With the 2008 financial crisis still fresh in some minds, one of the questions many are asking is this: Is there a way for me to protect my nest egg from market drops during retirement? One of the financial tools receiving a second look right now is the annuity. However, annuities have something of a bad name right now because so many of them are complex and costly.
But that doesn’t mean that all annuities are bad, or that no one should ever get one. There are some annuities worth considering, and some retirees, with the right annuity, can do well incorporating one into the retirement strategy.
One of the types of annuities gaining in popularity is the fixed indexed annuity. This is an annuity that promises a fixed rate of return (usually pretty low), but that also leaves the door open for greater returns because the annuity follows an index. So, you are protected from loss because there is a minimal rate of return, but at the same time there is room for you to see better returns because the annuity’s performance is connected to how a specific index performs.
You can choose to invest in the annuity before retirement, and build up to a payout later, or you can choose to get an immediate annuity. With an immediate annuity, you take part or all of the money in your retirement account and use it to purchase an annuity which begins offering regular payouts immediately. You have a fixed income stream now, and it can be used to fund you during retirement.
Things to Consider Before Getting an Annuity
Of course, an annuity isn’t for everyone. Before you agree to an annuity, you should consult with a knowledgeable and trusted financial professional. (Be wary of those pushing a specific annuity product, and receiving a commission for it.) You should consider the risks associated with annuities, as well as some of the complicated surrender policies and inheritance policies that come with some annuities. Here are a few things to keep in mind as you consider annuities:
- Stability of the company: Annuities are offered by insurance companies. If the insurance company goes down, you risk losing your money. A minimum guaranteed rate of return is no good if the insurance company goes down. There are some state funds that offer insurance against this sort of loss, but you do need to be careful. Check ratings and determine the strength and stability of the company.
- Costs: All annuities come with fees. However, some annuities have higher fees than others. Find out about total yearly costs, as well as costs associated with mortality and other issues. You might need to pay additional fees for extra features.
- Inflation adjustment: Find out if the minimum guaranteed return will be adjusted for inflation. A 2% guaranteed annual return still results in a loss of spending power if inflation is at 3% or 4%. Look for annuities that offer inflation adjustments.
- Surrender period: Make sure you are clear on this, and the terms of how you can withdraw money from your annuity. Otherwise, you might find yourself racking up extra fees.
Like many financial products, annuities aren’t all bad. They are worth considering, and, when used properly, they can provide you with a way to ensure retirement income.