Are Annuities A Good Retirement Strategy?

As you think about retirement and the future, you might be wondering if investing in annuities is a good strategy or if you should consider other kinds of investments. If you have a financial advisor or insurance agent, they have probably mentioned that you should add annuities to your list of investments so that you can be more financially secure in the future.

This guide will cover if annuities are a good retirement strategy or not as well as cover all the pros and cons you need to know before putting your money into annuities. 

Why Consider Annuities? 

An annuity is a type of contract that is given between insurance companies and individuals. The investor gives money either up front or in smaller payments over time and the insurer then pays them a regular amount of income in return for the investment. 

There are two main types of annuities. You can either invest in an immediate annuity where you start getting payouts right away or you can get a deferred annuity where you start getting payments in the future. Most deferred annuities start during retirement. 

Now that you know a little about annuities, it’s time to see the advantages so you can consider whether it might be a good investment strategy for your future or not. 

What Makes Annuities a Good Retirement Strategy? 

There are several reasons why annuities are such a popular retirement strategy and why many people rely on them for income after retirement. 

Here are the main advantages to know about. 

Assistance With Money Management 

If you choose to get a variable annuity, most of the companies offer many different professional ways that you can manage your money that you otherwise wouldn’t have access to unless you were paying a financial advisor large sums of money to see where you should put your money. 

The closer you get to retirement, the more you need to watch your money because you will not have the same amount of income coming in once you retire. This is why you also need to watch your investments including doing some rebalancing of your portfolio from time to time. 

Income Every Month 

One of the main reasons you should consider getting retirement annuities is that they offer a steady stream of income. Many people get nervous as they near retirement because their income decreases, but with annuities, you know you are getting a payment every month to help you with your retirement and the needs you might have. 

Remember though that the payments you receive are only as good as the insurance companies you are investing with. This is why you want to research any company before signing an annuity contract with them. 

Have the Features You Want 

One of the best parts about using annuities in retirement is that you can customize it to meet your needs. For example, if you have children or a spouse and you want them to continue receiving the payments after you have passed away, you can add a death benefit to ensure they are getting some of your investment money. 

Other Options 

Even though annuities are usually straightforward and give you money during retirement, they do have some downsides. This is why even though annuities are a good investment choice, they should not be your only investment when it comes to retirement. 

Along with annuities, make sure you have plenty of other retirement investments set up including a 401k, dividend-paying stocks, individual retirement accounts, deferred compensation plans, and variable life insurance. 

Annuities have several issues that while they are a good investment choice, they should not be your only investment for retirement. This is because you cannot earn interest, they don’t keep up with inflation well, and they have very limited equity. Some also have very high fees depending on the company you’re investing with. 

A good option many investors take is to have plenty of mutual funds and then move some of that money into an annuity after they have retired. This allows you to avoid the high annuity fees while you are still working but still have plenty of income once you have retired. 

Reasons You Need Other Investments in Retirement 

As mentioned, you need some other investments besides annuities once you are retired. This is because annuities have a few drawbacks that need to be considered. 

High Fees 

Almost all annuities have annual fees including maintenance charges and operational charges. This is why it’s important to look at the small print before you make any final investment choices. You want to make sure you get an annuity with the smallest expense ratios possible. 

Charges for Surrendering 

If for some reason you need to withdraw the annuity or take a portion of it out, you will have to pay a very large charge for taking the money out before retirement. Most of the time, you are not allowed to make withdraws for at least eight years, but sometimes longer. 

No Tax Benefits 

While annuities are tax-sheltered, they do not have the same tax benefits as traditional IRAs and 401ks. This is why you need to consider also having the retirement accounts and funds that are offered by most jobs. 

Tax Penalties

Along with no added tax benefits, they also have high tax penalties. If you need to withdraw the annuity before you are 59.5 years old, most companies will make you pay an early withdrawal fee of around 10%. 

The Bottom Line 

While annuities are a good retirement investment strategy, they are not the only one you should use. Annuities should be added to your investment portfolio because they are high-risk and give you a monthly income payment to help you in retirement. 

However, because of the high fees and other drawbacks, you want to make sure you have other investments in your portfolio to be able to maximize your income and savings for retirement. This way you can be as financially secure as possible.