Annuities for Income
Look at this simple-language guide of the good, the bad and the unsavory when it comes to the world of Annuities for Income.
Annuities for Income were just lambasted by John Oliver in his segment – they on are the single financial device that investment professionals seem to either love or hate. Here’s a simple-language guide of the good, the bad and the unsavory when it comes to the world of annuities.
Great news about Annuities for income
What exactly is an annuity anyway? It’s a retirement product that behaves like a 401(k) or an IRA, but with some differences we’ll examine in greater detail. Specifically, an annuity is a type of insurance policy that can be set up to pay out a predictable stream of future income in monthly, quarterly, or annual installments. (Or even one big lump sum if need be.)
This predictable future income that can last a lifetime is why most investment professionals see annuities as a good idea, that and the high commissions. Many professionals see annuities for income as a “guaranteed income base ” that can help provide the foundation of a healthy retirement. Creating many legs of guaranteed income for use at a date in the future can be accomplished using deferred income annuities (longevity annuities), or income riders. Both can potentially solve your desired future income needs.
Speaking of that guaranteed income base, there are a variety of ways that retirees can specify their payouts. Here are a few of the most popular options:
With a period certain annuity, a retiree is guaranteed a specific payment over a defined period of time. You can specify the timeframe that works best for you. Five years, a decade, 30 years…the choice is yours.
As the name implies, a lifetime payment annuity pays a retiree until death. With this type of annuity, there are no beneficiaries.
A joint/survivor annuity is a great choice for married couples because a spouse or other beneficiary continues to receive the specified payments after the death of the account holder.
The final good thing about annuities is that you can contribute as much money as you’d like to them. With 401(k) and IRA accounts, there are limits to how much money you can contribute per year. This unlimited contribution feature can make annuities a great choice for folks nearing retirement who are trying to catch up on funding their accounts.
Not great news about annuities for income
Like any financial product, annuities for retirement aren’t perfect for everyone. Before even thinking about purchasing an annuity, it’s crucial to speak with a financial expert about your specific retirement goals and objectives. (A financial expert who ISN’T an annuity salesperson who’s trying to sell you the annuity in question.)
The salesperson selling you your annuity is going to charge you a fairly steep commission for their time and effort. Commissions can be as high as 10%, which can eat into the value of the investment.
Let’s say you buy your annuity after your retirement age of 59-and-a-half and you decide to cash it out in a year or two. Doing this will trigger something known as a surrender charge, which can be as much as 7% of the value of your account. The surrender charges usually drop by 1% per year until finally dissipating to zero in year seven or eight. But if you have to cash out your annuity early, surrender charges can be a killer!
Some annuities come with high annual fees that can take a big bite out of your nest egg every year. If you’re looking at fees of 2–3% per year or more, these fees will definitely make an impact.
The unsavory about annuities for income
The ugliest annuity scenario is also, thankfully, the one that’s least likely to happen. What if the insurance company that’s funding your annuity goes bankrupt? If that happens, you could lose all your money! One of the best ways to guard against this nightmare scenario is to make sure that if you choose to invest in an annuity, you at least invest in a rock-solid company with several decades of excellent performance under its belt. The first step is to check the insurer’s credit rating with bureaus such as A.M. Best, Standard & Poor’s and Moody’s. Only go with companies with an A+ rating from A.M. Best or an AA- or better rating from Moody’s and Standard & Poor’s.
So, is an annuity a good, bad or ugly way to fund your lifestyle? It depends on your specific retirement objectives. Again, the first step is to talk to great financial advisor who has your best interests at heart. Investigate, ask questions and make the decision that’s right for you.
I hoped this helped answer the question are Annuities for Income a good idea? Leave your comments.