Are annuities right for me?

• Learn about annuities
  Find out which type may be right for you.
  
  
• Know the tradeoffs
  Consider the pros and cons of buying an annuity.
  
  
• Questions to ask yourself
  Your situation may help determine if an annuity might be right for you.

You’ve spent a career building your nest egg for retirement. But at some point, you’ll stop saving for the future and start living off that money. Since this is an important stage for retirees, now's a good time to see if purchasing an annuity as part of your retirement income strategy makes sense for you.

Annuities can be a source of guaranteed income for the rest of your life, or for a set number of years. But you’ll want to know your options, the pros and cons of buying an annuity, and some other important considerations first.

If you own a home, you probably bought home insurance. Well, an annuity is a form of insurance too. It’s a contract with an insurance company. But while a homeowner’s policy might protect you in case of fire or water damage, an annuity offers a different type of benefit—guaranteed monthly income.*

If you worry about outliving your savings, annuities are an option you may want to consider. Annuities can be purchased that offer payments over your life (and even a loved one’s life). The longer you live, the greater the benefit your annuity may hold.

An annuity can help you manage the risk that you’ll outlive your savings, often referred to as longevity risk. Likewise, an important consideration is how long you expect to live. Trying to estimate this is understandably difficult. But your current health and your family medical history can help inform your decision. In addition to lifetime annuities, some annuities offer payments for fixed periods of time—say over 10 or 20 years.

There are lots of options. Here are some common ones you might see:

• Immediate fixed income annuity. You buy the annuity now, and regular payouts begin shortly afterwards. They offer a guaranteed amount each month, so your monthly payout won’t change. Some insurers may offer guaranteed minimum payouts or a refund if you die before the payouts equal what you paid for the annuity. Keep in mind that, with options like this, your payouts will be reduced.

• Deferred fixed income annuity. You buy it now, but payouts don’t start until later—maybe even years or decades in the future. They also offer a guaranteed amount each month. Deferred annuities offer larger payouts than immediate annuities. If you’re buying an annuity with money in a retirement plan or IRA, you may see it called a qualified longevity annuity contract (QLAC).

• Variable annuity. Your payouts can vary. They’re determined by the performance of underlying investments. Payments would be higher when your investments do well, and lower when they perform poorly.

• Index annuity. Your payouts can vary. They’re determined by the performance of a market index.
   

Note: Annuities are not risk free.* They’re subject to the risk that the insurer will default. In addition, immediate variable annuities contain underlying investment portfolios that are subject to investment risk, including possible loss of principal. Deferred variable annuities are long-term vehicles designed for retirement purposes and contain underlying investment portfolios that are subject to investment risk, including possible loss of principal.

If you’re considering annuities, determine if you’d want a single annuity (just for you) or a joint one with a spouse. With a single annuity, the payouts will stop when you die. With a joint annuity, they’ll continue as long as one of the beneficiaries is still alive. There are many possible features to take into account when considering a single or joint annuity. Just keep in mind that each additional feature can add costs, fees, and other charges. For example, your monthly payments could get reduced by a certain amount or percentage if your spouse dies.

An annuity can give you a steady stream of income in retirement. You could use it to supplement Social Security, pensions, and the retirement savings you could have in an 401(k) plan or an IRA. For example: You’re looking for $3,000 a month in steady income in retirement. If you’re receiving $1,600 a month in Social Security and $400 a month from a small pension, you might look for an annuity that pays $1,000 a month to reach your target.

Buying an annuity is an important decision. Take time to learn the differences and compare annuities to other retirement savings options to determine what will best meet your needs. Annuities come with a big trade off—you’ll part with a sizeable chunk of your savings to purchase one. This can reduce the cash you have to pay for emergency expenses, for example. When you buy an annuity, your liquid wealth (or money on hand) immediately drops. And you’ll lose flexibility with your hard-earned savings. You won’t have that money available to spend as you want, when you want.

There may be a psychological barrier as well. You’ll be writing a big check from your nest egg. And you may not receive your first payout for years.

It’s worth noting that many investors can meet their retirement income needs in other ways. For example, using your investment assets—usually supplemented by Social Security and/or a pension—and using a strategic spending strategy. This approach allows retirees to maintain access to and control of their assets.

Ask yourself some questions:

• Am I worried that I’ll outlive my current retirement savings?
• Would I feel better knowing I’ll have a steady stream of income in the future?
• Am I comfortable giving up the potential for higher after-cost returns in exchange for the greater stability of the annuity payments?
• Do I have enough money after purchasing an annuity to handle an unexpected expense?
• How much are the fees, expenses, charges, and any other costs?

Note: Consider the cost of buying an annuity. Is the peace of mind that an annuity might bring worth the upfront cost?

For some people, annuities can make sense. For example, if you:

• Expect to live a long life.
• Have a low risk tolerance and are concerned about outliving your assets.
• Have enough savings left to meet unexpected expenses after buying the annuity.
• Have no legacy intent for the money used to purchase the annuity.

As you plan for retirement, you may have a gap between your living expenses and your income. An annuity may help fill this gap.

There are other considerations as well. You should consult with your tax or financial advisor.