An annuity is an investment baked into an insurance policy. You pay a premium, either all at once or over time. The insurer invests that cash, and in return pays you a guaranteed monthly, quarterly or annual payment starting at a specific time and lasting a set number of years or for the rest of your life. There is often a 10% penalty for withdrawal before age 59½.
Is an annuity a good choice for your retirement?
Guaranteed payments are appealing if you’ll be paying a large fixed expense like a mortgage in retirement or if you worry about running out of money in old age.
Pros:
You get a set payment you can count on.You can choose an annuity that pays until you die, or until you and your spouse have both died.You can choose an annuity with a death benefit, which lets you name beneficiaries to receive any unpaid funds.Some types of annuities can help high-income investors looking for a tax deferral who have already maxed out contributions to their 401(k) and IRA accounts.
Cons:
Inflation will erode the buying power of a set payment amount over time.You have limited (or no) say in annuity investments.You get a set return and the insurer keeps the difference if the investments do well, although some types of annuities have payments that fluctuate depending on investment performance. Read more on that below.Fees are higher than IRA fees and carry potential “surrender” charges if you terminate your policy.
But perhaps the biggest drawback to annuities is their complexity.
What to know before buying an annuity
Annuities can come in a wide variety of models, with varying time frames, payment amounts and lengths. These layers of complexity can make them hard to understand.
Some different annuity types include:
Fixed annuity: You pay a premium, then after a period of time, you get payments for a fixed dollar amount.
Variable annuity: Allows you to choose some investment options for your premium, such as mutual and bond funds. Sometimes minimum loss or growth rates are set.
Equity-indexed annuity: Will track to some degree a stock index like the S&P 500 and guarantee minimum interest payments.
Annuities are said to be “more sold than bought,” that is, brokers may be eager to sell annuities because they carry high commissions, rather than because they’re a great fit for the client.
For more information about Annuities call JCT Insurance Agency at (626)354-2000 or email jctfinancialsvc@gmail.com