One of the biggest concerns retirees face is simple: Will I have enough income every month for the rest of my life? If you’re looking to create a more predictable retirement paycheck, an annuity may be worth considering. However, it’s not the right solution for everyone.
An annuity is a contract with an insurance company. In exchange for a lump sum of money, the insurer agrees to provide income, often for a set period or for the rest of your life. It is a way to turn a portion of your retirement savings into a pension-like stream of income.
The biggest advantage of an annuity is guaranteed income. Unlike withdrawals from an investment portfolio, annuity payments are typically not affected by stock market volatility.
An annuity can help cover essential expenses, reduce anxiety about running out of money, provide a lifetime income stream, and complement Social Security and pensions.
But annuities are not perfect. Before purchasing one, consider the trade-offs:
- Reduced liquidity: Once you invest in certain annuities, accessing your money may be difficult or expensive.
- Fees and complexity: Some annuities carry significant costs and complicated features.
- Inflation risk: Fixed payments may lose purchasing power over time unless inflation protection is included.
- Opportunity cost: Money placed in an annuity may not grow as much as it could in a diversified investment portfolio
An annuity can be an effective tool for increasing reliable monthly retirement income, particularly if you are concerned about outliving your savings or want greater financial certainty. However, guarantees come at a cost, including reduced flexibility and potential fees.
Before purchasing an annuity, evaluate your income needs, health, life expectancy, legacy goals, and other retirement assets. A well-designed retirement plan often combines guaranteed income sources with a diversified investment portfolio, rather than relying entirely on either one.
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/ SIPC.
This is a hypothetical situation based on real life examples. Names and circumstances have been changed. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or strategies may be appropriate for you, consult your advisor prior to investing.