The Pros and Cons of Annuities, What You Need to Know Before Deciding
When people first hear about annuities, they often hear two extremes: that annuities are either the perfect retirement tool or that they are riddled with fees and should be avoided. The truth is that annuities are simply a financial tool, and like any tool, they can be powerful in the right situation and impractical in others.
In this article, we’ll look honestly at the advantages and disadvantages of annuities so you can make informed decisions about whether they belong in your retirement strategy.
The Real Strength of Annuities
For many retirees, the greatest appeal of annuities is the promise of dependable income. Unlike the ups and downs of the market, an annuity can create a consistent paycheck that lasts for a set period or for life. This reliability often helps people feel more at ease about covering essential expenses such as housing, healthcare, and day-to-day living costs.
Another benefit is longevity protection. One of the hardest questions in retirement planning is, “What if I live longer than I expect?” An annuity that pays for life ensures that your income continues as long as you do.
Annuities also offer tax-deferred growth during the accumulation phase, which means your earnings are not taxed until you withdraw them, allowing them to compound more efficiently over time.
Where Annuities Fall Short
While annuities can create peace of mind, they do have limitations that are important to understand.
Liquidity constraints are one of the most common challenges. Once your money is inside an annuity, you generally can’t access large sums without facing penalties or surrender charges for a set period.
Some annuities also come with fees or costs, such as administrative charges or the cost of optional riders. These fees are not inherently bad, they often pay for valuable guarantees, but you should know exactly what you are paying for and why.
Finally, some types of annuities, such as variable annuities, expose you to market risk, which can lead to fluctuating payments or lower returns if the market underperforms.
How to Decide If an Annuity Fits Your Needs
The question is not whether annuities are good or bad but whether they suit your specific goals and comfort level. If having a guaranteed source of income brings you peace of mind, or if you want to reduce the risk of outliving your savings, an annuity can be worth considering.
However, if you value access to all of your funds at any time or already have enough predictable income from pensions and Social Security to cover essentials, an annuity may not be necessary.
The key is matching the product to your priorities. That is where guidance from a fiduciary advisor becomes invaluable, someone who can help you weigh the benefits against the trade-offs for your personal situation.
If you are thinking about how an annuity could support your retirement income, contact Troy for a conversation. Together you can evaluate the pros and cons in light of your goals and determine if an annuity makes sense for you.
Disclosure: This information is for educational purposes only and is not intended as a recommendation to purchase or sell any annuity or other product. Products involve risks, fees, and surrender charges that may not be suitable for all investors. Guarantees are subject to the claims-paying ability of the issuing insurance company