In the financial industry, the word “annuity” can often spark some strong opinions and judgement. Some people may see them as a reliable source of income, while others view them as an overly complex and expensive tool. The truth is that more nuanced annuities are neither inherently good nor bad, they are simply financial instruments with specific purposes. Whether or not these specific purposes make sense for you will depend on your goals, risk tolerance and overall retirement strategy.
First, we need to define the different types of annuities. A fixed annuity is a relatively safe investment option that provides predictable, guaranteed payments. Variable annuities fluctuate based on market performance and are seen as a riskier investment than their fixed brethren. Indexed annuities are linked to a certain market index and achieve returns based on that index–this type is typically seen as a more balanced option between risk and protection. Each of these three options can either be immediate (income starts right away) or deferred (assets grow over time for future use).
Although there are multiple benefits to owning an annuity, one of the main appeals of an annuity is the ability to provide guaranteed income. This guarantee makes annuities a potential cornerstone for retirement security and for anyone who may be concerned about outliving their money. Often, annuities offer tax-deferred growth and some additional/optional features such as guaranteed minimum income or legacy benefits. By having customized provisions in place, the owner can match income and risk concerns with steady cash flows. Many clients prefer an investment structure that may provide peace of mind knowing they have protection and will not run out of money.
Now that we have listed some of the positives an annuity can provide, we now need to discuss some of the tradeoffs. While annuities can offer security and guaranteed income, you may want to give some consideration to what you are willing to give up. Some annuities can potentially have high fees, limited liquidity and complexity. This means that your money can potentially be “locked up” and subject to penalties if accessed early. As a result of this, it is crucial that you fully understand the specific terms of the contract and how or if it fits into your overall financial plan and circumstances.
Annuities are one of the many tools that can help support long-term financial security, particularly in retirement. They can potentially offer unique benefits but also come with complexities that require careful evaluation. By understanding how annuities work and where they fit, you can make informed decisions aligned with your holistic financial plan. If you would like to learn more or discuss whether an annuity fits into your financial plan, please feel free to contact me.
Recent Comments