Annuities are popular financial products that often guarantee income throughout the course of your retirement. While you may even have one in your investment portfolio, it's important to understand what an annuity is and if it's a good fit for your retirement plan.
First and foremost, an annuity is generally defined as an insurance contract that exists between an individual and a financial company. That being said, a public annuity is essentially a contract between an individual and a government entity. An annuity can provide lifetime income if you know how it works.
There are several types of annuities, including fixed, variable, indexed, and immediate annuities. Fixed annuities offer a guaranteed rate of return and are often used for conservative investors who want to protect their principal. Variable annuities, on the other hand, allow investors to choose from a variety of investment options and have the potential for higher returns, but also carry higher risks.
Indexed annuities are a hybrid between fixed and variable annuities, offering a guaranteed minimum return while also providing exposure to a stock market index. Immediate annuities, as the name suggests, start paying out immediately after purchase and provide a steady stream of income for life.
One of the biggest benefits of annuities is their ability to provide a guaranteed stream of income for life. This can be especially attractive for retirees who are concerned about outliving their savings. Annuities can also provide tax-deferred growth, meaning that investors don't have to pay taxes on their earnings until they start taking withdrawals.
Another advantage of annuities is their ability to offer protection against market volatility. Fixed annuities offer a guaranteed rate of return, while indexed annuities provide some exposure to market gains while also protecting against losses.
However, annuities are not without their drawbacks. For one, they can be expensive, with fees and commissions that can eat into your returns. They can also be complex, with many different types and features to consider.
Furthermore, annuities are not a liquid investment. Once you purchase an annuity, you typically cannot access your principal without incurring penalties. This can be problematic for investors who need access to their money in case of an emergency.
Additionally, annuities are not suitable for everyone. They may be more appropriate for conservative investors who are looking for a steady stream of income in retirement, rather than those who are comfortable with more risk in their investments.
Higher interest rates made annuities more attractive in 2022. Better quality products are increasingly available, but consumers still need to do their due diligence before investing in an annuity. Consumers are on pace to buy almost $300 billion of annuities in 2022, which would handily beat the prior record, set during the financial crisis.
In conclusion, annuities can be a smart investment tool for the right person under the right circumstances. They offer guaranteed income, tax-deferred growth, and protection against market volatility. However, they can be expensive, complex, and illiquid, and may not be suitable for everyone. If you're considering an annuity as part of your retirement plan, it's important to do your research and consult with a financial professional to determine if it's the right choice for you.
