Any proper discussion of retirement investment will include the option of annuities. What is an annuity? An annuity is a contract with an insurance company that guarantees a fixed payout, depending on how much money is put into the annuity. Some annuities are immediate, which means the payout begins within thirty days of the deposit into the annuity. Others are deferred, meaning payout does not begin until retirement age.
There are variable annuities, and fixed annuities. Variable annuities are those which you periodically contribute to. Fixed annuities are those which you make one single deposit, then leave alone.
In any of the above categories, an annuity can provide a fixed payout period, such as ten or twenty years, or a lifetime payout. Since we are talking retirement here, we are going to look at deferred variable annuities with a lifetime payout. Are they worth using for saving toward retirement?
Advantages of investing in annuities for retirement:
1. They are much lower-risk than investments based on the stock market, as they do not fluctuate but always gradually increase in value.
2. They come with a guaranteed minimum interest rate for a certain period of time.
3. In the case of lifetime deferred contracts, they guarantee a fixed payout for life at a certain date.
4. They are safe because of strict industry regulations. For example, if one insurance company goes under, it will be picked up by another. The name of the company may change, but your money will still be there.
Disadvantages of the annuity:
1. The growth rate is always much slower than that of stock mutual funds, sometimes gaining less than a fourth the return of mutual funds.
2. Therefore, unless you have a high enough income to really stuff the annuity, your nest egg may not be the size you wanted it to be by the time you retire.
3. The rate of return falls when the economy falters. Generally speaking, their rate of return falls when the Fed lowers interest rates.
What can we conclude, then? A deferred annuity is safe, but you will not build wealth very quickly this way. The general recommendation is to be willing to be a more aggressive investor during your working years – e.g., invest in stock mutual funds. When you retire, if you want your money to be in a more conservative investment, put the nest egg into an immediate, lifetime payout annuity.