Is An Income Annuity A Good Investment?

Retirement is that looming horizon you have likely been thinking about for your entire working life. Whether you are just shy of the start of your retirement years or you are looking decades into the future, it is important to fully consider all of the options that could support you later in life.

When envisioning retirement accounts, stocks and bonds are the typical first consideration; however, annuities shouldn’t be overlooked. Income annuities can be a powerful and reliable method of ensuring that you always have a reliable income. Are they a good investment? Here is what you need to know to make that determination.

What Is an Income Annuity?

An income annuity is a type of financial product that pays out a set amount on a predefined schedule. Most annuities are funded with a single lump sum. The annuity will then spread your payments out across your anticipated lifespan.

You can select annuities that begin immediately, or you can fund them years in advance with a scheduled start date. Once they begin paying out, you will receive those payments on the timetable established when you signed the contract. This could come monthly, bimonthly, quarterly, or sometimes even annually.

Unlike stocks and bonds, annuities are not tied to the market. For some, this is an advantage since it shields you from volatile shifts that could reduce your net worth. For others, missing out on the potential for significant growth during a bull market makes them hesitant about their value. Thus, annuities can be the right choice in certain circumstances, and for certain people.

When Annuities Are a Good Choice

To understand whether an annuity is the right retirement vehicle for you, consider:

1. Your Risk Tolerance

Because annuities do not base their value or your income on the stock market, those with a low risk tolerance could benefit from an income annuity. You can always rest assured that you will receive the same amount of money in each payment, and your payments will continue for the rest of your life. This consistent stream of income also makes planning easier.

2. Your Other Retirement Accounts

An annuity can certainly function as the only part of a retirement plan, but those who have already maxed other vehicles such as 401(k)s and IRAs are in an even better position to select an annuity. Income annuities are useful places to secure money when other accounts are already at their limit.

3. Your Life Expectancy

Income annuities are especially useful for those who are concerned about outliving their retirement. Your annuity will never run out, no matter how long you live. Compare this to investing in the stock market where you may see impressive gains but also dramatic losses that could siphon away your money until you have nothing left. If you want to be sure that you will have a steady stream of income until you pass away, an income annuity could be right for you.

Things You Need to Know

Annuities provide a fair share of benefits, but there are also some details you need to be aware of before you commit.

1. Modest Returns Only

Because income annuities are not primarily investment vehicles in the traditional sense, they will not experience growth potential as is possible with stocks. You can rest assured that you will always receive income, but you should not plan for that income to increase as a result of a growing balance.

2. Limited Fund Availability

Annuities are meant to be a vehicle to store your money and never touch it again. If you need cash, the process of withdrawing money back out of a funded annuity can be complex or even impossible, and you may be charged fees to do so. Compare this to a brokerage account, where you can cash in investments at any time.

3. Death Benefit Not Always Included

If you still have money in your annuity when you pass away, not all products automatically pass that money on to inheritors. It is possible to purchase a product with an included death benefit or add a rider that grants this option, but be aware that it may take extra work from you to secure the ability for an annuity to be inherited or used by other family members.