Should You Switch to an Annuity From Your Standard Retirement Plan?

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Using annuities is a popular way of managing money in retirement, but are they for you? Used properly, an annuity can ensure you have guaranteed income for the remainder of your life. But if you use an annuity wrongly, you could lose access to a lot of your cash. Here are some things retirees should know about annuities before purchasing them.

Determine Whether an Annuity Would Help You

The great advantage of annuities is a steady income for the rest of your life, or at least a decade or two, depending on the product. Many seniors prefer the peace of mind that comes with knowing their Social Security payment plus an annuity payment will always give them enough money to cover their basic expenses. An annuity is a strong shield against the swings of the market. The downside is that once your money is in an annuity, it’s very difficult to get it back except through the scheduled payments.

If Social Security isn’t going to bring in enough money for you to cover your basic expenses, using part of your nest egg to buy an immediate annuity to make up the difference is a smart choice. That leaves the rest of your retirement income open for sudden expenses or just enjoying retirement. That said, if you have a lot of money already saved up, you may not need the guaranteed payouts that an annuity can provide.

Investigate Fixed Annuities First

Many annuity brokers prefer variable annuities because the brokers themselves can earn a higher commission, but a fixed annuity may be better for you. A fixed annuity locks in the amount of your payouts at a guaranteed rate. It doesn’t fluctuate like a variable annuity will. Of course, that also means that if the market does really well, you won’t be able to take advantage of the upswing.

Fixed annuities have lower fees than variable annuities. If you want to ride the market, you’ll need to make sure that the increased fees for a variable annuity don’t eat too much into what you would gain. Shoot for a fee rate of 1.5 percent if you can, and don’t go above 2.5 percent.

Consider Longevity Annuities

If you have a lot of money now, but you’re worried about outliving your funds, you might want to consider a longevity annuity. This is a fancy term for a deferred annuity bought late in life. Your payouts wouldn’t start until 10–20 years after you buy the annuity. That way, if you lived longer than you expected, you’d still have a guaranteed stream of income. If you or your spouse is likely to have a long life and you don’t have immediate money worries, you may want to consider buying a longevity annuity as an insurance policy.

Annuities have their place in a retirement portfolio, but as with purchasing any financial product, you need to be aware of the terms and conditions. Take the tips in this article to heart and do your research before buying an annuity.

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