Should you consider an Annuity Plan as a Retirement Investment Tool?

| September 23, 2012
Retirement Investment

Retirement Investment

As you already know, an annuity is a special type of insurance vehicle that pays out particular amount of money to the annuity purchaser on yearly basis, usually for the rest of his life. Annuity plans can be considered as one of the most common retirement investment tool.

Here are some points that would help you understand whether or not you should invest in annuity. If you’re approaching towards retirement, then the discussion would help you.

  1. Alternative to typical retirement investment plans – You may consider buying an annuity only if you have crossed the maximum investment limit of other retirement savings tools like IRAs and 401(k) plans. Both of these plans provide some tax advantages that an annuity can’t provide. The money invest in an annuity is tax-deferred, but the income you yield from the same is not tax-free. You need to pay income tax at regular rate to Uncle Sam.
  2. Tax-free growth of money – If you have saved some extra dollars for retirement, you can invest in an annuity to ensure tax-free growth of your money. It would be even more suitable, if you presently belong to high-income bracket.
  3. Early withdrawal penalty – Annuity plans generally charge exorbitantly high surrender fees (even up to 7% on your investment) for early withdrawal. So if you face an emergency and need to pull out money from your annuity plan within initial 5 to 7 years from date of commencement, you may have to pay even a fortune as surrender charges. Therefore, if you can set aside your money for many years, then annuity would be a good option for tax-deferred growth of your hard-earned dollars.
  4. Complicated fee structure – Unlike other retirement investment tools like IRAs and 401(k) plans, annuities have very complicated fee structure, especially in case of variable annuity. Apart from exorbitant surrender fee, it charges very high annual fees including yearly insurance fee, yearly investment management charges and different insurance riders. If you add up them, you will find that you may need to pay from 2% to 3% of the investment per year as annual annuity fees.
  5. Flexible withdrawal options – With an annuity plan, you can choose the withdrawal option as per your need. You can take out a lump sum from your annuity-income if that goes well with your requirement. But you can also set up a guaranteed payment schedule to ensure regular income for a particular time span or for rest of the life.
  6. Complement post-retirement income – Annuity often complements post-retirement regular income like Social Security allowance or pension.

Discussed 6 points would help make a wise decision about whether or not you should opt for an annuity plan. It would be even better if you consult an investment expert before making any final decision.

Author’s Bio – Jonny is a regular contributor to My Pension Expert. He also writes for other popular finance communities.

Should you consider an Annuity Plan as a Retirement Investment Tool?

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