If you’ve ever wondered how annuities work and whether you should invest in one, you’re not alone. Many people have chosen to invest in annuities as part or all of their retirement plan, but some are not happy with their choice in the long run.
Before you choose an annuity, learn what they are, as well as what risks they may pose to your financial future.
What are Annuities?
In short, annuities are contracts between individuals and insurance companies. You pay lump sums or monthly premiums into an annuity fund with the promise of receiving regular income or payouts from the selected financial institution, typically upon retirement.
- Immediate annuities begin to pay out soon after your initial investment.
- Deferred annuities, which are much more common, begin to pay out at a later date, such as retirement.
There are several types of annuities to choose from.
- Fixed annuities provide a specified rate of return on your money.
- Variable annuities allow the insurer to invest your money in a portfolio, which causes your return to vary based on how well (or how poorly) they perform.
- Indexed annuities fall in between the first two categories, providing a minimum guaranteed payout while still varying based on the index’s performance.
4 Benefits of Annuities
- Annuities are often used as a supplemental retirement fund for those who are already invested in the stock market. But keep in mind that in the case of deferred annuities, they are typically unable to be withdrawn without tax penalty until age 59½.
- They can provide a reliable income stream for your future. Your investments accrue on a tax-deferred basis.
- Some people opt for annuity investments because of their customization capabilities. They can be structured to pay over a set amount of time or for the life of the annuity holder. They can also be formed as higher-risk (variable) or lower-risk (fixed) investments.
- Annuities also have the option of several added provisions that help the holder, including guaranteed minimums and death benefits.
4 Risks of Annuities
While annuities do offer some benefits, there are significant risks associated with this type of investment.
- Annuities often come with high fees and commissions. When you invest in annuities, expect a higher price tag than you might find with other fixed income investments such as treasury bonds. They often come with premiums, commissions, fees and surrender costs – and all of those can add up.
- Your guaranteed income may not be able to match inflation. Annuities do provide guaranteed income, but they are not required to adjust for inflation. As the cost of living continues to increase, your annuity payout may not be enough to sustain you financially in later years.
- Annuities offer little to no liquidity. The surrender fees that most annuities carry are meant to discourage investors from cashing out early. Some annuity funds offer a set amount of annual liquidity before incurring these fees, while others offer no fee-free withdrawals at all.
- Your beneficiaries often won’t receive benefits after your death. Investing in other ways and purchasing life insurance can sometimes offer a more secure financial future for the next generation.
How Marietta Wealth Can Help
At Marietta Wealth, we’re committed to helping each of our clients find the best investment strategy for their particular needs. If you’re considering your investment options, it may help to talk with an investment adviser with experience in many investment options.
Our team would be happy to advise you about your options and get you on an investment plan that seeks to achieve financial freedom and peace of mind for your future. Contact us today to see how we can help.
The information provided is for informational purposes only. It is not intended to be used, and should not be used, as the sole basis for legal and/or tax advice. Individuals should seek and rely upon the guidance and advice of their own legal and tax counsel before making any decisions regarding any planning, investment, tax concepts or strategies discussed herein. Individual circumstances may vary and results discussed are no guarantees of applicability or future performance.
Marietta Wealth is a registered investment adviser. Registration of an investment adviser does not imply any level of skill or training. For additional information about Marietta Wealth’s financial planning and advisory services, please see the Marietta Wealth Disclosure Brochure or ADV Part 2A for full details, which is available upon request or by visiting our website.