Should I Buy an Annuity for Retirement?
Annuities can be a great vehicle for retirement, but it’s important to first determine what you goals are.
- Are you trying to make sure you don’t outlive your money?
- Are you looking for a safe place to allow your money to grow?
- Are you looking for a way to preserve the money you’ve made up to this point?
We, of all people, know that money isn’t just money. It’s a representation of your time – countless hours of hard work, dinners away from your family, and sleepless nights planning for that next big project.
An annuity treats your money with respect, ensuring you don’t lose any of that time you dedicated so much of your life to.
Are annuities good for retirement?
Annuities are excellent tools for
- eliminating risk,
- preventing loss, and
- guaranteeing that you won’t outlive your money.
This is the only investment product that withstood the Great Depression, and that’s because it guarantees you won’t lose any of your principal. Annuities are reinsured, and you have a contract in place to protect your money.
What type of annuities are good for retirement?
Depending on your specific goal, we recommend either
- a fixed annuity or
- an indexed annuity.
These are tremendous retirement solutions, but we don’t recommend variable annuities due to the fees that are involved. When you add up all of the fees, that type of annuity might not actually make you any money. In fact, your fees could be greater than the interest you make, meaning you could lose money.
What is a fixed annuity?
A fixed annuity is a very straight-forward contract that’s going to show you a guaranteed interest rate that you’ll lock in for a certain period of time.
For example, your contract might be a 3.15% interest rate for 5 years.
The most common thing we sell is a fixed annuity, because it guarantees you 100% safety on your principal, and the interest rate is a little better than 3%. There is also the option to take a 10% withdrawal after the first year of your contract. That way, if you need to access some of that money, you can.
The ability to take out 10% of your principal is usually the biggest sigh of relief from folks, because you do have access to your money. It’s not all locked up like many people think!
What is an indexed annuity?
An indexed annuity offers the potential to earn a greater amount of interest. Most of the time, it’s tied to the performance to the S&P 500.
For example, you have a 401(k), and you’re getting ready to retire. You want to roll that 401(k) into an annuity. If you put that into an indexed annuity, you will never lose value.
We aren’t 100% sure how it will grow each year, but what we can guarantee is that even in a negative year, the worst you can do is that your account stays the same. You will never lose value.
What’s attractive about an indexed annuity is that you get to capture more of the stock market gains. The insurance company takes on the risk – they guarantee you that you won’t lose money, but when there is a big gain, they cap your gains. In a good year, where the stock market makes 12%, you might be capped at 6%.
So, you have the opportunity to do better than a fixed annuity, which is usually around 3%, but there is the chance your investment might stay the same if the stock market has a bad year.
Out of every 10 clients who need help with their retirement money, 8 of them are going to prefer the sure bet of a fixed annuity. There’s no moving parts, you don’t have to think about how the stock market is performing, and you know you’ll get about 3%.
For the other 2, they like the indexing option where they have the chance to join the party when the stock market is doing well. But if their friends are losing money when the stock market tanks, they can stay comfortable knowing they aren’t losing anything.
An indexed annuity with an income rider is also really nice. You can have a guaranteed income for the rest of your life, no matter how old you live.
We like to say that life insurance is protection for if you die too soon, while an indexed annuity with an income rider is protection for if you live too long.
How much does it cost to get a retirement annuity?
For a fixed annuity, the minimum is usually about $10,000 to start up a contract. On average, the clients we’ve worked with will start up an annuity with about $40,000-$50,000.
With indexed annuities, you want to put in more money. If you’re rolling over a 401(k) or an IRA, you might be looking at rolling over $100,000+.
What age should you set up a retirement annuity?
Setting up a retirement annuity follows that common phrase: the earlier the better. But we don’t always have the luxury of turning back the clock.
If you’re really looking at using an annuity for retirement, starting an annuity at about 55 is wonderful. However, if you’re waiting to use your 401(k), you’ll need to wait until you’re retired and your employer is no longer contributing.
As a general rule of thumb, it’s true – the earlier the better. 55-60 is a really great age to begin, but if you’re older, it’s certainly not too late to talk to your agent about it.
What happens to the annuity if I pass away?
On a fixed annuity, your beneficiaries are listed. Your annuity money goes directly to your beneficiaries, and it’s as simple as that.
One of the things that’s great about annuities is that they avoid probate. That’s the amount of money an attorney will charge for settling an estate, which can be up to 15%.
With an indexed annuity, it depends on how long you’ve been drawing out money and how well the stock market has done. The main takeaway is that whatever the account value is, that’s what your beneficiaries will receive.
Are you interested in talking with an agent about a retirement annuity? Contact us to get started.
Our team of dedicated, licensed agents can help you as little or as much as you need. Whether it’s answering a few questions about Medicare or creating a comprehensive Medicare Planner with you, we are your Medicare Allies.