Do You Need An Annuity For Retirement?

Deferred income annuities are very similar, but don't start paying out for a while (that's the deferred part). Because the issuer has time to invest your money before starting to pay you, your premium should be relatively small. 

If an investor wants a guaranteed payout for a surviving spouse, or even if he or she wants to just invest a portion of their wealth into an annuity, we'd grudgingly say "OK." Not everyone has the same risk tolerance, and it's hard to put a price on sleeping well.

Our view, though, has long been that most people can handle income generation in retirement themselves, with the help of dividend-paying stocks such as Johnson & Johnson (JNJ), Exxon (XOM), and Procter & Gamble (PG).

Know What You're Paying For

Investing costs money. That is, you're putting your hard-earned dollars into something that should make you more of those dollars, but you're also paying for the ability to do so in one form or another. It could be trading commissions, mutual fund expenses, fees for managing a certain quantity of assets--there are lots of ways you pay.

So a big part of a successful investment plan is to know what your investments cost. Fees and expenses can have a surprisingly large effect on total returns over time. That's not just for annuities--that's for everything.

It's easier to understand the effects when they're presented graphically. In this example, which we ran through WealthTrace, dropping fees by just 20 basis points (that's 0.20%) leads to an extra $112,000 at the end of the retirement plan.

 

The Facts Don't Change

We don't know if the legislation making it easier to purchase an annuity via a retirement account will get through, or what form it will take if it does. Regardless, what's needed to make a retirement plan successful remains the same. Investing is risk taking; people's comfort with taking risks varies. If an annuity ends up in a risk-averse investor's arsenal--using money they might have otherwise just foolishly stashed away in a bank account--that's OK. But if you're relatively early in your investing years, and quite a ways from retirement, it's probably going to be better to take bigger risks--and get higher returns--with the bulk of those assets.

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