Retirement annuities are insurance contracts between the owner of the annuity and the financial institutions issuing it.
You can purchase these contracts with monthly premiums or lump-sum payments. From there, those invested funds grow over time in what we refer to as the “accumulation phase.” After that, we enter the “annuitization period”, in which the owner will begin receiving payments for either a specified period of time or for the remainder of the annuitant’s life.
This steady stream of dependable income is what makes annuities so beneficial to retirees as it helps avoid the risk of outliving your retirement savings.
Now that we have defined annuities, let’s weigh the pros and cons to see if this contract is the right fit for you.
Pro: Choice of plan type.
There are two main types of annuities: immediate and deferred. Immediate annuities start to pay out within a year of purchase, while deferred annuities grow in value for a few years before paying out.
To better choose which annuity type is the best choice for you, it’s important to consider financial needs and future plans. Are you looking for an immediate source of income or are you planning for your future financial security?
Con: Interest rates are key.
When it comes to mortgages, loans, and credit cards, low interest rates are ideal. However, when dealing with annuities, the opposite is true. The best time to buy an annuity is when interest rates are high.
The payout amount for annuities depends on market conditions and interest rates. Typically, when you buy annuities with high-interest rates, you lock in a higher rate, which means higher payouts. If you buy when interest rates are low, you may see less attractive returns. This means it’s important to time your annuities investment wisely.
Pro: Flexible payout options.
In addition to choosing when your payments start, annuities also give you the freedom to choose your payment duration, whether for a fixed period or for life. By assessing how long you’d like to receive these payments, you can tailor an annuity structure that aligns with your long-term aspirations and security. For example, if you want to maximize payments for a specific period to achieve a home buying goal, or ensure payments continue for life to use as retirement income.
Con: Complex and confusing.
The fact that annuities come in many varieties and offer customizations can mean great things for the purchaser, but it can also be the biggest disadvantage. The truth is: annuities can be extremely confusing. We highly recommend having a trusted financial advisor to guide you throughout your purchase.
To understand all the different types of annuities and offerings, you’ll practically need to learn a whole new vocabulary, including “mortality and expense fee,” “subaccount,” “surrender fee,” “market-value adjustment.” This complexity can lead to people buying annuities without fully understanding the terms, or worse, being left with a product that does
Pro: Death benefits for beneficiaries.
You can customize your annuity contract to include a provision for a death benefit. Rather than simply “losing” your invested money when you pass, your designated beneficiary can receive the contract value, regardless of how your annuity’s investments perform.
With enhanced death benefits, your beneficiary could even be eligible to receive a payout amounting to the highest recorded value of your annuity.
Reach out to us today at [email protected] or 301.990.9170 to learn more about annuities and when the best time to buy is.
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