Annuities: What Every Retiree Should Be Aware Of

Michele Brigman-Pemberton |

Planning for retirement is essential as a step toward financial security. Most investors are familiar with 401(k)s, Traditional IRAs, or Roth IRAs but often may not know about an annuity's benefits in retirement. Knowing if retirement savings can last the rest of our lives can be stressful, and retirees often consider an annuity to provide them with consistent payments that last their entire life.

Annuities are an option for those who don't have a pension, limited Social Security benefits, and may be reluctant to draw from assets that mimic stock market performance in low valuation or volatility. Although annuities are relatively simple, there are a few nuances every retiree should be aware of:

Annuities are an agreement between the annuity owner and an insurance company. Not all insurance companies issue annuities, and not all annuities are the same. Work with your financial professional to determine which annuities are highly-rated through rating agencies such as A.M. Best and Standard and Poor's and appropriate to your situation.

Payouts are based on age, gender, and interest rates. The younger you are, the lower your monthly benefit, depending on your initial contribution. Therefore, the earlier you purchase an annuity, the more interest the annuity can accumulate. Since women generally live longer than men, they may receive a lesser payment than their male counterparts.

There are different types of annuities, including fixed, fixed indexed, and variable annuities. Each of these annuity types may entail an immediate or deferred payment determined by your annuity's contract. It's essential to understand which type of annuity is appropriate for your financial situation.

Understand what a single-life annuity covers. A single-life annuity provides the most significant monthly payout based on the contribution but covers only the annuity owner. If the annuity owner dies earlier than expected, their spouse does not receive the money that is left unused since it goes to the annuity carrier. This single-life annuity feature is significant to keep in mind for those who have preexisting health issues.

Once your annuity is purchased, you can no longer access the funds outside your contract's scheduled payments. With this in mind, only contribute an amount that you feel comfortable with not having to access until you need it in retirement.

Annuities have fees. You may be thinking an annuity sounds too good to be free, and that is correct. There is a price for enjoying the benefits of an annuity's consistent payouts, which are fees that reduce the payments you receive. When purchasing your annuity, the costs are disclosed, so read and understand everything before buying it.

Payouts may vary based on the provider. Depending on which insurance company you use to purchase your annuity, your payments may vary.

Work with your financial professional. Do your research ahead of time and consult your financial professional before making your final decision.

Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any annuity product or individual security. To determine which annuity product(s) or investment(s) may be appropriate for you, consult your financial professional prior to investing.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by Fresh Finance.

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