Is an Annuity a Good Choice for You? Questions to Ask
Find out if you’re a good candidate for an annuity, and if so, which kind you might want to consider.
You are now subscribed
Your newsletter sign-up was successful
Want to add more newsletters?
Delivered daily
Kiplinger Today
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more delivered daily. Smart money moves start here.
Sent five days a week
Kiplinger A Step Ahead
Get practical help to make better financial decisions in your everyday life, from spending to savings on top deals.
Delivered daily
Kiplinger Closing Bell
Get today's biggest financial and investing headlines delivered to your inbox every day the U.S. stock market is open.
Sent twice a week
Kiplinger Adviser Intel
Financial pros across the country share best practices and fresh tactics to preserve and grow your wealth.
Delivered weekly
Kiplinger Tax Tips
Trim your federal and state tax bills with practical tax-planning and tax-cutting strategies.
Sent twice a week
Kiplinger Retirement Tips
Your twice-a-week guide to planning and enjoying a financially secure and richly rewarding retirement
Sent bimonthly.
Kiplinger Adviser Angle
Insights for advisers, wealth managers and other financial professionals.
Sent twice a week
Kiplinger Investing Weekly
Your twice-a-week roundup of promising stocks, funds, companies and industries you should consider, ones you should avoid, and why.
Sent weekly for six weeks
Kiplinger Invest for Retirement
Your step-by-step six-part series on how to invest for retirement, from devising a successful strategy to exactly which investments to choose.
Annuities can help you save for retirement, reduce risk, cut your taxes and guarantee a lifetime income. But they’re not right for everyone.
How can you tell if an annuity is right for you? And if one is, which kind would best meet your needs?
Deferred annuities — fixed, variable and fixed-indexed — help you save more for retirement while deferring taxes on earnings. Immediate annuities pay current income for people who need more income right away, usually retirees.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Ask yourself the following questions to decide whether an annuity is right for you:
- Do I have enough cash reserves to meet my expected needs? Most annuities tie up your money for a number of years. They’re thus appropriate only for people who can afford to set aside some of their money.
- Does it look like my Social Security and pension income (if any) won’t quite cover my expenses in retirement? Estimate how much income you’ll need in retirement. An annuity can fill a shortfall by paying a guaranteed lifetime income. Equally important, it can serve as longevity insurance — a hedge against the financial risk of living to a very old age.
- Will I need supplemental income for anyone else besides myself, such as a surviving spouse should I pre-decease them? If so, then the reliable income an annuity provides could be beneficial.
- Would I benefit from tax-advantaged savings? Most people will benefit, but if you’re in a low tax bracket, an annuity won’t be quite as compelling.
Once you decide that an annuity is right for you, these questions can help you decide which type or types will suit you best.
- When do I expect to need the annuity's income payments? If it’s right now or within a few months, you should be looking at an immediate annuity. If you’re saving for retirement years in the future, a deferred annuity makes sense.
- Will I be able to withdraw money from the annuity if I should need it? An immediate annuity usually has no liquidity, because your money has been converted into an income stream. Deferred annuities usually offer unpenalized access to some of your money. Different types have different amounts of liquidity.
- Do I want a guaranteed interest rate and guaranteed principal? If your answer is yes, then you’ll want a plain fixed annuity, which provides a set rate for a number of years, much like a certificate of deposit. This type of annuity is called a multi-year guaranteed annuity. Advantages over CDs include tax deferral and often a markedly higher rate of interest. Savers who are willing to commit their money for five years or longer as of mid-April 2021 can earn 2.90% or more, guaranteed and tax-deferred. See this summary of current annuity rates.
- Am I willing to risk losing principal for a chance of higher earnings? If so, then consider a variable annuity, which is much like a set of mutual funds within an annuity wrapper that provides tax deferral and optional benefit guarantees.
