The term “annuity” refers to an insurance contract issued and distributed by financial institutions with the intention of paying out invested funds in a steady income stream in the future. Investors invest in or purchase annuities with monthly premiums or lump-sum payments. The holding institution, which is typically an insurance company, then issues a stream of payments in the future for a specified period of time, or for the remainder of the investor’s life.
Annuities are designed to provide a secure, steady income in retirement, and can be used to supplement other retirement income sources such as Social Security or a 401(k). Annuities can alleviate the fear many retirees have of outliving their assets.
Annuities come in many different forms, including fixed, variable, indexed, and hybrid annuities, so it is important to understand the different types and how they work before investing.
The Pros of Adding Annuities to Your Portfolio
- Annuities provide a guaranteed stream of income for life, so you have peace of mind in knowing you will have consistent and reliable income in retirement.
- Annuities provide tax-deferred growth, so you can potentially accumulate more money than with other investment vehicles.
- Annuities provide flexible payout options, so you can customize the income stream to meet your specific needs.
- Annuities offer a death benefit, so your beneficiaries will receive a payout if you pass away before the annuity is depleted.
The Cons of Adding Annuities to Your Portfolio
- Annuities often come with large fees and charges, which can erode your savings over time.
- Annuities are not liquid investments, so you may have difficulty accessing your money if you need it.
- Annuities are not protected by FDIC insurance, so you could potentially lose some or all of your money if the company goes bankrupt.
- Annuities can be difficult to understand and comprehend, so you should make sure to thoroughly understand the terms and conditions before investing.
As with any investment product, those interested in annuities should do their own research and should seek out advice from their financial professional.
If you have questions about annuities or want to speak with our financial advisors to see how an annuity could fit into your financial plan, you’re welcome to schedule a complimentary consultation with our team.