Is an Annuity Right for You? Here’s What You Should Know

Contracts can be confusing, and costs can add up fast if you’re not careful, but the right annuity can still be a good income strategy for the right person.

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If you’ve been considering adding an annuity to your retirement plan, you’ve probably noticed that opinions vary widely as to whether it’s a good strategy.

Many people, potentially including some knowledgeable financial advisers, think annuities can play a vital role in retirement — especially if you need to shore up a shaky income plan. But others may argue that annuities often don’t live up to the hype, and consumers aren’t always sure about what they’re getting before they are persuaded by a sales pitch.

Both sides can be right.

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Annuities can be an appealing option for those who want or need a dependable, long-lasting income stream — in retirement or otherwise. But the contracts can be confusing, the costs can be high and sometimes hidden, and all annuities are not created equal.

What is an annuity?

An annuity is a contract you make with an insurance company. You buy an annuity by making a single upfront lump-sum payment or a series of payments. The insurance company then puts that money into an investment strategy designed to help you grow wealth for the future. Later, usually when you decide to retire, the insurance company will begin making payments based on the terms of your contract. You might receive payments monthly, semi-annually or annually, or you could get one lump-sum payout.

Sounds simple, right? You can use an annuity to help create a guaranteed income stream or to help build more wealth for retirement.

But there are several types of annuities, including variable annuities, fixed annuities and indexed annuities. Each works a bit differently and has a varying amount of risk. Adding optional “riders,” or upgrades, also can make purchasing an annuity more complex — and add to your cost. So it’s important to do your homework and/or consult with an adviser you trust before you add an annuity to your financial plan.

Could an annuity be a good choice for you?

Absolutely. Here are just a few ways you could potentially benefit from purchasing an annuity:

Annuities can help provide stable, predictable income. Any investment comes with a certain level of risk. But with some annuities (a fixed annuity or a “hybrid” fixed-index annuity, for example), your contract should include certain guarantees that you won’t lose money. This means you can count on your annuity payments to help supplement your other reliable income sources, such as your Social Security benefits or a workplace pension.

You can use an annuity to help diversify and reinforce your overall portfolio. Investing in a variety of financial products and strategies can help you better withstand market volatility and reduce the potential for loss. This should be a critical goal as you transition from accumulating money for retirement to protecting what you’ve saved.

Your contributions can grow tax-deferred. Much like a 401(k) or similar workplace plan, you won’t pay income tax on the earnings from an annuity until you start making withdrawals. But unlike a 401(k), there are no annual contribution limits on the amount of after-tax money you can place in an annuity. And you won’t have to worry about taking required minimum distributions (RMDs) after age 73 — unless your annuity is part of an IRA or retirement plan. (If you withdraw from an annuity before you turn 59½, however, you may face a 10% penalty.)

You can personalize your annuity to fit your financial needs and goals. You can customize an annuity in a variety of ways, depending on whether you want to focus on creating a steady income source or grow your money for the future. Riders are also available that can help pay for long-term care or help provide income or other benefits to your spouse or other beneficiary. The types of riders available vary based on the type of annuity you’re buying.

Some things to be careful about when considering an annuity

A good place to start when considering adding an annuity to your plan is to establish your goals.

You’d be surprised how many people may skip this important step, which can help determine which type of annuity — if any — would be a good fit for you. If you choose to purchase an annuity, here are some things to keep in mind:

How much will the annuity cost? It can be easy to get carried away when customizing an annuity with various riders, or when you’re considering the potential return you might earn. Stay focused on what you want the annuity to do and try to keep value top of mind. Make sure you understand any fees or commissions you might pay and how those could affect your bottom line. Then weigh the true benefits of the annuity against other investment options (bonds, CDs, mutual funds, etc.) before making your choice.

When will you need your money? Annuities typically aren’t meant to serve as an emergency fund or short-term investment. Be clear about what will happen (including surrender costs) if you have to withdraw your money sooner than planned. And think about whether you’re willing and able to give up the flexibility that other investment options might offer.

Will the insurance company selling the annuity be able to live up to the contract? Your annuity is only as good as the company behind it, so look into the issuer’s reputation and credit rating.

Feeling overwhelmed?

An annuity can be a useful addition to a financial plan. Finding your way to the one that’s right for you, however — and sorting through all the decisions to be made — can be time-consuming and frustrating.

You could avoid much of that work by enlisting the help of a properly licensed and credentialed financial adviser. But even if you’re sure you know what you want, it’s a good idea to review your choice with a professional before moving forward.

Kim Franke-Folstad contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger was not compensated in any way.

Insurance products are offered through the insurance business Generations Retirement Group, LLC. Generations Retirement Group, LLC is also an Investment Advisory practice that offers products and services through AE Wealth Management, LLC (AEWM), a Registered Investment Adviser. AEWM does not offer insurance products. The insurance products offered by Generations Retirement Group, LLC are not subject to Investment Advisor requirements. Investing involves risk including the potential loss of principal. Any references to protection benefits, safety, security, and lifetime income generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. The information and opinions contained herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Generations Retirement Group, LLC. 2189273 -1/24

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

David S. Corman
Investment Advisor Representative and President, Generations Retirement Group

As an Investment Advisor Representative and president of Massachusetts-based Generations Retirement Group, is committed to helping his clients navigate the stumbling blocks that can get in the way of enjoying a fulfilling retirement. The firm is dedicated to all aspects of retirement planning, including Social Security optimization, income planning and investing. David Corman is co-author of the book Plan Now. Retire Well.