Can Retirement Annuities Be Wrong for Me?

Let me begin by telling you about my friend Ian.

Ian is 57 years old.

The company he works with is likely to lay off some employees this year, and Ian could be one of them.

Since he is expecting this to happen, Ian is thinking of shifting his 401k balance to an IRA because many of his colleagues have done a 401k rollover into annuities.

Ian is wondering whether this is a good move.

Now, the thing with most financial advisors is that they tend to think annuities are the ideal retirement planning option. This is probably why most of Ian’s colleagues ended up with annuities.

Another reason people recommend annuities is the commission on sales, which is pretty good. Apart from that, in the event of a lay-off, while a 401k rollover to IRA could be sensible, there are other options, too. However, this depends on your specific circumstances. Even after you roll over your 401k to IRA, annuities may not always be the answer.

While annuities are definitely a good option in retirement investments, you need to choose the right type of annuities. For example, immediate annuities can be a great idea for converting your savings into a life-long steady income.

Unfortunately, immediate annuities are not always advertised. Instead, advisors push variable annuities at their customers. These come with an interesting proviso called a guaranteed lifetime withdrawal benefit. Obviously, this looks like a happy situation, as it implies you can withdraw around four percent of your principal throughout your life.

You might even be offered a guaranteed rate of return before you begin to earn your income.  As your money is invested in the annuity’s sub-accounts, quite similar to mutual funds, you can expect your money to grow substantially, in spite of any market fluctuations.

So what could go wrong? Why am I being pessimistic? It’s because there are some issues. The fees could be high, plus the income may not be guaranteed. Many people don’t really understand the nuances behind what the guarantees include and what they do not.

So should you purchase one of these annuities?

The best thing to do even BEFORE you invest in retirement annuities is to talk to a financial advisor like Zecco/Tradeking/optionsxpress who does not depend on commissions from annuities for his or her income.

Approach a fee-only financial expert.

Instead of just talking about the benefits and shortcomings of annuities, look at how you can handle your 401k money based on when you expect it to provide you with retirement income.

So – consider a strategic way to get the income you want instead of just looking at different products.

Your strategy could possibly include more than one type of retirement annuity.

I told Ian that he should take his time looking at his options.

Considering that he has taken decades to build his retirement plan, why make hasty decisions? It is worth it to be absolutely sure if the retirement income options you choose will give you what you want.

If you are stuck with a 401k plan at work and want to know how to get the most out of your retirement savings, get in touch



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