For years, there have been debates about whether annuities are a good investment, and the debates aren’t ending soon. So instead of an argument, you can just go through the pros and cons of having an annuity rather than stocks during your retirement.
Annuities are a great way to receive a guaranteed steady income in retirement. Investing in an annuity offers a tax-advantaged way to save your money.
Advantages of Getting an Annuity
Planning for retirement isn’t always easy. First, you need to know how much you need to save in order to retire, then start planning your investments. You may find many retirement saving options, such as an individual retirement account (IRA), 401(k) plan, and an annuity.
Annuities provide you a supplement for your retirement income. It’s a contract between you and an insurance company, which pays you back in a lump sum or regular payments.
There are different types of annuities in which you can invest, and the payment structure depends on terms you agree to with the insurance company. Types of annuities are – fixed, variable and indexed.
A fixed annuity guarantees a fixed number of payments and provides a minimum rate of interest on your money by the insurance company. In a variable annuity, you can invest in different areas such as mutual funds, and the payment depends on your investment performance.
An indexed annuity is technically a combination of fixed and variable annuities, as it gives the benefit of both. The returns depend on the stock market index but not your investment decision.
You can choose an immediate annuity or a deferred annuity for the above-mentioned annuities.
Pro #1: You receive a regular payment
The biggest advantage of getting an annuity is that you receive a regular payment from the insurance company. During your retirement, it provides a supplemental income to cover your regular expenses. Be sure to go through the terms and conditions for the type of annuity you choose.
Pro #2: Gives a guaranteed return
There’s always a risk involved when you invest. A fixed annuity contract includes guarantees to prevent you from certain investment risks. It will pay you back the principal amount you have invested.
Pro #3: It offers death benefits
A variable annuity is a bit risky, as they have the potential to lose your money. However, it provides an extra benefit – Death Benefit. A death benefit is a payment by the insurance company if you die, and doesn’t depend on your investment performance.
Disadvantages of Investment in Stocks for Retirement
The main disadvantage of stock market investments includes higher risks and the time involved for a good return. Investing in stocks during your retirement will not be a good idea. For retirees, it’s a bit riskier to chase after big returns as younger investors do. Instead, go for a guaranteed return investment.
Subject to Higher Risk
Investing in a stock market is like, the higher the returns the greater the risk of losing your money. When a company is facing difficulties then there is a decline in the price of the stocks and one can see a loss of investment. And if many of them are leaving the market because of the economic downturn then it’ll be difficult to sell your shares to someone else. For retirees, it’s risky to face such a disturbance.
Time-consuming Investment
Investing in stocks is not like winning a lottery. You need to have done complete research on the stock market for a good profitable investment return. It is a time-consuming task as you need to monitor the movement of the stock price before buying it. Additionally, you an exit point investment in stocks for retirement is a bad choice.
