Annuities are a very interesting investment option that has increased in popularity recently with the volatility of the stock and bond markets. Annuities are a great investment for some people, but not so great for others. How do you know if they are right for you? Here is a pro and con list of annuities so you can decide whether or not they are right for your portfolio.
Tax deferred. The primary benefit of investing in annuities is that annuities grow on a tax deferred basis. What this means is that no matter how well your annuity performs, and no matter how much money you make with it you will not pay taxes until you begin to receive annuity payments, and even then you are only taxed on the interest portion of your payment.
Guaranteed rate of return. One of the biggest draws for annuities, especially in this turbulent economy, is the fact that for many fixed annuities the rate of return is guaranteed over a set number of years. Even though it isn’t a large rate of return many investors close to retirement appreciate the low risk that fixed annuities provide. (It should be noted that variable annuities do not provide guaranteed rates of return.)
Payments for life. One of my personal favorite parts of annuity investing is that even if you outlive your initial contribution amount, the annuity provider will continue to make regular payments until you eventually pass away. This is a great way to insure that your golden years are taken care of since other investments like mutual funds eventually dry up if you live longer than anticipated. With annuities you keep living and they keep paying.
Fees can be high. One of the drawbacks to annuity investing is that fees tend to be higher than other investment options such as mutual funds. Some annuity providers may charge fees that exceed your potential tax savings, so it is important to analyze any annuity you may invest in to be sure you are maximizing your retirement investment.
Not very liquid. Another drawback is that annuities are not a very liquid investment. Similar to certificates of deposit if you need to withdraw funds from your investment you may be subject to a surrender charge that can be significant at times. Usually annuity companies start the surrender charge high and decrease it as time goes on. If you think you may need the funds somewhere down the line you may want to look elsewhere.