One of the main concerns that people have when planning for retirement is running out of money. Because of this, people aggressively fund their IRA or 401(k) during their working years to lower the risk of outliving their income.
However, no amount of saving guarantees that you won’t end up strapped for cash in your later years. The best way to ensure you have the funds you need is with an annuity.
But if you’re like most people, just hearing the word annuity makes you cringe. So why do these retirement investment accounts have such a bad reputation?
The downsides of a traditional annuity
Annuities have drawbacks, and we all know someone that has a horror story to tell. These retirement/insurance accounts are beneficial in that, for a set amount of money, you can be guaranteed regular payments for the rest of your life.
However, “rest of your life” is subjective. If you die shortly after opening an annuity, your return on investment is low, to put it nicely. You’ll only get back a small fraction of the amount you paid upfront.
Aside from this risk, annuities are expensive and often impossible to get out off. The good news is that there are ways to reduce your risk so that you can make the most of your annuity.
Addressing common annuity risks
Don’t let the downsides of an annuity keep you from benefitting. Here are some ways to make an annuity a little less scary.
Pick the right type
One of the biggest things that scares retirees about annuities is the cost. While most investments come with fees, annuities have some of the highest. Common fees include:
- Annual fees
- Administrative fees
- Surrender charges
- Interest rate reductions
- Mortality expenses
However, not all annuities are subject to these fees. Immediate and deferred income have very few fees. On the other hand, variable annuities are a totally different beast and are known for becoming quite expensive.
Choose a minimum payment term
Most insurance companies offer what’s known as a minimum payment term. This is the guarantee that you’ll receive annuity payments for a minimum length of time after purchase.
All payments will go to you for as long as you live. If you die before the minimum term ends, you can make it so that your beneficiaries receive any remaining payments.
Insurance companies also allow you to combine this feature with traditional features. This way if you outlive the minimum term, you can still receive payments throughout your lifetime.
Pick a survivor
If you’re married, make sure that you purchase a joint-and-survivor annuity. This ensures that if either of you passes away, the other surviving spouse will continue to receive payments.
With this type of annuity, payments are based on the joint life expectancy of the couple. In turn, your monthly payments will be smaller, but you’ll receive more payments during the annuity’s payout period.
Final thoughts
Whether you’re set to retire in four years or 40, you won’t regret having an annuity. Be aware of the risks and know how to mitigate them. In turn, you can have total peace of mind that money problems won’t be an issue during your retirement years.
