The Pros And Cons Of Adding Annuities To Your Retirement Plan

Annuities are investment products offered by insurance companies, investment houses and other financial entities that allow a person to purchase a future monthly, quarterly or annual income for life. The amount you pay for an annuity is based on the current rate of interest, your age and the fees associated with the type of annuity that you are interested in.

Advantages of annuities

1. A fixed, reliable income. The chief benefit of investing in annuities is that you know exactly how much money you will be getting every month, quarter or year. Unlike income from dividends and interest, annuity income won't vary depending on market fluctuations and the health of a particular company.

2. Less room for squandering. An annuity can be a good choice for a person who suddenly comes into a great deal of money via an inheritance or winning the lottery. By investing in an annuity, you can guarantee your future income and, essentially, protect yourself from spending all of your money quickly and having nothing left in a few years.

3. Deferred taxes. Buying an annuity doesn't eliminate your taxes in the future. However, since a portion of your income is considered principal, your taxes will generally be lower than if you earned that same amount as earned income or interest.

Things to consider before purchasing an annuity

1. Fixed interest rate. Knowing exactly how much you'll receive each period in income from your annuity has a down side. Although you'll be protected if interest rates fall after you buy your annuity,  you won't be able to benefit from rising interest rates as you would with other types of investment products.

2. Fees for withdrawing money. When you buy an annuity, you'll be required to leave the money in for a fixed period of time, usually six to eight years. If you withdraw your funds earlier, you'll be charged a significant fee.

3. The annuity company could go out of business. When you invest in an annuity, you are vulnerable to the company who holds your annuity going out of business and stopping your payments abruptly.

While purchasing an annuity can provide the peace of mind that comes with knowing exactly how much money you'll have each month for the rest of your life and deterring you from squandering a windfall, it's important to weigh the pros and the cons of annuities carefully before investing your money.