Should you Purchase an Annuity?

Posted by Richard on November 13, 2013

 

If you are retiring soon and looking into your options to start drawing down your savings from your employer-sponsored plan, you may have the opportunity to purchase an annuity. Annuities, simply put, help you ensure that you’ll have enough income to last a lifetime.

Understanding Annuities

Annuities are contracts offered by insurance companies that pay a stream of monthly payments in exchange for a premium. An immediate annuity is one in which you receive payments right away. A deferred annuity is one where you purchase a contract, but don’t receive payments until after a set period of time.

There are many different types of annuities. Some of the most important differences between them have to do with the length of time over which the payments are made, and whether they are fixed rate or variable rate.1

With respect to the length of time, among the most important annuity types are:

• Lifetime annuities, which make payments until the annuitant dies.

• Joint and last survivor annuities, which make payments until the second of two people dies.

• Guaranteed term annuities, which make payments for a guaranteed period, even if the original annuitant has died (with the remaining payments going to a designated beneficiary).

• Period certain annuities, which offer a payout guaranteeing that the annuitant or their beneficiaries will receive income for at least a minimum period, typically 5, 10, or 20 years.

While annuities reduce the risk that you will outlive your savings (and suffer a drop in your standard of living), they do so at a cost. They reduce the amount of money you have available for precautionary savings and bequests. Additionally, they are not liquid — once you have purchased one, it can be expensive or impossible to change your mind later. For this reason, using a portion of your savings to purchase an annuity may be most attractive when:

• You (and your spouse) expect to live for many more years.

• You have relatively low income from other annuities (e.g., from defined benefit pension plans).

• You are relatively more averse to risk.

Which One Is Right for You?

Whether the amount of the annuity is right for you — or even if you should annuitize — involves a lot of issues, such as your other assets, savings, income, and taxes. If you’re only taking care of yourself, the lifetime payment option might be a good choice. If there are other people counting on the income, you’ll want to look into the other options.

Regardless of your decision, here are three key factors to keep in mind.

1. Comparison shop. Payment rates will differ significantly from insurer to insurer. Look carefully at the fees and expenses. Examine the rates and terms they offer.

2. Find a reputable company. Investigate the stability and financial strength of the companies you are thinking of purchasing from. You expect them — and need them — to be in business for a long time.

3. Watch for additional costs. At their core, immediate annuities are a very simple product, but extra features come with additional costs. Be sure to read through the fine print.

Source/Disclaimer:

1 Variable annuities are long-term, tax-deferred investment vehicles designed for retirement purposes and contain both an investment and insurance component. They are sold only by prospectus. Guarantees are based on the claims-paying ability of the issuer and do not apply to a variable annuity’s separate account or its underlying investments. The investment returns and principal value of the available subaccount portfolios will fluctuate so that the value of an investor’s unit, when redeemed, may be worth more or less than their original value. Withdrawals made prior to age 59½ may be subject to a 10% IRS penalty. Surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal.

Required Attribution

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2013 S&P Capital IQ Financial Communications. All rights reserved