Pros And Cons Of Annuities
There Are Pros And Cons Of Annuities
What Is An Annuity
Before discussing the pros and cons of annuities you need to define annuity. Even though financial guru’s make it seem complicated and you may feel like you need a class on annuities for dummies, an annuity definition is quite simple. You buy a contract from an insurance or investment company; when you want to start your payout the company holding your contract agrees to pay you a stream of income. Since there are different types of annuities, it all depends upon your personal financial situation if you are trying to decide between annuities good or bad.
Annuities Pros And Cons
You can buy a variable or fixed annuity. The payouts from a fixed annuity are more stable, the payouts are guaranteed and you lock-in to the same payout amount. Some investors like that guarantee however dislike the effect inflation can have on their locked-in payout. Of course you can buy the inflation protection option if you too like the guaranteed payout of a fixed annuity but worry about inflation eroding your investment.
A variable annuity payout is less stable and the payouts are not locked-in. This is due to the fact that variable annuities are invested in the stock market. So the potential for a better rate of return is there and you generally avoid inflation risk but you do run the risk of market ups and downs.
One great benefit that attract investors who are close to retirement is the longevity benefit that annuities offer. The number one concern of most retirees is the risk of outliving their retirement assets. The stream of income offered by annuities ease that concern because they provide the cash flow for as long as you determine you need it. You can structure an annuity payout to continue paying until you or your spouse dies. You can structure it for a certain period of time. You can defer the payout period or start it immediately. The choice is yours and depends upon your personal financial situation.
Keep in mind that the fees and expenses charged by insurance and investment companies can add up. Which is one of the reasons many people shy away (or run) from annuities. But before you decide, do your research. Some of the fees you need to be aware of and ask about include mutual fund fees (for a variable), monthly maintenance fees, death benefit fees, early withdrawal fees and commissions.