As a fee-only Financial Advisor who does not make commissions on recommended financial products, I don’t like annuities most of the time. It’s not only that annuities are mostly sold by salesmen seeking an annuity’s high commission, it is that annuities are complex, tax-inefficient, and not used for their intended purpose by most buyers. Simply put, you turn over your money to an insurance company (an annuity is not an investment), and when you “annuitize” the money, the insurance company has a contract to pay you (usually) so much a month for as long as you live. Problem is most people do not annuitize and end up with a variety of high and unnecessary fees.
The concept of an annuity is sound – an income stream for life. Social Security is a type of annuity. You put money into Social Security during your working life and when you reach retirement age, Social Security sends you a monthly check (actually, checks are history, they now send you the money electronically). Unfortunately, Social Security is designed to supplement your pension and retirement savings, not to be your main source of retirement income.
Let’s consider your retirement savings as a possible alternative to the annuity. During your working life, you put part of your income into a company savings plan – example 401(k) – or into an IRA (Individual Retirement Account). When you reach retirement age (as early as 59 1/2), you can take out some or all of your money. The big difference is that how long you can take out money depends on how much you put in. If you don’t contribute enough, you will run out of money during the retirement years. When you reach age 70 1/2, you must begin to withdraw your retirement savings. It is called Required Minimum Distribution (RMD).
RMD is, in effect, an annuity because the chart goes to age 115 and beyond. So, if you use the RMD formula each year, you will not run out of money, ever. And you won’t be giving your money away to some insurance company, nor will you be paying their fees and commissions and penalties. The biggest challenge is to have a large enough RMD, which when added to your Social Security and your other assets, will provide you with enough money to enjoy the rest of your life.
Here’s my Money Coach advice:
The key to retirement – save early and save often.
The secret to living within your means after retirement is living within your means before retirement.
Aggressively add to your retirement plans each paycheck.
Use RMD instead of an expensive annuity.