Can an Annuity Aid Your Retirement Plan?

When Should You Begin Planning For Retirement?
November 27, 2017
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Can an Annuity Aid Your Retirement Plan?


Cautious investors who want a buffer to prevent their savings from being depleted have various investment options that can complement their retirement plans. One of these options is using annuities as part of their retirement plans. Some investors prefer annuities to alternative forms of investment for various reasons. In particular, retirement annuities can:

  • Ensure you receive a steady income when retired
  • Help protect the money that you have already saved
  • Build tax-deferred savings

As life expectancy in the country increases, there is an increased risk of your savings becoming depleted after retirement. Retirees can prevent against outliving their retirement savings by using annuities to get truly lifelong income.

What is an Annuity?

An annuity is a financial product that can generate income for your retirement. The income can be generated for life or a specific number of years, or you may choose not to receive an income at all if leaving a legacy is your goal. By purchasing an annuity, you are entering a contract with an insurance company, whereby they invest your money and agree to pay you regular income – either immediately, or after a certain period. You can purchase the annuity from the insurance company with a series of payments or in one lump sum.

There are two main types of annuities: an “immediate” annuity and a “deferred” annuity.

  • “Immediate” annuity. With this option, your money will be invested and you can start receiving income in about 30 days.
  • “Deferred” annuity. With this option, you will receive income after a lapse of some specific time.

Annuities allow you to participate in various investment options. Moreover, no taxes are charged on any investment growth until you take money out.

Is an Annuity Right for You?

The benefits of annuities cannot be denied. However, it’s important to consider both the pros and cons before jumping into any investment option.

If having guaranteed lifetime income after retirement is something you desire, investing in an annuity is recommended. You should figure out how much guaranteed income you would need every month and how much money should remain invested before purchasing one, and research which type of annuity is right for you.

In particular, you should be familiar with how fixed, variable, and index annuities work.

For example, if you invest in a “fixed” annuity, you will be guaranteed a fixed percentage return for life. This is the simplest of your choices.

With a “variable” annuity, your returns can rise or fall depending on how the investments within the annuity perform. This is the riskiest of annuity choices. There is investment risk, which can mean a lower payout to you if you experience a decline in value. There are also higher fees with this type of annuity since they require more management. The potential to outpace other forms of annuities is there, but at what cost?

Finally, with an “indexed” annuity, the insurance company will invest your money in an index such as the S&P 500, the Nikkei, or some other proprietary index, and offer upside potential with downside protection. With this type of annuity, you participate in the gains of the index, in some instances up to a cap, but you are guaranteed not to experience a loss of principal. What this means is that while everyone is losing money, you don’t lose a penny. Zero becomes your hero. I absolutely love indexed annuities in the right circumstances!

Retirement annuities definitely have their appeal but they are not always the right choice for everyone. For example, it would not make sense to purchase an annuity if you have not already established an emergency fund and maxed out your contributions to other employer-sponsored retirement plans. However, if you have changed jobs and wish to roll over an old 401(k) or consolidate your IRAs, or if you are retired (or are about to) and want to receive guaranteed income for life, an annuity is a great option.

Before purchasing a retirement annuity, look at your retirement income needs as well as your goals and objectives during retirement. Consider things like life expectancy and healthcare costs, and ask for professional advice regarding managing your finances after retirement. Doing this will educate you on whether an annuity will be a beneficial addition to your retirement plan.