WHAT IS AN ANNUITY?
In simplest terms, an annuity is a contract between you and an insurance company. The insurance company agrees to pay you a certain amount—sometimes with pay increases for inflation—either starting immediately or at a later date. In exchange, you roll over a sum of money. Most people grow their retirement savings in tax-deferred vehicles such as 401(k)s or IRAs. An annuity also grows your money tax-deferred. They can be a safe place to park a portion of your portfolio as you get closer to the time of retirement because annuities don’t just pay you out an income, they can also grow your money.WHAT CAN AN ANNUITY DO?
Annuities can do two things: they can grow your money and they can turn your money into an income stream. Some annuities grow your money better than other annuities. For example, a fixed annuity grows at a rate competitive with bank CDs – somewhere in the neighborhood of 2 or 3 percent. Other annuities can earn you higher returns upwards of 5 percent. They are not, generally speaking, designed to compete with the stock market. At best, annuities are designed to function as the more secure part of a retirement portfolio for people who are at or near the time of retirement. For example, a longevity annuity (or fixed indexed annuity) can be a good place to put a portion of your portfolio that you know you need for income. The annuity can grow your money for the next 10 years at a guaranteed rate of, for example, 7 percent regardless of stock market performance; at the end of the 10 year time period, you can either move the money out of the annuity or turn on the income to activate regular, recurring payments.WHY DO OTHER PEOPLE HAVE THEM?
A 2017 retirement readiness survey found that only 14 percent of workers today have a written strategy for retirement, and those who do are more likely to do the right thing with their money. Another study conducted with Greenwald & Associates found that current and retired workers who scored the highest in terms of retirement readiness were more likely to have more than one type of financial solution in their portfolio. But here’s the shocker: those who had the highest scores were more than four times as likely as the lowest scoring workers to own annuities. These recent studies support the findings of journalist Dan Kadlec who wrote a 2012 article for Time magazine titled, Lifetime Income Stream Key to Retirement Happiness. People who have a guaranteed income stream during retirement are happier than those who don’t have one. The reason comes down financial to peace of mind. Annuities are the only financial product that can give pension-less workers a pension-like income.HOW DO YOU CHOOSE THE RIGHT ONE FOR YOU?
Choosing the right annuity can be a tricky thing for three reasons:- There are different kinds of annuities, and one kind, in particular, does not give you the kind of principal guarantees and security we talked about earlier.
- Annuities are often misrepresented by salespeople, which leads to misperceptions and misunderstanding.
- Annuities are, generally speaking, long-term contracts, so once you get into them, you’re in a commitment.