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Examining the Pros and Cons of Annuity

Examining the Pros and Cons of Annuity

For people worried about retirement payment, it is essential to examine the pros and cons of an annuity.

An annuity is a type of insurance that gives payment. There is a payment that one makes as an investment in the annuity, which in turn gives you payment. With this, you get a guaranteed retirement stream when you retire. 

Annuity Pros 

There are considerable benefits that annuity has over other retirement investment types. These investments make it suitable for people who do not want to lose part or all of their retirement savings. Here are the pros of an annuity:

Lifetime Income: when you go for an immediate lifetime annuity contract, there will be periodic payment for you as long as you are alive. The insurance company providing the annuity bears the risk of you living longer and happily.

This is similar to retirement protection that comes from pension and social security, even though they pay a limited dollar amount. Your monthly annuity is only limited by what you purchase. Many retirees get a more significant income as they grow older, even for the same price. 

Protection from Inflation: it is possible to customize annuity to ensure that what you get every month corresponds to your cost of living. This is critically essential as Inflation can wreck your asset. This annuity type has a disadvantage of higher cost in that you either get a lower payout when collecting or pay more initially. 

Protection of your principal: all fixed and equity-indexed annuity enjoys the advantage of having the annuity value guaranteed at or more than the invested amount. In other words, you or your beneficiaries will get a value corresponding to what you invested. 

Tax Efficiency: You can save money on taxes by buying an annuity with retirement savings that qualify like IRA or 401(k) funds, compared to going for a lump sum payment. It is possible to roll over funds that are eligible into a qualified annuity with no tax penalty. The tax only applies to the annuity income.

Predictability: Oh, what a happy feeling knowing your income to cover your entire expenses is guaranteed. This sort of predictability comes with a lifetime annuity. On the contrary, if you have to withdraw from investment to foot expenses during retirement, the anxiety level will be higher. 

All in all, an annuity provides a guaranteed way to have a better quality of life during your golden years. With your retirement assets, you can use them to buy guaranteed income that will last you for as long as you are alive. Besides, such payment enjoys protection from Inflation and other financial uncertainties.

Cons of Annuities 

Before rushing off to get yourself an annuity, it is wise to be aware of the drawbacks as discussed below:

All Annuities are not Created Equal: according to the financial planning community, some annuity, especially fixed annuity, is the best for many seniors in their golden years, as it gives guaranteed income. However, other annuity products are not so great as many advisors classify them as unnecessary and expensive. This makes it essential to understand the terms of an annuity before buying. 

Lower Return on Investment: While annuity will give you an income in retirement, you will, however, let go of the opportunity to make better returns by investing in other assets like stock. Many people love annuity due to the save and risk saving feature; however one will have to forgo possible gains that apply to a riskier investment.

High Costs: many people complain about management fees and sales commissions in the annuity. Besides, the cost of an annuity could be too high. This makes it necessary to ask around when you want to buy an annuity to know what you will get. 

Absence of flexibility: compared to other retirement plans, annuities are not flexible. As soon as you buy an annuity, your money is tied up with it, making it impossible to access such cash.

Advice from some financial planners is that one should reserve not less than 40% of retirement assets for unplanned expenses. The idea behind an annuity is to give steady income during retirement, which makes them unsuitable for covering sudden and massive costs.


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