Annuities are an effective tool for individuals seeking to secure their financial future. After all, they provide a steady income stream, often for life, and can ease concerns about outliving your savings. However, annuities are not for everyone. So, before deciding whether to invest in one, you should carefully consider your financial goals, current situation, and long-term needs.
So, if you’re wondering whether an annuity is right for you, here are 11 signals indicating you should buy one.
1. You don’t want to outlive your savings.
A common fear of retirees is running out of money during their lifetime. With life expectancy on the rise, this is a valid concern. Half of non-retired Americans (51%) indicate that they are “concerned” or “very concerned” about outliving their retirement assets, according to Schroder’s 2024 U.S. Retirement Survey.
To solve this problem, anAnnuitiesvide guaranteed Inc. by providing a period or even for as long as you live. Therefore, an annuity may be the best option if you are approaching retirement and are concerned that your savings or other income sources may not last long enough.
Generally, it acts as a safety net, ensuring that you receive consistent payments regardless of market conditions.
2. Predictable, steady income is important to you.
It is common for individuals to prefer financial stability over chasing high returns in the market. If you want a predictable income stream, annuities could be an excellent option for you. Unlike stocks or mutual funds, annuities provide fixed or guaranteed payments, depending on the type.
A steady cash flow allows you to cover essentials such as housing, healthcare, and groceries without worrying about market fluctuations. This predictability can benefit retirees and those with lower risk tolerances.
3. Your other retirement accounts have been maxed out.
If you plan to invest in an annuity, ensure you have taken full advantage of other retirement savings vehicles, such as 401(k)s, IRAs, and Roth IRAs. Compared to annuities, these accounts usually have tax advantages as well as higher growth potential.
For example, 401(k) plans allow you to save before taxes are deducted from your paycheck. As a result of this pre-tax contribution, your taxable income will be reduced, thereby lowering your overall tax bill. Employers may also match your contributions, which means they will add a certain percentage. Additionally, your 401(k) money is invested in stocks, bonds, and mutual funds. As these investments grow, your retirement savings may increase.
As soon as you’ve maxed out your contributions to these accounts, you could consider an annuity as a smart way to supplement your retirement income. In addition to complementing your existing retirement plan, it can also help you feel more secure financially as you age.
4. You’re seeking tax-deferred growth.
When it comes to deferring taxes on investments, annuities can benefit those with high tax brackets. The reason? You won’t owe taxes on gains until you withdraw funds from an annuity because it grows tax-deferred.
When you retire, you’ll likely pay fewer taxes on the income you receive — particularly if you’re in a lower tax bracket. In addition to other retirement accounts, annuities can also offer tax-deferred growth.
5. You want to make sure your retirement portfolio is diversified.
To achieve a well-balanced retirement portfolio, a mix of assets is necessary. An annuity can benefit those with heavily invested retirement savings in stocks, bonds, or real estate by providing diversification that enhances financial stability.
Unless you choose a variable annuity, annuities are not directly tied to market performance, so they can provide a reliable source of income even during difficult economic times. As a result of your diversification, you will be able to weather market volatility and ensure you receive consistent income.
6. You’re close to retirement or have already retired.
Those who are nearing retirement or have already retired may benefit most from annuities. It is often at this point that the focus shifts from growing wealth to preserving it and making sure it lasts into retirement.
Whether you’re near retirement age or are already in retirement, an annuity can help you bridge the income gap between saving and spending. When you are in your golden years, it provides financial security by transforming your lump-sum savings into regular payments.
7. You have no pension.
In today’s workforce, pensions are becoming increasingly rare. Only 15% of private industry workers were covered by a defined benefit plan. Due to this, many retirees are left without a guaranteed source of income. In the absence of a pension, an annuity can substitute for security provided by one.
With an annuity, you essentially create your own pension-like income stream. As a result, you will be able to ensure you have the financial resources you need to enjoy a comfortable retirement.
8. You want to leave a legacy for your family.
You can leave a financial legacy for your beneficiaries with certain types of annuities, such as fixed or variable ones with death benefit riders. In addition to providing lifetime income, annuities can help you leave money to your loved ones after you pass away.
Keep in mind, though, that not all annuities offer this feature. So you must choose the right one and determine its costs and benefits.
9. Long-term care costs are on your mind.
Despite the staggering cost of long-term care, many people fail to plan adequately for it. However, there are some annuities that offer riders that provide additional income for long-term care costs.
In the future, annuities can help fill that gap if you’re concerned about covering these costs.
10. Your tolerance for financial stress is low.
For people who want to avoid risk — annuities can be a good option because they transfer investment risks to the insurer. A fixed annuity, for example, will offer a guaranteed interest rate and a consistent income stream even during a recession. As such, they are a good choice for retirees who place a high value on security over high returns.
In fact, it’s been shown that annuity owners value the security that guaranteed lifetime income provides. According to 97% of annuity owners, their annuities help them worry less about running out of money.
11. You’re looking for a customized financial plan.
Annuities can be customized to meet your specific needs with riders. No matter what your goals are, there’s an annuity product that can match them. It is possible to find the right investment by working with a financial advisor.
Final Thoughts
With guaranteed income and tax advantages, annuities can be valuable to a retirement portfolio. They are, however, not a one-size-fits-all solution. To decide whether an annuity is right for you, you must consider your financial goals, risk tolerance, and overall retirement strategy.
If you recognize a few of the points outlined above, you might be ready to explore annuities further. If you are uncertain about your options, consult a financial professional to help you choose the right annuity.
If you’re ready to invest in an annuity, you can gain financial security and confidence for years to come.
FAQs
What is an annuity?
An annuity is a financial product that pays a regular income stream over a specified time or for life. Retirement strategies often incorporate it.
How do annuities work?
Individuals purchase annuities from insurance companies and make a lump sum or series of payments. As a result, the insurer will make periodic payments to the individual, starting immediately or in the future.
In addition to guaranteed income and tax-deferred growth, annuities have a variety of payout structures to meet different financial goals.
What are the advantages of annuities?
- Guaranteed income. During retirement, annuities can provide a guaranteed income stream.
- Tax deferral. Generally, annuity earnings are not taxed until withdrawn.
- Protection from market risk. Variations in the market are not a factor in fixed annuities.
What are the disadvantages of annuities?
- High fees. It is common for annuities to have high fees, which can reduce your returns.
- Lack of liquidity. An early withdrawal may result in a penalty.
- Limited investment options. While variable annuities provide more investment options, they also carry a greater risk.
Should I invest in an annuity?
It depends on your individual circumstances whether an annuity is right for you. Before deciding, weigh the pros and cons carefully and consult a financial advisor.
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