When you think of retirement, what does that look like to you?
Annuities are products that provide a fixed income stream. They are highly customizable and can offer tax advantages, payment periods tailored to your needs, protection against losing your initial investment and options to transfer money to your beneficiaries. Consumers often use annuities to guarantee income for life and to help fund retirement. Annuities can be optimized for income or long-term growth; however they are not short-term investment strategies. These products appeal to people whose objectives include long-term financial security, retirement income, diversification and principal protection.
More specifically, an annuity contract is a legally binding, written agreement between you and the insurance company that issues the contract. This contract transfers your longevity risk — the risk of you outliving your savings — to the insurance company. In exchange, you pay premiums as outlined in the contract.
People buy annuities to create long-term income. While most often considered financial solutions for older people who are close to retirement, annuities can benefit investors of any age with a variety of financial goals.
Reasons to buy an annuity include:
• Long-term security
• Tax-deferred growth
• Principal protection
• Probate-free estate distribution
• Inflation adjustments
• Death benefits for heirs
Some consumers see sacrificing liquidity in return for lifetime financial security as a disadvantage. Indeed, if your financial status or short-term goals limit the amount of cash you have on hand, an annuity is probably not the right solution for you. It wouldn’t make financial sense to purchase a valuable, practical product if it’s not valuable and practical for you. Investors and retirees need to assess opportunity costs as they relate to their specific circumstances. It is less likely that people in this age group would consider opportunity costs a disadvantage of an annuity.
Do annuities meet my financial objective and goals?
For many investors, the main objection to annuities is the risk of losing access to their money for the length of their contract. This means that in addition to the possibility that you won’t be able to cover unexpected expenses, you may miss the opportunity to take advantage of higher interest rates or to invest in the stock market.
This is where your understanding of your long-term goals comes in. Your decision to purchase an annuity should be in alignment with your goals, and you should be comfortable with having your money locked down for a modest payout in exchange for guaranteed lifetime income.
To reduce your opportunity cost, consider a partial investment upfront. This will allow you to reserve some of your savings for unplanned expenses and give you the ability to capitalize on a potential rise in interest rates.
