Annuities comprise one of the many investment tools available for individuals planning their retirement income. Their greatest draw is their tax-deferred status that allows investments to grow tax-free, but there are several other pros and cons connected with these plans. Before purchasing an annuity, review its rates and specific terms with a financial adviser, as every plan varies in its details.
Pro: Guaranteed Income
Annuities come as either fixed or variable rate plans. Fixed annuities and some variable annuities guarantee the investor a minimum periodic payment, according to the Michigan Office of the Attorney General. Thus, you don't have to worry about your investments not earning money and can easily take the guesswork out of calculating your retirement income.
Pro: Death Benefits
Many annuity plans include a death benefit, according to the U.S. Securities and Exchange Commission. This lets you designate a beneficiary on your plan who will often either receive continued fixed payments or a lump withdrawal upon your death.
Pro: Tax-Free Growth
The Registered Rep financial magazine says annuities have "favored tax status," meaning your deposits compound every year and aren't penalized with taxes until you withdraw funds. This might have significant financial benefits, as you may be in a lower tax bracket when you retire and withdraw money from the annuity plan than when you were depositing the money.
Con: Liquidity
Annuities have essentially zero liquidity and will lock up your money for several decades before you can withdraw them without paying large penalty fees. This makes such plans less suitable for individuals who are already close to retirement, according to the Michigan Office of the Attorney General. You also may find such plans less attractive if you expect to need access to funds in the near future, like to support a child's education or to make a large purchase.
Con: Expenses
Annuities traditionally have very high administrative fees, says Registered Rep magazine. You'll often pay percentage fees for every extra feature and benefit you add to your plan, plus annual fees and fees when you deposit money. The magazine estimates that you'll pay 2.5 percent more than you need to in avoidable fees, which eats away at any savings generated by the annuity plan's tax-free status.
Con: Inflation
If you register for an annuity plan that offers fixed periodic payments, make sure the plan takes into account potential fluctuations in inflation. The fixed fee payment may look attractive at today's rates, but may be worth significantly less in 20 years, which can lower your return on your investment.
Member Comments