Retirement is when one can finally relax and enjoy the fruits of their labor. However, it is also a time when one has to make critical financial decisions, such as what to do with retirement savings. One of the options available is to buy an annuity, which is a contract that provides a regular income for life or a specified period. But should a retired person buy an annuity? This guide will discuss the advantages and disadvantages of an annuity in retirement.
- Advantages of buying an annuity in retirement:
- Disadvantages of buying an annuity in retirement:
- Why It's Important To Consult With An Annuity Expert
- Next Steps
- Frequently Asked Questions
- Request A Quote
Advantages of buying an annuity in retirement:
Provides a guaranteed income stream
An annuity provides a guaranteed income stream for life or a specified period, which can be reassuring for retirees worried about outliving their savings. This means the retiree will still receive a fixed income even if the stock market crashes or interest rates drop.
Protects against inflation
Some annuities come with inflation protection, meaning the income will increase yearly to keep up with inflation. This can be important for retirees who want to maintain their standard of living as prices rise.
Removes investment risk
Buying an annuity removes investment risk from retirees, who are no longer responsible for managing their investments or worrying about market fluctuations. This can provide peace of mind and reduce stress during retirement.
Disadvantages of buying an annuity in retirement:
Loss of control over the assets
Retirees could give up control over their assets in exchange for a fixed income stream when they buy an annuity. However, this means that if they need a large sum of money for an unexpected expense, they may not have access to it.
Note* – Most annuities offer control, but a few will require you to give up control.
No opportunity for growth
An annuity provides a fixed income stream, meaning there is no opportunity for growth or higher returns. This can be a disadvantage for retirees willing to take on some investment risk to earn higher returns potentially.
Annuities often come with high fees, which can reduce the retiree’s income. Therefore, it is essential to carefully read the terms and conditions of the annuity and understand all the fees before buying.
Why It’s Important To Consult With An Annuity Expert
There are several reasons why it is essential for a retired person to contact an expert if considering an annuity:
Annuities can be challenging to understand
Annuities can be challenging to understand, with complex terms and conditions that may not be readily apparent to someone who is not an expert in the field. However, an annuity expert can help retirees understand the different types of annuities, their pros and cons, and how they work.
An expert can help retirees evaluate their options
An annuity expert can help retirees evaluate their financial goals, personal circumstances, and risk tolerance to determine if an annuity is the right choice. They can also help retirees compare different annuity products and providers to find the one that best meets their needs.
An expert can help retirees avoid common mistakes
Annuities can be expensive and may come with hidden fees affecting retirees’ savings. An expert can help retirees understand the costs of different annuities and avoid common mistakes that can lead to financial losses.
An expert can help retirees plan for the future
An annuity expert can help retirees plan for the future by guiding how to structure their annuity payments to meet their income needs and maximize their tax benefits. They can also help retirees plan for unexpected expenses or changes in their financial situation.
Buying an annuity in retirement can be a good option for some retirees, but it is not the right choice for everyone. An annuity provides a guaranteed income stream, protects against inflation, and removes investment risk. Still, it also comes with a loss of control over the assets, no opportunity for growth, and high fees. Therefore, before buying an annuity, retirees should carefully consider their financial goals, personal circumstances, and risk tolerance. They should also seek the advice of a financial professional who can help them make an informed decision. Ultimately, the decision to buy an annuity in retirement should be based on a thorough analysis of the pros and cons and tailored to each retiree’s needs and preferences.
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Frequently Asked Questions
Why annuities are bad investments?
Annuities can be considered bad investments because of their high fees, lack of liquidity, limited growth potential, and potential for complex terms and conditions that can disadvantage investors.
Can a retired person buy an annuity?
Retirees choose annuities to get a secure and confident income either right away or at a later point in time. They provide a lump sum or regular payments to an insurance provider to receive this income. The investment grows without taxes, but your income is taxable as average income.
Why are annuities popular with retirees?
Annuities are popular with retirees because they provide a guaranteed income stream, tax advantages and can help protect against the risk of outliving their savings.