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When Are Annuities a Good Investment?


August 16, 2021 ( Newswire) Annuities are an insurance contract, though they may also count as a security. Annuities have their place in the pantheon of retirement options along with stocks, bonds and other investments. But when are annuities right for you? When are annuities a good investment? We'll explain when you should consider investing in annuities.

You Want Guaranteed Income

Annuities are popular because they are one of the few options that can literally guarantee set returns. The potential returns will depend on how much money you put in, how long you draw on the annuity, and things like survivor benefits. The simplest annuities will use a basic equation to determine how much you will get each month or year for the duration of the contract. It is impossible to get these same guaranteed returns with investment accounts. Furthermore, your withdrawals from a cash savings account can erode in value over time due to inflation. Some choose to buy variable annuities that have guaranteed minimum payments but stronger upside potential.

You Need to Save Far More than Tax-Advantaged Retirement Accounts Allow You to Save

There are contribution limits on IRAs, 401Ks and SEP IRAs. If you're high income, this means you can't contribute enough to these tax-advantaged accounts to generate a comparable income when you retire. On the other hand, annuities do not have contribution limits. You could invest a million dollars in a single lump sum contribution into an annuity. Or you could invest $100,000 a year for years until you decide to retire.

You Want to Control the Distribution of the Money

Traditional IRAs and 401Ks have required minimum distributions. When you have an annuity, you can decide when you activate it and when you start receiving money, as long as the annuity is not inside of a tax-advantaged retirement account. This means that you can continue making contributions after the IRA forces you to take money out of the account. And you can activate an annuity before you hit the magical number. (That is 72.)

Annuities have other benefits. When buying annuities online, you can select who will receive payments after you die. You could have the annuity send payments to your heirs or surviving spouse. Or you could have the annuity provider send the principal balance to the person of your choice. While this will reduce the annuity payments you receive, it can provide peace of mind.

You Won't Need the Money Immediately

You can sign up for an annuity that starts making payments immediately. However, most annuity purchasers start putting money into the annuity and wait to activate the annuity. Don't put all of your money into an annuity, if you may need access to the cash. There are potential tax implications for borrowing against your 401K, and you be hit with a tax bill in certain situations if you withdraw money from the annuity. Annuities charge a hefty fee if you take the money out before the distribution date. Have an emergency fund separate from the money invested in your annuity so that you don't have to pull money out of it.

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