Should You Consider an Annuity? Weighing the Pros and Cons

Should You Consider an Annuity?

When talking about retirement, income is one of the main points of discussion. Will Social Security be available? Will you work part-time? Will you investments be enough to cover your expenses?  I am going to dive into the details, and at the end I’ll give you my recommendation on a general level.

Annuity Product Options

Annuities are essentially insurance products — you pay in to purchase the annuity, and the company agrees to make payments to you in the future. Annuities are also sold by some banks, brokerage firms, and mutual fund companies.

Payout Value

There are three different methods that can determine your annuity benefit payout value. Fixed annuities promise a minimum rate of interest and a fixed amount of periodic payments. Indexed annuities offer a return based on the performance of a stock market index, like the S&P 500.

Phases

If you are considering an annuity, you’ll hear people talk about the two phases of the product. I like Investopedia’s description: “The period of time when an annuity is being funded and before payouts begin is referred to as the accumulation phase. Once payments commence, the contract is in the annuitization phase.”

Payout Schedule

Annuities will start paying out the benefit to you either within 1 year (which is called an immediate annuity) or later (deferred annuity) these details will be detailed in the contract.

The Positives of Annuities

The appeal of annuities is pretty clear “guaranteed” income during your retirement. That concept alone sounds nearly magical, doesn’t it? All of your retirement planning problems solved.

The Negatives of Annuities: Risk

Depending on the details of the annuity product, the payout benefit value isn’t fully guaranteed. An indexed annuity benefit, for example, could shrink if the stock market recedes. Worse still, your benefit is being paid by a company.

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