Annuities can be a great option for those looking for a stable investment without all of the ups and downs of the stock market. As a contract between an insurance company and an individual an investor will contribute a sum of money upfront for the promise of a consistent stream of income later on. Annuities have the option to be set for a person’s lifetime or for a pre-written number of years. There are both fixed and variable annuities, which have different rates of return. A variable annuity tends to fluctuate a bit more, while a fixed annuity is set at a specified rate. A financial planning expert can help you determine if an annuity is the right investment for you.

Here we’ll discuss the benefits and drawbacks of annuities.

Pros of Annuities

Annuities are a popular investment for retirees who do not want to take a huge investment risk in their later years and want income that is secure for the years to come.

Guaranteed Income

Guaranteed income is one of the biggest advantages of an annuity. When you invest in stocks or real estate, the value of those investments can change from year to year. With an annuity, the insurance company is liable for paying any promised expenses over to the investor. Usually, this promise lasts for life, so it can be a vital source of income for those who are no longer working in retirement.

Customized Features

Annuities also have customized features. These contracts are adaptable to an annuity buyer’s needs. With customized income benefits, there can be a promised payout despite the performance of a variable annuity. Another feature of annuities is money management assistance which could be useful for portfolio rebalancing as the market changes.

Cons of Annuities

Some of the major disadvantages of annuities are that they can be complex, and they are also affected by inflation. Inflation can alter the value of a fixed annuity. These factors can bring a large caveat into the world of annuity investing depending on the annuity owner’s timing and unique circumstances.

Commission Prices

Annuity sellers can receive high commissions for their sales. Compared to mutual funds, annuity commissions are significantly higher. This could mean many might suggest that someone purchase an annuity due to the high commissions they will receive as opposed to other retirement investment options.

Large Fees

Similar to the high commission sales, there can be large fees associated with annuities. Sales charges are usually not considered upfront, but there can be hidden maintenance fees and other overhead operational charges.

Key Takeaways

Like all investments, annuities have numerous benefits, but also some disadvantages. All investments involve some level of risk and reward, and luckily the risk for annuities is extremely low compared to other popular investments. However, it’s important to understand exactly what you’re investing in and how to best take advantage of the benefits of annuities.

If you need help understanding if an annuity is right for you, contact a financial planning expert to help guide you through the complexities.