Once of the most common complaints that people have with planning their retirement is that they don’t know where to invest to get the money that they need. Perhaps they’ve accumulated some money in their nest egg and as their planned retirement date comes they worry about having the income.
For some baby boomers, using annuities as part of their retirement plan may be the way to go.
What are Annuities?
There are several types of annuities, but the main gist of it is that you give a principle sum to the annuity company and they guarantee a fixed amount (single premium immediate annuity or SPIA) or an amount based on a benchmark for the rest of your life (single premium immediate variable annuity). They can provide a predictable stream of fixed income.
Advantages of Annuities
The main advantage of annuities for most people interested in them is that annuities reduce some of the risks with retirement.
One risk that some investors find themselves worrying about is wondering whether the amount they’ve saved will last long enough. With better health care, many are living longer, which means that the money has to be large enough to cover one’s lifespan.
Market uncertainty is also another concern of many investor, especially as they get closer to retirement. Annuities are guaranteed for the rest of one’s life, so there is an element of consistency that is reassuring for some people.
Disadvantages of Annuities
For all the benefits of annuities there are some drawbacks to consider. When you purchase an annuity, you can not pass it on to your heirs.
For some soon to be retirees the solution to this is just use a portion of their retirement nest egg for an annuity. They can get some certainty with their income and still a portion available to leave to their heirs.
Deciding If Annuities are Right for You
You have to weigh the pros and cons of using annuities for yourself. For some retirees they find that annuties can give them some predictability that they’d want.
If you do decide to set aside a portion of your retirement savings for annuities, please check that the company you work with is financially sound. There are ratings agencies that you can use to check – Moody’s, Standard and Poor’s, and A.M. Best.
Even if your company is currently in good standing, as a matter of precaution you should also check with your state about their guarantee association coverage should the company become bankrupt. You want to protect your money, especially as you approach retirement.
I’d love to hear from you. How many of you are thinking about retiring in the next 10 years or so? Have you though about the pros and cons of having annuities in your retirement plans?
Disclosure: Post includes information sourced from Genworth Financial