You may be considering an annuity as an investment vehicle for your retirement or other future spending needs. Annuities are essentially insurance contracts: you pay a set amount of money today, or over time, in exchange for a guaranteed lump-sum payment or stream of income in the future.
Annuities offer both advantages and disadvantages versus other investment options, so it is important to analyze whether this is the best option for your needs.
Some advantages of annuities include:
There are usually no contribution limits to annuities, so it may be a good place to invest for your nest egg after you’ve maxed our your 401(k) or IRA.
Many investors like the predictable and guaranteed return offered by annuities.
You can assign beneficiaries to your annuities, so they shouldn’t be subject to probate fees if you pass away.
Some disadvantages of annuities include:
Most annuities have high fees, making them one of the more expensive investment options.
Annuity income is subject to ordinary income tax.
Early withdrawals incur a penalty fee.
Annuities are not insured by the FDIC or NCUA, but instead are covered up to a certain amount by individual state regulations.
Annuities do not offer the same growth potential as riskier investment options like stocks or mutual funds.
VisualCalc’s Annuity Break-Even Calculator helps you compare an annuity to an alternative investment vehicle, showing you the break-even point (in time) at which the annuity becomes the superior investment option.