- Can I “have my cake and eat it too?” If that’s your goal, consider a fixed indexed annuity, which offers the potential for higher interest earnings while guaranteeing your principal. However, unlike a traditional fixed annuity, it pays a fluctuating interest rate, which can go as low as zero when the stock market declines. Also, there are caps on upside gains. Over the long term, a fixed indexed annuity stands a good chance of outperforming bonds, CDs and standard fixed annuities.
- When do I plan on using the money that's in the annuity? Immediate annuities begin making income payments shortly after purchase, while deferred annuities leave the funds inside your annuity to accumulate over time before converting to an income stream in the future. If you think you’ll need to use the funds before age 59½, a deferred annuity won’t be suitable because of tax penalties on early withdrawals. On the other hand, the longer you can leave your money in a deferred annuity, the more attractive it becomes, because tax deferral is powerful in the long term.
- What’s my risk tolerance/where is my money invested now? Your risk tolerance will depend on several different factors, such as your age, your investment time horizon, your retirement goals, and your comfort level with volatility. The good news is that annuities can offer a wide range of different options to choose from based on your specific risk tolerance, as well as the financial goals that you're trying to accomplish. If the bulk of your savings is in the stock market, consider a standard fixed annuity to reduce your risk profile. On the other hand, if almost all your money is in safe, no-growth holdings like bank accounts and money market funds, consider adding growth potential via a variable or fixed indexed annuity.
- Do I understand the tax implications? Annuities have tax advantages, but withdrawals of earnings are subject to ordinary income tax. Typically, you’ll be taking income from your annuity during retirement when your tax bracket will likely be lower. If you are purchasing the annuity contract for an Individual Retirement Account (IRA) or another type of retirement program, consult with a tax professional regarding eligibility and tax consequences.
-
Quiz: Do You Know How to Avoid the "Medigap Trap?"Quiz Test your basic knowledge of the "Medigap Trap" in our quick quiz.
-
5 Top Tax-Efficient Mutual Funds for Smarter InvestingMutual funds are many things, but "tax-friendly" usually isn't one of them. These are the exceptions.
-
AI Sparks Existential Crisis for Software StocksThe Kiplinger Letter Fears that SaaS subscription software could be rendered obsolete by artificial intelligence make investors jittery.
-
Social Security Break-Even Math Is Helpful, But Don't Let It Dictate When You'll FileYour Social Security break-even age tells you how long you'd need to live for delaying to pay off, but shouldn't be the sole basis for deciding when to claim.
-
I'm an Opportunity Zone Pro: This Is How to Deliver Roth-Like Tax-Free Growth (Without Contribution Limits)Investors who combine Roth IRAs, the gold standard of tax-free savings, with qualified opportunity funds could enjoy decades of tax-free growth.
-
One of the Most Powerful Wealth-Building Moves a Woman Can Make: A Midcareer PivotIf it feels like you can't sustain what you're doing for the next 20 years, it's time for an honest look at what's draining you and what energizes you.
-
I'm a Wealth Adviser Obsessed With Mahjong: Here Are 8 Ways It Can Teach Us How to Manage Our MoneyThis increasingly popular Chinese game can teach us not only how to help manage our money but also how important it is to connect with other people.
-
Looking for a Financial Book That Won't Put Your Young Adult to Sleep? This One Makes 'Cents'"Wealth Your Way" by Cosmo DeStefano offers a highly accessible guide for young adults and their parents on building wealth through simple, consistent habits.
-
Global Uncertainty Has Investors Running Scared: This Is How Advisers Can Reassure ThemHow can advisers reassure clients nervous about their plans in an increasingly complex and rapidly changing world? This conversational framework provides the key.
-
I'm a Real Estate Investing Pro: This Is How to Use 1031 Exchanges to Scale Up Your Real Estate EmpireSmall rental properties can be excellent investments, but you can use 1031 exchanges to transition to commercial real estate for bigger wealth-building.
-
Should You Jump on the Roth Conversion Bandwagon? A Financial Adviser Weighs InRoth conversions are all the rage, but what works well for one household can cause financial strain for another. This is what you should consider before moving ahead.
