Annuities in Your Retirement Plan

Do you need a piece of mind in retirement?  Are you looking for a somewhat safe investment for your golden years?  Then certain annuities may be for you.  While just as in any investment there are certain risks and annuities can be instruments with very high fees.  But they can offer you some piece of mind for a steady return, or at least in theory depending the annuity you pick.  And although they are long term investments they can act as an insurance policy for you in your retirement years that does provide you protection from not out living your income if you chose an annuity with a lifetime payment.

Annuities can offer you some protection in a downturn of the markets if they are set up to provide you a guaranteed rate of return.  And like many retirement accounts they do grow in a tax deferred account that will only be taxed on the gains and not the principal when you do receive your payments after age 59 ½. But you need to be aware of surrender fees that can eat a substantial portion of your investment of you need to withdrawal the money before you have met the company’s number of years that you have to keep the annuity with the company.  This can range anywhere from six to eight years and can charge you as much as 7% of your investment if you withdrawal the fund early.  On the plus side the percentage that you have to pay normally decreases as you get closer to the end of the surrender period.

Many insurance companies offer incentives for you to move your existing annuity to their annuity and in many instances a variable annuity.  These annuities do offer you an opportunity to have outstanding gains in your annuities value but also come with higher fees than a fixed annuity so beware of the fees.  After all the more you pay in fees the more your investments will have to earn for you to make more money.  An example is if you have an annuity that charges fees totaling around 1% and pays 5% you are netting a 4% gain in your investment.  With a variable annuity you can invest in pools of money that are similar mutual funds that will charge a management fee in addition to the normal fees associated with the annuity and can be as high as 4% when added together.  That means the investments you chose in your variable annuity will have to make more than 3%, depending on the riders you chose, and that means in order for you to make money in the annuity you will have to have a return of more than 3%.

Annuities can be a valuable tool for your retirement but they are a complex product that you need to understand before you buy one.  There lots of fees, surrender charges and a multitude of options and riders you can add to your annuity to make it a product that does work for you and your needs.  Some of the choices you have with annuities is immediate or deferred, fixed or variable, and how long you want to receive your payments.  Once you figure out those three things you can start to shop for an annuity that meets your needs and has fees and charges you can accept.  And always remember that your annuity is considered a safe investment but it is also only as safe as the financial soundness of the issuing insurance company so make sure you do your homework and make sure the insurance company is sound and has a good financial history.  After all of that research of what you want and need and you find a sound company you are in a better position to purchase your annuity.  And never buy any financial product that you do not understand and if you do not understand something ask a professional for their help until you do understand what it is you are buying.

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