Retirees, Here's What to Consider When Buying an Annuity

Annuities are sometimes touted as a solution for retirees concerned about outliving their savings. But these products can be complicated.

A man does some calculations.
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Saving for retirement is daunting enough without inflation throwing retirees a curve ball. Inflation soared in 2021, rising 6.8% year-over-year in November, the highest since 1982, according to government data. "When prices are going up, there's less margin for error," says Wade Pfau, a professor of retirement income at The American College of Financial Services. "Where you might have had surplus in your budget before, now there isn't that room to absorb a less-than-ideal investment."

Annuities are often pegged as the ideal solution for someone worried about outliving savings, but even they can come up short. Retirees turn to annuities for an immediate or future stream of guaranteed income in exchange for a lump sum or periodic payments to an insurer. The money invested in an annuity grows tax-deferred, but the payments you receive are taxed as ordinary income.

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David Rodeck
Contributing Writer, Kiplinger's Retirement Report