By Rachel Hartman | US NEWS

Before you make an annuity a part of your retirement income plan, it’s essential to understand what’s involved with this type of investment option.

“The concept of an annuity is simply a series of fixed payments over a period of time,” says Robert R. Johnson, principal in the Fed Policy Investment Research Group in Charlottesville, Virginia. “The goal of annuities is to provide a steady stream of income beginning either immediately or at some point in the future.”

These payments can be carried out in a number of ways. Depending on the type of annuity you choose, you might make a lump-sum payment and then receive payouts from the insurance company during your lifetime or a set number of years. Alternatively, you may send in a series of payments to the insurer, and then receive regular disbursements or a lump-sum distribution at a specific time. And while some annuities are set up to give you an established rate of return, others include a minimum investment return or a rate that can fluctuate.


With so many different types of annuities to choose from, figuring out the details and options available in today’s market can quickly become confusing. That’s why we’ve sorted through the most common misnomers about annuities and identified the realities behind them.

All annuities are the same. Like stocks and bonds, there are a wide range of options for annuities. These selections tend to fall into two basic categories: an immediate annuity and a deferred annuity. “With an immediate annuity, you make a lump-sum deposit and immediately start drawing income,” says Brad Bertrand, an investment advisor representative and president of Retirement Solutions in Oklahoma City. With a deferred annuity, on the other hand, you give an insurance company money and the company promises to return your money, with the agreed-upon interest rate, at a later point in time. This payout period usually begins much later down the road, such as 10 or 15 years in the future.

Annuities have a low rate of return. Some annuities include a set interest rate, which makes it easy to calculate the earnings. “A traditional fixed annuity is like a certificate of deposit,” Bertrand says. “It has a fixed term or maturity and a fixed rate, so you know how much you will have when that term is up.” If you opt for a variable annuity, its performance will usually be based on the stock and bond markets it is invested in. This means it could have a positive or negative performance, based on market conditions. Alternatively, a fixed index annuity acts as a hybrid of a fixed and variable annuity. “Like a fixed annuity, the term is fixed, and like a variable annuity, the rate of return can vary,” Bertrand says.

Annuity fees are always sky-high. You’ll want to understand the expenses involved with an annuity you’re considering before signing anything. Keep in mind that the fees can vary depending on the features involved. Variable annuities will generally include management fees and a mortality and expense risk charge, which is calculated based on factors such as life expectancy and the cost of ensuring the insurance company is compensated if the individual lives longer than statistically expected. “The fees in variable annuities can range from 2 percent to 4.5 percent,” says Dan White, founder of Daniel A. White & Associates in Glen Mills, Pennsylvania. Both variable and other types of annuities may also include a fee for a guaranteed lifetime income benefit rider, which ensures a certain amount will be provided as income, regardless of how the investment performs. Ask your financial advisor for a detailed list of fees and ongoing expenses to anticipate, and then request an explanation for anything that isn’t clear in the fine print.


When I die, the insurance company keeps my money. If your annuity plan calls for life-only payouts, you can expect larger payments from the insurance company during your lifetime. When you pass away, however, the balance within the annuity goes back to the insurance provider. If your payout plan includes a beneficiary agreement, your beneficiaries will receive the remaining amount of money in the contract. “Some annuities include this feature as part of the base contract,” says Ian Myers, communications coordinator at, an independent online resource for annuities, retirement and income planning. “Other annuities provide this feature as part of a death benefit rider, which often comes with an additional charge.”

Read the terms and conditions listed with an annuity, as they will spell out where the remaining money will go after you pass away. And if beneficiary terms are not listed, ask your agent to explain how the payout will work.

I won’t be able to access my money if I need it. Many annuities are set up for a certain time frame, often between three years and a decade. During that time, if you want to withdraw a significant amount of the funds, you’ll likely face a surrender charge, which is a fee required for taking out funds early or canceling the contract. To access a small percentage of your allocated funds, however, you might not encounter any fees. “Most annuity contracts do allow for a 10 percent withdrawal with no penalty,” White says. In addition, some annuities offer a liquidity option in certain events, such as a terminal illness or nursing home care.

A deferred annuity isn’t worth the wait. If you set up a deferred annuity, it’s true that you won’t immediately start receiving income. You will, however, be able to factor in future expected payments into your retirement plan. “A deferred annuity may be an ideal investment for those planning for retirement or for those already retired because it can provide a lifetime income stream,” Bertrand says. If you are 55 years old and get a deferred annuity to start using when you retire at age 65, you could have the advantage of knowing how much you will receive when retirement begins.

An annuity will cover all my retirement needs. While an annuity can provide an income stream, you’ll want to have additional accounts with funds that are easy to access. Keep an emergency fund in place for unexpected costs. Also factor in other ongoing sources of income, such as Social Security benefits and distributions from retirement accounts, to establish a retirement budget.

When considering your retirement portfolio, aim for balance and assess the risks that you are comfortable with. Annuities tend to provide high layers of protection for your investments. “They can leave your invested dollars unaffected by market fluctuations,” says Andy Whitaker, a financial planner at Gold Tree Financial in Jacksonville, Florida. For a well-balanced portfolio, you may want some exposure to equities or other higher-risk investments.


If my financial advisor recommends an annuity, it’s right for me. To establish a retirement strategy that best fits your situation, you’ll want to work with a professional who focuses on the big picture. “An advisor might be totally honest and not have a clue about a whole list of things that should be considered when assisting you with your life savings,” Whitaker says. When choosing a financial planner, pay attention to how much information he or she needs before starting to make suggestions. You should be asked about items such as tax returns, account statements, estate documents, a listing of your assets and debts and insurance policies. Also make sure the advisor considers your personal goals and expectations to help you set a plan for your future.

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