Most people would need a certain form of income in their retirement years, and among the few sources of it that are often overlooked are annuities. While these resources can provide dependable amount of cash for long periods of time, even for the rest of your life, they are not without its own set of drawbacks. To better determine whether or not they are the best option to take for a retirement plan, it is best to assess their pros and cons.
List of Pros of Annuities
1. They offer protection from inflation.
By customizing annuities, you can ensure that your monthly paycheck can support your cost of living. This is very important considering that inflation can have a very negative effect on your assets. Take note that adding an inflation protection can add up to the overall initial cost, not to mention that it can also affect your starting payments.
2. They ensure lifetime income.
With lifetime annuity contracts, you will be guaranteed periodic payments for the rest of your life. Though pensions and Social Security provide similar forms of retirement income protection, they are only of limited dollar amounts. As for annuities, the only limit to the size of the periodic payment is the amount you are going to pay when you purchase an annuity at the start. Moreover, the older you are, the bigger will be your monthly payments for the same price.
3. They provide tax efficiency.
Purchasing annuities with qualified retirement savings, such as IRA or 401k funds, can save you more money on taxes. Basically, you will be able to roll over qualified funds into a qualified annuity without incurring any tax penalty, and you are only required to pay taxes on the income provided by the annuity.
List of Cons of Annuities
1. They offer lower returns on investment.
In return for the retirement income provided by fixed or equity-indexed annuities, you are forgoing the opportunity to make larger returns by investing in assets with fluctuating values, such as stocks. While fixed annuities are regarded as safe and conservative investments, this means that you cannot see possible gains or losses of an investment that is more risky.
2. They are not created equal all of the time.
Financial planners view annuities as ideal solutions for retirees to receive guaranteed income. While annuities have such a good reputation, not all of them offer such a benefit, as others are viewed as unnecessary and expensive products. That is why it is crucial to understand the various terms and features applied to annuities.
3. They are not flexible.
Generally, annuities are less flexible than other options for retirement. If you have purchased an annuity contract, your capital will be tied up in it, preventing you to have access to that lump of money. Financial planners would suggest that you reserve at least 40% percent of your retirement assets for unforeseen circumstances.
So, what do you think about the pros and cons listed above? Do you believe that annuities are the best source of income for your retirement?
Brandon Miller has a B.A. from the University of Texas at Austin. He is a seasoned writer who has written over one hundred articles, which have been read by over 500,000 people. If you have any comments or concerns about this blog post, then please contact the Green Garage team here.