The Pros and Cons of Annuities

Shawn Plummer

CEO, The Annuity Expert

Annuities are a type of investment that has been around for centuries. They can provide a stream of income during retirement, and they can be a good way to save for the future. However, there are also some downsides to annuities, which is why it’s important to understand both the pros and cons before you decide whether or not an annuity is right for you. In this guide, we will discuss the advantages and disadvantages of annuities in detail so that you can make an informed decision about your financial future!

What Are Annuities?

An annuity is an investment for retirement sold by insurance companies. The money in these long-term investments comes with various pros and cons. This guide will explain the advantages and disadvantages of annuities.

The Pros Of An Annuity

Guaranteed Income

The objective is to ensure that the investor receives a steady stream of retirement income. Customers may use one of these retirement plans as an add-on to their regular pay during retirement, much like they would while working. The client adds the payment on top of his or her Social Security check. The customer will receive a guaranteed income for a period of time or until death do us part.

Tax-Deferred Growth

Annuities are a type of investment that grows tax-deferred, which means the retirement savings plan is not taxed until you take money out. All of these pension programs provide the same advantage: tax deferral. Tax deferral simply refers to a benefit offered by the IRS that allows taxpayers to postpone paying taxes until they withdraw funds for personal use. Annuity income is taxable when received.

Long Term Care Insurance

To help offset the ever-increasing expense of long-term care, insurance companies have created supplements and riders. A few firms have even developed deferred annuities to provide tax-free payments to pay for nursing homes, assisted living facilities, and home healthcare.

Customizable Retirement Plans

Annuities, as with any commodity contract, can be tailored to fit the needs of the buyer. Notable benefits:

Automated Money Management Assistance

A guaranteed minimum income benefit rider can distribute a portion of an investor’s retirement savings throughout their retirement, relieving the worry and stress of running out of money. This rider can provide income for either an individual or a married couple.

The Cons of Annuities

High Fees

Insurance-based annuities can charge fees for additional add-on benefits. Variable annuity contracts can charge both benefit and annual maintenance fees.

Annuities with No Fee

Shop and compare annuities that do not charge fees for enhanced benefits, then request a quote.

Surrender Charges

Annuity owners who want to withdraw money from the annuity before a certain period (typically 2 to 10 years) have matured, often subject to heavy surrender fees.

Annuities with Extra Liquidity

Research annuities that offer extra liquidity to access your money when you need it, then request a quote.

Tax Penalties

If you are under the age of 59½, you may also have to pay an additional 10% early withdrawal penalty on any money taken out.

4 Reasons to Purchase an Annuity

#1: With a lifetime annuity, your money will last as long as you do.

With a life annuity, you know you’ll be paid regularly for the rest of your life. The insurance company that issues the annuity is responsible for ensuring your longevity. Your money will continue to flow as long as you do.

The fear of running out of money is one of the most common concerns among seniors and those close to retirement. Annuities appeal to retirees since they turn their savings into a form of predictable income.

#2: You’re looking for a long-term care planning strategy that is both effective and efficient.

If you want to get an annuity that pays for your long-term care, it is a good idea to get one now. This way, if you need it in the future, you will have it.

If you don’t need long-term care, you’ll receive a raise in pay when you begin collecting your annuity payments.

Annuities with Long-Term Care Benefits

Research annuities that help pay for LTC expenses.

#3: You’re aware of how annuities complement other assets and income strategies.

You want to increase your money but also spend it in retirement. You have several financial goals vying for your attention. You wish to do the following:

  • Increase your purchasing power. Grow your money — or at least outpace inflation.
  • Make sure you’re protecting your assets in case something happens.
  • Turn your savings into monthly income in a way that protects you against unforeseen future costs.
  • Make arrangements to leave something behind for your heirs.

Developing an asset allocation plan is a good approach to balancing these competing objectives. However, a retirement asset allocation plan often involves putting your money in several “buckets,” each of which is invested for a different purpose.

Inflation Annuities

Research annuities that help retirees keep up with inflation, then request a quote.

#4: Annuities may help to relieve stress.

There are a number of financial incentives to consider purchasing an annuity right now, but the greatest of all is that an annuity can make you happier.

Retirees who must withdraw funds from their retirement investments to pay for retirement expenses had the highest financial anxiety. When you acquire an annuity, the stress of investing and anticipating your money being lost in the market is alleviated considerably. You are assured of a predetermined monthly payout regardless of whether the stock market rises or falls.

4 Reasons to Not Purchase an Annuity

Despite the many advantages of annuities, they do have disadvantages.

#1: Annuities can be inflexible.

Annuities are not as adaptable as other investment alternatives – once you buy an annuity contract, your money is committed.

It’s critical for individuals approaching retirement to set aside at least 40% of their retirement savings in case something goes wrong. Because annuities are generally intended to provide steady money flow over time, they aren’t well suited to cover large unanticipated costs.

Avoid These Annuities

If you are not a fan of giving up control of your money, avoid these annuities, then inquire about annuities with flexibility.

#2: Annuities can be complicated

Some annuities, particularly fixed annuities, are seen as the perfect answer for a retiree’s need for a fixed income. As a result, fixed annuities have an excellent reputation. Other annuity products, on the other hand, are considered unneeded and expensive products. Therefore, you must understand the various features and terms that are applied to annuities.

#3: Giving up the potential for higher gains

A fixed annuity is regarded as a safe and conservative investment. This implies that you will not incur the riskier investment’s potential gains (and losses), such as the stock market.

Index Annuities with the Highest Returns

Research fixed index annuities that illustrate the highest returns to safely grow your retirement savings.

#4: High Fees

Commissions and administration charges are common annuities complaints. And, while some expenses may appear to be excessive, they might not always be so. When it comes to annuities, it is suggested that you shop around and understand exactly what you’re paying for.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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