Should You Consider an Annuity?

Retirement is big business — we think about how to save for the future, and financial wizards think about how to use our passion for trying to make the future a brighter and safer place for maximum profit gain. So who really wins?

Well, in a word: you. Indeed, even though it might seem like you’re actually letting the bad guys win, it’s definitely a good idea to really think about the type of retirement progress that you want to make. As you might imagine, no two retirement plans are going to be the same for two people. Everyone is going to want to do different things with their retirement years. No longer are you expected to just drop out of life and enter a senior’s only community. You can open a business, or even move to a completely different country. It’s just something that you will need to think about when you’re really serious about getting things done. It can be scary thinking about all of this retirement stuff, but as you learn more things about retirement savings in general, it gets a lot easier.

One question that will come up as you read through the financial community online is whether or not you should actually get an annuity. In order to answer the question properly, there’s some background that’s definitely in order.

First and foremost, an annuity is a combination of an insurance policy and an investment product. Some people look at them like any other savings account, but they do have some features that you’re not going to find in other vehicles. Annuities are always contracted through insurance companies — you can’t get them anywhere else. Like any other insurance policy, you’re going to pay a set of premiums into a policy. Instead of just wasting away like other insurance products — those premiums add up to a lot of money that will become a pension for you at retirement time. It’s very similar to the old school pensions that used to be the norm perhaps in a previous generation, but aren’t as widespread as they used to be. An annuity is very safe — especially if it’s not a variable annuity. However, you aren’t going to find the high returns that you might with other vehicles for retirement. In addition, the fee structure can be complicated — how complicated? Well, it’s going to be complicated enough that you will definitely want to make sure that you the fine print and also exercise your option to back out of the policy if it doesn’t suit your needs.

You should understand that there are really two types of annuities out there. The first is called a deferred annuity, but many people refer to it as a savings annuity. This is a tax-deferred account that lets you put in as much money as you want — unlike a Roth IRA. Since it’s an insurance vehicle as well as an investment vehicle, you can have your annuity actually go to your heirs and/or beneficiaries after you pass away. They are guaranteed to receive what you’ve actually invested into the annuity — even if the value has gone down due to your investment choices.

Like other retirement vehicles, you cannot withdraw money from your annuity until you are 59 1/2 years old. However, unlike other vehicles, you don’t have to withdraw from the account until you reach 70 1/2 — this gives you plenty of time to actually build up a great nest egg. Accumulating assets in this way is actually a great idea for many people, because it gives them the peace of mind that their initial investment will be preserved without a problem for the future — something that’s on a lot of people’s minds at the moment.

You need to make sure that you really take your time to pick the best annuity. Generally speaking, a deferred annuity is actually going to be the best type of annuity to go for if accumulation is your goal and you have already maxed out all of your other retirement vehicles. Don’t forget that you also have a regular IRA and a 401(k) that you can contribute to — yes, you can actually contribute to both types of retirement vehicles without expecting a call or a nasty letter from the IRS.

Now, you might recall that we were just talking about a different type of annuity earlier. The second type of annuity that you’re going to run into is called an immediate annuity. This is where you get money back from the annuity after you’ve contributed to it for a long period of time. You can turn a deferred annuity into an immediate annuity, which is called annuitization. Now, you might feel that this isn’t a good fit for you, but why would you turn down having checks sent to you for the rest of your life? There’s no way that you’ll outlive the money — the payment swill keep running like clockwork until you are deceased. At that point, the payments can shift toward your spouse or your child, if you choose this. Otherwise the account will be liquidated. Either way, the money is tax-free for your loved ones, which can make it appealing for estate planning purposes.

There are variable annuities, but they can be either deferred or immediate. What you really have to watch for when it comes to a variable annuity isn’t just the changes in the market, but also the fee structure that you agree to. A variable annuity tends to have a lot more fees than its non-variable counterparts. Smart shopping is required if you really want to get a good deal with annuities — and that’s the truth!

So, should you really think about an annuity? Well, annuities are pretty flexible — you have them inside IRAs, if you really wanted to. You can have them standalone. You can do a lot with annuities, but you have to make sure that you don’t just put all of your money into the annuity. Like CDs and other “locked” assets, there will be penalties if you try to withdraw the money too soon. As long as you keep that in mind, annuities can actually make a lot of sense!