Several of our friends are considering using their 401K / IRA savings to purchase one or more annuities in retirement. OK – I know. News flash – lots of people buy annuities. Just not us. Somewhere along the line we’ve managed to become convinced that annuities are a bad investment and that we should run away – run far away – from anyone who tries to convince us otherwise.
But our friends are smart people. Maybe it’s time to take another look. Here’s what I learned while researching annuities.
1. An annuity is an insurance product. You purchase the annuity for a specific amount, either through regular premiums or through a lump sum, and then it pays you a specific annual income for the rest of your life. Like most insurance products, the insurance company helps you manage risk. An annuity helps you manage the risk of outliving your money.
2. The basic annuity pays only for your lifetime. Once you die, the payments stop. Annuity contracts can be written to provide ongoing income for a beneficiary or for a guaranteed number of years that the annuity will pay out – but this will cost more.
3. The insurance companies use your projected life span, based on actuarial tables, to calculate your annual payout. The annuity holders who die early cover those who live longer.
4. One of the main advantages of annuities is that there is no limit to the amount you can invest in them. Many investors will fund annuities once they have maxed out their IRA / 401K contributions. Earnings on the funds are tax deferred. Since investment is made with after-tax dollars, the money you contributed is not taxed at withdrawal (if you are over 59 ½); earnings are taxed at your regular tax rate.
5. One of the main disadvantages of annuities is that once you’ve invested in one, your money is locked in. Many annuities offer a way out – with a hefty surrender charge.
The architect in me loves the model at the top of the post – it is from the Utah Division of Securities, and you can get the step by step information on their web site. The accountant in my husband is convinced that we can do just as good a job as an insurance company in managing our assets – and managing our risks. I’m convinced as well. While annuities may be the right solution for some, they are still not for us.
Disclaimer: A few days of research does not make me an expert. I used the following web sites in researching this post:The Utah Division of Securities