For most individuals, retirement planning is largely a self-directed exercise. Once we set up our 401(k) and IRA accounts, we are responsible for deciding what to invest in, how long to hold those investments, and how to change our investment strategies over time. Even if we solicit help from an investment advisor, the decisions we make within these types of accounts are our own.
But there’s also another retirement related investment product that doesn’t require the same degree of decision-making on our part – the annuity.
There are different types of annuities available, so here are some terms and retirement advice for understanding the differences and deciding what’s best for you.
Annuity Basics. An annuity is essentially a contract that you enter into with an insurance company or other financial entity. Your annuity contract will require you to make certain payments to the insurance company, and in exchange they agree to make certain payments to you at some point in the future.
Deferred Annuities Versus Immediate Annuities. As you might imagine, there are a number of different annuity products to choose from. A deferred annuity is one in which you won’t start to receive payments back from the insurance company until some point in the future. For example, a retirement saver might purchase a deferred annuity at age 40, where they will begin to receive payments back from the insurance company until they reach age 65.
On the other hand, an immediate annuity begins its payment stream as soon as the investor makes all of the payments that are required under the contract. The immediate annuities are more suitable for individuals that are at or very near the retirement age.
Fixed Annuities Versus Variable Annuities. Another significant distinction in annuity types is the difference between fixed annuities and variable annuities. Fixed annuities provide you with a guaranteed payout stream, meaning that the amount of each payout is specified. In contrast, variable annuities will be tied to the overall performance of a broad market or predefined group of investments, meaning that the payments you receive can go up or down depending on how those investments perform.
Payout Options. There are also various payout options for different types of annuities. Some make payments for a specific number of years (on a monthly, quarterly or annual basis), while other payout streams can last for the remainder of your life. Selecting a different payout option will impact how much each payment will be.
Watch Your Expenses. Not surprisingly, because annuities offer such a low stress and full-service approach to retirement investing, the fees are higher than other investment options. There is certainly a wide range of these structures, and these are largely dependent on the type of annuity you choose, as well as your age and selected payout option. Annuities shouldn’t be automatically dismissed as an investment option because of their higher fees, but it is important to make sure that you are not paying too much for whatever product you choose.
While it’s generally not thought to be a good idea for annuities to comprise the bulk of your retirement planning, they can have a strong supporting role in many savers’ portfolios.
For most individuals, retirement planning is largely a self-directed exercise. Once we set up our 401(k) and IRA accounts, we are responsible for deciding what to invest in, how long to hold those investments, and how to change our investment strategies over time. Even if we solicit help from an investment advisor, the decisions we make within these types of accounts are our own.
