{"id":13756,"date":"2022-07-27T10:42:07","date_gmt":"2022-07-27T15:42:07","guid":{"rendered":"https:\/\/johnsonwim.com\/?p=13756"},"modified":"2022-08-01T13:05:22","modified_gmt":"2022-08-01T18:05:22","slug":"pros-and-cons-of-annuity-investments","status":"publish","type":"post","link":"https:\/\/johnsonwim.com\/pros-and-cons-of-annuity-investments","title":{"rendered":"Pros and Cons of Annuity Investments"},"content":{"rendered":"

If you are worried about paying for retirement, it is worth evaluating the pros and cons of annuities.<\/strong><\/p>\n

Annuities are a great way to help provide guaranteed lifetime income in retirement while hedging against inflation and other financial woes. Which is why financial advisors and Fiduciaries<\/a> alike have long recommended that their clients invest retirement money in annuities. However, the criticism leveled at this practice usually focuses on high commissions paid to salespeople, along with stiff fees charged to annuity owners year after year.<\/p>\n

Here\u2019s a rundown of the pros and cons of annuities, compared with other ways to invest for retirement.<\/p>\n

How Annuities Work<\/b><\/h4>\n

An annuity is a contract between an individual and an insurance company. Annuities are investment vehicles structured to help pay a stream of income for a preset number of years, such as 10 or 20; or the life of the annuity owner. When the owner dies, any money remaining in the account typically belongs to the insurance company. However, even if they live to be over 100 years old, the insurance company still has to keep those regular payments coming.<\/span><\/p>\n

An immediate annuity begins making monthly income payments almost instantly. A deferred annuity starts making payments at some point in the future, typically during retirement. The dollar amount of those payments depends on various factors, including the balance in the account and the age of the investor.<\/span><\/p>\n

Pros and Cons of Annuities<\/b><\/h4>\n

Annuities can be fixed or variable. In a fixed annuity, the insurer guarantees to pay a specified rate of return on the investor\u2019s money. In a<\/span> variable annuity,<\/span><\/a> the insurer invests the money in a portfolio of mutual funds chosen by the investor, and the return will fluctuate based on their performance. <\/span>Here\u2019s a look at the pros and cons of annuities.<\/span><\/a><\/p>\n

Pro – Guaranteed Income<\/i><\/strong><\/p>\n

An insurance company is responsible for paying the income it has promised, regardless of how long the annuity owner lives. The company’s promise is only as good as the insurer behind it, which is why investors should only do business with companies that receive high ratings for financial strength from the major independent ratings agencies.<\/span><\/p>\n

Pros – Assistance with Money Management<\/i><\/strong><\/p>\n

Variable annuities may offer a number of professional money-management features for investors who’d rather leave that work to someone else. These include periodic portfolio rebalancing and the ability to invest in a range of asset classes, including stocks, bonds and real estate<\/a>.<\/span><\/p>\n

These features can be particularly appealing to those who are looking for an easy way to invest in a diversified portfolio without having to do all the legwork themselves.<\/span><\/p>\n

Pro – Customizable Features<\/i><\/strong><\/p>\n

Annuity contracts can be customized to suit a buyer’s needs. For example, a death benefit provision can help ensure that the annuity owner’s heirs will receive at least the original amount of money invested in the annuity in the event of his or her death.<\/span><\/p>\n

A guaranteed minimum income benefit rider helps ensure a certain payout regardless of how well the mutual funds in a variable annuity perform. A joint and survivor annuity provides continued income for a surviving spouse, but it also costs more.<\/span><\/p>\n

Pros – Inflation Protection<\/strong><\/em><\/p>\n

As mentioned in the previous point, you can customize annuities to help ensure that your monthly paycheck will keep pace with the cost of living. This is critically important because inflation can have a devastating effect on your assets. The downside of an add-on like inflation protection is that it will cost more \u2013 either in initial costs or in lower payouts when you begin to collect.<\/p>\n

Cons – High Commissions<\/i><\/strong><\/p>\n

Annuities can be a great tool for investors. But it’s important to know the difference between annuities and mutual funds, and why the commissions for selling annuities are almost always higher than those for selling mutual funds.<\/span><\/p>\n

Say an investor rolls a $500,000 balance in their 401(k) into an individual retirement account (IRA). If that money is invested in mutual funds, the financial advisor may charge roughly 2% as commission. This is if it’s invested in an annuity that holds the same or similar mutual funds. However, the advisor could always charge more.<\/span><\/p>\n

Because annuities are more profitable for advisors, many of them will direct their clients into them. A $500,000 rollover into mutual funds would pay the advisor a $10,000 commission at most, while the same rollover into an annuity could easily pay the advisor $25,000 to $35,000 commission. Because of this, it is important to get multiple quotes from different companies before deciding on an annuity provider.<\/span><\/p>\n

Cons – Tax Penalties<\/i><\/strong><\/p>\n

If you are under age 59\u00bd and receive the annuity payments, you may have to pay a 10% early withdrawal penalty on any money you take out. This is in addition to the income tax on the withdrawal.<\/span><\/p>\n

Income received from a pension or annuity contract is fully taxable if you have no investment in the contract.<\/span><\/a> This can happen if any of the following situations apply:<\/span><\/p>\n