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
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