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Is an Annuity Right for Retirement? The Pros and Cons of Fixed Annuities

Podcast |: Retirement Answer Man
Publisher |: Roger Whitney, CFP®, CIMA®, RMA, CPWA®, AIF®
Media Type |: audio
Podknife tags |: Investing,; Personal Finance,; Retirement
Categories Via RSS |: Business,; Careers,; Investing
Publication Date |: Jul 17, 2019
Episode Duration |: 00:43:23

On today’s episode of Retirement Answer Man, we’ll consider the pros and cons of fixed annuities. During this series on annuities, we are discussing whether annuities are right for your retirement. Many people choose pretirement as an income floor for their first few years of retirement to help them ease into the lifestyle and decrease financial risk. An annuity can be considered a backend floor to cover your retirement spending in your 80’s, 90’s and even 100’s. We all know that longevity is a big factor in retirement planning and a fixed annuity could help supplement your social security income in old age. Listen to this episode to help you consider the pros and cons of fixed annuities so that you can judge whether an annuity is a good choice for your #retirement.

What are the pros and cons of fixed annuities?

What are the pros for a fixed annuity? Since an annuity is like a pension that you pay for in advance, you get a guaranteed income for the rest of your life. Once you buy it and put it in place you can‘t really mess it up. It also offers protection for your future self. You may not be as astute in your later years and an annuity can help protect you against fraud, poor judgment, etc. An annuity also gives you a kind of longevity insurance since you get payments for your entire life whether you live until 80 or 110.

Although an annuity can simplify things, you must give up some things in return. First of all, you give up your lump sum. In doing so, you lose the opportunity to use the money in a different way. You don’t really know how much you will get in return since it is gone if you die the next day. Another potential downside is inflation. By the time you actually begin annuity payments, the inflation can lower your purchasing power by 20% or more. You also give up the opportunity to leave a legacy with the money.

Why did B.W. choose to purchase an annuity?

B.W. is a member of the Rock Retirement Club and has recently retired at age 55. He has decided to dive headfirst into retirement financial planning. Since he chose a bucket strategy for retirement expense planning. He has 10 years of spending set aside until he reaches the age of 65. At age 65 he’ll receive Social Security and a pension which will cover 75% of his costs. He decided to find an annuity to cover the other 25%. B.W. chose a deferred annuity since he doesn’t need the money until the age of 65. He looks at purchasing an annuity as an insurance policy rather than an investment. Listen to this episode to hear why B.W. chose to purchase an annuity to cover his retirement expenses.

How did B.W. determine which annuity to buy?

B.W. started searching for annuities by considering the amount of money that he wanted to cover. He also knew how much he was willing to spend. This led him to explore the options that he could afford. He narrowed his selection down to one consideration: What would be the guaranteed joint life income stream from the annuity? He looked at just about every annuity there was and considered various sources. B.W. ended up choosing a deferred fixed annuity called SPDA (single premium deferred annuity). He chose an annuity that would cover both the lives of he and his wife. Are you considering an annuity as a way to provide income in retirement? Listen now to hear how B.W. figured out which annuity would work best for his goals.