Finding ways to save for retirement in an uncertain market can present some challenges. It begs the question, what is the best way to maximize your money without the threat of losing it? Let’s explore some annuity risks and advantages that offer solutions for the risk-averse investor.
What is an Annuity?
First and foremost, an annuity is a financial vehicle that creates a steady income through a contract between you and an insurance company. It can provide supplemental income for one’s retirement years.
There are three main types of annuities: fixed, variable and indexed. Each has its unique strength. The most appealing advantages are predictable. Annuities have a variety of pros and cons to consider as you weigh all of your options. Depending on your stage of life, some options are better than others.
What is the Upside?
When exploring this option, it is helpful to understand the advantages. There are a few attributes that make an annuity a good option for conscious, risk-averse investors. Risk aversion describes an investor who chooses preservation over risk in their income growth strategies.
Protection from Market Volatility
In some annuity formats, like a fixed annuity, the interest rate is promised regardless of market conditions. This creates a barrier that protects your funds from volatile downturns. This factor helps ease concerns about fund losses.
Guaranteed Income
The predictability of annuities makes them a common choice for those seeking more stability. Annuities bring a sense of certainty to retirement that other options can’t quite provide. Knowing the fixed amount produced by an annuity is one major benefit.
What are the Hangups?
Now that we have explored the positives, let’s explore some annuity risks or downsides.
Fees
One of the most noted hangups of annuities would be the associated fees. The fees related to annuities tend to be around 2% or 3% a year, which is double or triple traditional investment vehicles.
Complexity
Annuities can be complex and difficult to understand with multiple layers integrated into the product. While it can also be used as a layer of protection from the market, the complexity can deter some investors.
Should I Consider an Annuity?
Now that we understand some annuity advantages and annuity risks, who should consider one? Are they right for you?
Traditionally, retirees and high-income earners benefit the most from annuities for a few reasons. For retirees, particular annuity types offer immediate payouts to supplement income. For high-income earners or families, since annuities are funded by premium payments there aren’t caps like there would be in a 401k or IRA which may be considered a plus.
It is always good to consider all of your options and even speak with a financial representative to discuss the best plan for you.
Bankers Life is Here
Reach your financial goals with Bankers Life. Start here to learn even more about annuities and see if they are a good fit for you.
