Guaranteed income annuities are an important part of retirement planning. They provide a guaranteed stream of income for life and can help retirees maintain their quality of life in retirement. However, there are some drawbacks to consider before making the decision to purchase an annuity for retirement income. In this article, we will discuss the guaranteed income annuity pros and cons so that you can make an informed decision about whether it is right for you.
If you’ve ever experienced the process of building a custom home, you know that there are seemingly endless options for how you can finish your ceilings, trim your walls, and install cabinets in your kitchen. Consulting with a professional home designer prior to beginning the custom building process helps you to not only narrow down the possibilities to something that will work well for you and your family, but it also helps you gain perspective on details that you were not aware of previously. But this assumes you have already done a bit of your own homework and walk into the design office with some semblance of a plan in mind—or at least an end goal, such as an open concept kitchen or a cozy office nook.
In a similar vein, the guaranteed income annuity pros and cons laid out below aim to introduce you to the various annuity options and possibilities before you sit down with an expert insurance advisor who can then help you make the best investment decision for your retirement dollars. Although you can buy nearly anything online these days, you likely wouldn’t buy all of the materials to build your custom home online, sight unseen. In the same way, while it is feasible to buy an annuity online, working with a trusted insurance advisor is key to ensuring you make a solid investment for your future.
Annuities come in all shapes and sizes, just like windows for a home. You can—and should—tailor the annuity to fit your retirement needs and to guarantee income in your golden years, with the help of a knowledgeable insurance advisor, after you’ve educated yourself on the options available to you. Together, let’s explore the pros and cons of a guaranteed income annuity for retirement investing.
The Pros of a Guaranteed Immediate Income Annuity
The major benefit of the guaranteed immediate income annuity is the ability to generate a lifetime income for yourself—and, in certain cases, for your survivor as well. If you are looking to generate the optimal amount of income immediately (meeting your income requirements while accounting for unforeseen expenses), this type of annuity will help you achieve that financial goal.
The Cons of a Guaranteed Immediate Income Annuity
The downside to an immediate income annuity is that it doesn’t have the time, nor the internal structure, to grow your principal before beginning income payments. The annuity will still give you much more of a return on your investment over the long term than if you were to simply leave the money in a checking account; however, if you are investing for a retirement that is still a decade or more in the future, there are more profitable options to help you plan for your retirement, as well as your estate.
The Pros of a Guaranteed Income Deferred Annuity
The benefit of the guaranteed income deferred annuity has a lot to do with the length of time that you have between investing in your annuity and the time at which you believe you will want to turn on the guaranteed income stream from the said annuity. If you have a significant length of time between your original investment and needed income generation, this annuity will allow you to grow your principal in the meantime, with either a fixed rate of return or a return based on a market index. The ultimate income is usually correlated to the length of the contract as well, so the longer you wait to turn on that income stream, the greater the return you can expect on your initial investment.
The Cons of a Guaranteed Income Deferred Annuity
The downside to the guaranteed income deferred annuity is the lack of ability to generate immediate income. It would be feasible, but much better executed by using an immediate annuity rather than a deferred annuity which is built to defer and grow your income while you wait. The other downside for some investors is the lack of market or index exposure to achieve a greater rate of return on their investment. However, this annuity’s rate of return is fixed and guaranteed, which does protect investors from market downturns or interest rate fluctuations.
The Pros of a Guaranteed Principal Fixed Indexed Annuity
One of the benefits of a guaranteed principal fixed indexed annuity is built into its name: the principal held within the annuity is guaranteed. It’s also typically guaranteed along with a fixed interest rate and usually index options as well. The investments internally follow the trend of certain indexes, much like a mutual fund or exchange-traded fund, which has great upside potential for the investor looking for guaranteed income—but not right away. This type of annuity is a great option for income planning and to preserve and grow your wealth prior to retirement.These specialized annuities are now attracting a very significant percentage of all annuity assets. They offer upside principal and income growth with downside protection. Potential and peace of mind go hand in hand with these annuities.
The Cons of a Guaranteed Principal Fixed Indexed Annuity
There are a few downsides to a guaranteed principal fixed indexed annuity if you aren’t in a situation where you can wait a year or more before initiating the income option on your annuity. The benefits of the internal index wouldn’t take effect unless you have the time to allow you principal to grow over the years before drawing your retirement income.
Some of the specialized “roll up” features that credit high guaranteed rates of fixed return or enhanced indexed based returns for income calculation purposes would be negated. If you intend to draw down the principal amount through income payments, the benefits of the guaranteed principal option would still protect you from market losses but not from reducing the value of the account through withdrawals. In some cases, the rate of return could actually be less than a fixed rate of return, depending on the performance of the index and the interest rate environment.
How to Choose the Annuity That Best Meets Your Needs
Now that we’ve laid the foundation for your custom financial home, metaphorically speaking, of course, you should have a more comprehensive understanding of what type of annuity can meet your financial needs and future goals. As I mentioned before, guaranteed income annuity pros and cons are much like custom options on a new home build. Ultimately the choice is yours, and in doing your research and working with an expert insurance advisor, you will be able to invest your capital in the annuity that you can best leverage (financially and in terms of tax-sheltered annuities) for your unique situation.
The combination of expert insurance advice, your knowledge of the annuity market, and awareness of your own financial situation will allow you to make the best decision, based on advice from an annuity expert, when it comes to purchasing your specific guaranteed annuity.
Howard Kaye Insurance has been advising clients on annuities, estate planning, and life insurance for more than 55 years. We have developed specific strategies for capitalizing on guaranteed annuities to sustain income throughout retirement. Contact a Howard Kaye advisor at 800-DIE-RICH to discuss the guaranteed income annuity pros and cons for your own financial and estate plan today.
