Annuities: Are they Right for Your Retirement Portfolio?

Annuities are a form of tax deferred retirement income for retirees. How it works in principle is fairly simple, but as all things in life, the devil is in the details. Annuities mirror social security in that they pay out a structured amount of your retirement income each month depending upon multiple details and options packages, as well as the size of the initial investment. Annuities can provide supplemental retirement income.

To setup an annuity, you will contact a life insurance advisor and he/she will discuss the details of what you are looking for through a screening process of which are listed below:

* Age: how long do you expect to survive? Its often a difficult question due to the sensitivity of the issue, but a reasonable estimate can be found in the lifestyle of the individual, family history, and current medical status of the individual or couple obtaining the annuity. The longer the lifespan, the lower the payment will typically be.

* Cost: for any substantial monthly income to be generated from an annuity, the initial cost can be daunting. A typical annuity begins at $100,000 and can get much larger depending upon the amount of income you require over your estimated lifespan. Such payments can be taken from traditional retirement vehicles like a 401k or IRA. The type of payment may also vary depending upon if you want to pay a lump sum just before retirement, or would you prefer to stagger payments over time?

* Customized details: many different types of annuities exist, each with their own individual features. For example, does your annuity last as long as you live or does it cover both you and your spouse? What is your risk tolerance? Can you afford to invest in equities where rewards are greater or do you prefer secured income sources such as bonds? These and many other details should be considered and thoroughly researched.

* Maturity date: when do you begin withdrawing funds? If for some reason you require funds before 59 ½ years of age, be prepared to lose 10% of your funds thanks to an IRS penalty. An annuity is a tax free investment vehicle, so any capital gains taxes are not charged until the distributions are withdrawn.

* Unexpected expenses: what happens if you require a large amount of your funds immediately? An annuity is similar to a Certificate of Deposit because it’s not considered a liquid (easily available) source of cash and can be difficult to recover in a time crunch.

* Inflation: will the amount of money you receive each month be worth as much as when you first purchased the annuity? We all know that $1000 is going to be worth far less 20 years from now, so inflationary fears should be factored into your decision making process.

* Wills and Estates planning: annuities often avoid litigation issues (commonly referred to as probate) after the annuities holder’s death. Meaning your heirs can acquire ownership according to your wishes quickly.

These are among the major aspects of the annuity decision making process. Do not be intimidated by the amount of money management topics mentioned here and avoid opening an annuity because of its complexity. Talk to family and friends about annuities, the pros and cons and what has worked for them. Research and don’t be afraid to ask as many questions as necessary from a reputable financial advisor and/or a licensed annuity agent. Caution and great planning should be made in consideration of retirement money due to the long term nature of this investment, and it could potentially tie up the majority of your retirement income. As always, seek advice from the professionals and execute common sense judgment.

About Cathy Severson

Cathy Severson helps baby boomers find more meaning and purpose in their lives and work. Get your copy of her complimentary e-book Guide to Retirement Activities a comprehensive look at work, volunteering and leisure based on an individuals’ personalities. Call for a complimentary 20-minute consultation to answer your most pressing concern. 928.775.4949 or email Cathy at

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