A few weeks ago I posted a rather long blog on annuities and here is a brief summary on what you need to know about annuities. First let’s be honest and all agree pensions are a retirement tool of the past and are really not a retirement option for the millions of people currently working. Workers today will rely on their retirement plans like 401(k) or an IRA in addition to Social Security if it is still there when you are ready to retire. An annuity can act as a supplement to Social Security and your other retirement accounts or it could replace what a pension used to provide retirees.
An annuity is an insurance product that will produce income on a monthly, quarterly or annual basis depending on what you purchase. Annuities are funded by you on taxed dollars and will grow tax deferred until you begin taking your payments. Unlike other retirement accounts there is no limit as to what you may contribute to an annuity and you are only taxed on the gains of the funds you paid in and not the full amount as technically you have already paid taxes on the funds you contributed.
No there are hundreds of different types of annuities and each annuity may offer different add on’s that could guarantee a specific return or may pay you for the rest of your life a specific amount regardless if you have paid in enough money in the event you live a long time and are receiving payments for decades. But the more you add to or change an annuity the more you can expect to pay for it in fees. Anything over 4% is too much to pay for what you will get as a rule and you should try to keep fees as low as possible to maximize your tax deferred growth for as long as you can. Also you need to always be aware of surrender fees as they are usually very high and can last for many years so make sure you examine the fine print of any annuity before you buy it and understand all of the fees that are associated with the annuity.
And as you will be associated with the annuity for many years to decades make sure you are dealing with a reputable company that is financially strong. Your retirement is not something you should just trust to any company and you need to deal with strong companies that offer competitive annuities with reasonable fees.
