How To Decide Whether to Invest Retirement Money in an Annuity

Though your retirement may be in the distant future, remember that how you enjoy those so-called golden years will depend a lot on how you live your life today. Making wise decisions about where to invest your money – and practicing some good ol’ self-discipline – will help ensure that you can keep up with the financial demands of old age. One of the most popular choices for investing retirement money is in an annuity. Here are some guidelines to help you decide whether this option is right for you: 

  • Understand what an annuity is. No matter what type of investment tool you commit to, it’s very important that you take the time to find out, in simplest terms, what it is and how you could benefit from it. In the case of an annuity, you will have to pay an insurance company either a one-time lump sum or through a series of payments. Then, this insurance company will give you regular income beginning at a set date, acquired from the earnings of the amount that you invested. Annuities are tax-deferred, meaning you will pay no taxes on your investment earnings until you withdraw your money.
  • Consider your appetite for risk. There are two general types of annuity: fixed and variable. Fixed annuity guarantees that you will receive a predetermined amount regularly, while the rate of return (or the amount of money that you will receive) on a variable annuity will depend on the performance of your investment. If you have lower appetite for risks, a fixed annuity may be a better option for you.
  • Determine the real cash amount that you will have to put out. Though annuities have many advantages, it is notorious for being stocked with lots of hidden fees and charges, such as steep commissions (as high as 10%), withdrawal penalties (for withdrawals made before retirement age), and annual fees. If you don’t want to commit to paying high charges, you may want to go for mutual funds instead, which charge lower annual expenses and no sales commissions. The bottom line is that you should sit down and compute for your total income versus expenses on whatever investment option you choose.
  • Know the common practices for investing in an annuity. Most people who invest their money in an annuity do so after they have maxed out other investment options, such as their IRAs or 401K. Another good thing about annuities is that there is no limit on investments, so those who have started investing rather late in their years tend to prefer annuities.     
  • Determine the time that you will need the money. If you are willing to wait until your retirement age before you take out your earnings, then an annuity may be your best option. That’s because all withdrawals made before the age of 59.5 will be charged with heavy withdrawal fees. Remember that annuities are specifically designed to meet long-term and retirement goals.

There you have it! These are some of the basic guidelines to remember when you’re deciding whether to invest your retirement money in an annuity. Remember, it literally pays for you to do your research on your options, so you could make the best choices for your own situation. Good luck, and hope this helped! 


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