recordkeeping and other fees, along with sales commissions.
You Need Additional Tax Deferral
Annuities, like IRAs and other tax-favored retirement investment vehicles, provide tax deferral of your investment earnings. This allows your money to grow without being reduced by annual income taxes.
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