Can an Annuity Help You Enjoy a Comfortable Retirement?

What Is an Annuity?

If you’re looking for a steady source of retirement income with minimal risk, an annuity may sound like a tempting option. Annuities are financial products sold by insurance companies. When you buy an annuity, you’re agreeing to deposit a large sum of money with the insurer. They’ll invest it on your behalf, and then return it to you through a series of regular payments.

Your annuity payments may not begin right away. The first stage of an annuity is called accumulation. That’s when you’ll deposit money into the annuity account. At a point specified in your contract, the account is annuitized—the money becomes the insurer’s and they’ll begin making payments. It sounds straightforward, but the reality is annuity contracts can be complex, making it difficult to grasp the ins and outs of what will happen with your money.

There are many types of annuities. The simplest is a fixed annuity, which provides a fixed rate of return—but typically at a lower rate than investors could achieve with different investments. Compare that to variable annuities, which deposit your money into sub-accounts, which are invested in the stock market. These investments can return more market-like returns, but come with risks similar to the market. Many other types of annuities exist, each with its own pros and cons.

Annuity Riders

Most annuities offer extra features as add-ons to the main contract, called riders. For example, you can add a rider to your contract to guarantee a minimum amount of income, or guarantee you’ll receive payments throughout your lifetime. These may sound like great benefits, but riders typically have a high cost, adding to the expenses associated with purchasing an annuity.

Annuity Pros and Cons

The regular payments you receive from an annuity are their primary benefit. The reduced risk of an annuity contract compared to investing in the stock market is also attractive to some investors. However, annuities generally don’t provide growth like other investments. They also come with significant fees, including annual administration and maintenance fees, as well as commissions paid to the adviser who sells you the annuity. Annuities can also tie your money up for the long term—if you have an emergency, you may not be able to access the money you need without paying a penalty.

Contact Fisher Investments to learn more, and to see if an annuity makes sense for your unique needs and goals.