You have likely encountered several longer-term investment options as you plan for retirement. One option you may have come across is an annuity. Some initially appealing benefits of an annuity contract are tax-deferred growth and the prospect of guaranteed lifetime income. However, you might want to consider whether an annuity aligns with your long-term investment goals before signing on the dotted line.
To determine if an annuity would meet your needs, first consider your retirement goals. Next, research how annuities work, their benefits and their drawbacks. Then compare your goals with the annuity’s benefits to see if they align or if your goals might be better served by an alternative investment.
In our experience, there can be a divergence in how investors envision their retirement years. Retirees may wish to travel more, dedicate themselves to a favorite hobby, open a business, or simply spend more time with family and friends.
Understanding your vision in detail can help answer three critical questions that address your future financial needs:
As you consider these questions, consider some common retirement planning goals: growth, cash flows or a combination of both.
As you work toward your retirement goals, consider some often overlooked factors:
Let us now take a closer look at what annuities may offer.
An annuity is a financial product provided by an insurance company. As with a life insurance policy, you pay a premium to the insurance company, either as a lump sum or in a number of payments. In return, you receive income payments (payouts) over a specified time period. These payments are usually either a fixed rate of income (fixed annuity) over a certain time period, or variable based on the returns of underlying assets in sub-accounts (variable annuity).
Annuity terms vary between annuity products and insurance companies. Following is a brief description of several common types of annuities.
Immediate annuities allow annuity owners to begin receiving payments right away.
Deferred annuities start paying income at a later date and may grow until that time.
Fixed annuities guarantee a fixed payment or minimum rate of return over a set time period, similar to a bank Certificate of Deposit.
Variable annuities’ payments are generally based on the performance of underlying assets in sub-accounts. Some variable annuities guarantee a minimum rate of return even if the underlying assets underperform.
Indexed annuities offer a rate of return based on a specific market benchmark, such as the S&P 500, often with a certain minimum return and a capped maximum return.
Annuities can have many considerations and features that may not be found in other investment products. Many types of annuities don’t offer the same liquidity as other investment vehicles. If you need cash immediately during retirement, you may have to pay penalties to access cash above your contracted payment amount. In some cases, if you need to cash out an annuity before a specific surrender period, you will likely have to pay additional surrender charges in order to receive your money.
You now know how to determine your retirement goals and how various types of annuities are structured. You are ready to answer an important question.
Understanding whether annuities align with your retirement goals can be difficult. We have helped many investors plan to meet their income needs at retirement. Download one of our educational brochures or call to speak with one of our experienced professionals to determine which investment products are right for you.
[i] Source: FactSet, as of 01/09/2018. Consumer Price Index data from 12/31/1990 – 12/31/2017.
[ii] Source: FactSet, Inc.; as of 2/12/2018. Based on US BLS Consumer Price Index from 12/31/1925 – 12/31/2017, average annualized inflation was 2.91%.