This is a great question, the question of “Is an annuity right for me?” There are many ways of investing your money towards your impending retirement and an annuity is one of them. But there are other tax-advantaged investments you should be considering as well for retirement.
The annuity is probably not the place to start if you are investing for retirement. You should certainly consider taking advantage of your company’s 401(k) plan first, as they will probably match you dollar for dollar which is huge.
After your 401(k) is being contributed to the maximum, the next step would be to consider an IRA, which is an individual retirement account. You can max it out as well, and then if you still have expendable income for investment you could consider an annuity. That is the simple answer to the question, “Is an annuity right for me?” There is more to the story, of course.
Should I Buy an Annuity?
Annuities aren’t the end-all investment. There are some positives and there are some negatives. Some of these drawbacks include that you have to put your money into it and leave it for years and years.
If you want access, you will pay a very large penalty for withdrawing early. We are talking about upwards to 20% or even more if you withdraw in the first five years, after considering federal penalties, income tax on the earnings, and commissions and management fees.
Another thing about annuities is that it’s not the most simple and clear investment to make. There are complex fee structures that can confuse you, which will cause you to need an insurance agent, but now you are talking about paying a commission and management fee as well. Don’t let them downplay the negatives and only talk about the positives. Try to arm yourself first by reviewing all you can about the annuity before signing on.
Once you do the research, you may find that you’d be better off with a mutual fund where it is a direct-sale mutual fund. What this ultimately means is that you don’t need an insurance agent so you ultimately don’t end up paying an extra 3% or more in fees to him or her. The other annual fees end up being much lower as well, so you can get it down to as low as half of a percent.
Buy an Annuity That is Right for You!
Make sure you understand all of the retirement investment options out there besides just an annuity. Look into a 401(k) and an IRA before you jump head first into an annuity. They may provide easier options to get you started. And before you invest in any of them, make sure you think you can leave the money in there for a long time, preferably until you retire. “Is an annuity right for me?” That is a question you must answer yourself through research.