Annuities have become a popular investment choice for those consumers who are close to reaching their retirement age. There are several reasons why annuities work for many consumers, as they allow for guaranteed income and have several safeguards in place to ensure that the consumer at least maintains a certain level of income once they have stopped working. However, there are also some annuity risks associated with purchasing an annuity, especially certain annuities, as there are a variety of different kinds of annuities currently available to consumers. In order for those consumers approaching retirement to make the best decision available to them, they must know both the advantages and disadvantages to purchasing an annuity in an effort to help them fund their retirement years.
While annuities do guarantee a level of income for a designated period of time that does not mean that the amount of money in question will remain constant over time. That is to say that annuities do not factor in inflation unless the consumer chooses to invest in an inflation-linked annuity. That means that with a standard or conventional annuity, the consumer may end up with less money over time, given the impact of inflation on their pension savings. That being said, annuities are not all made equal. While the consumer can customize their annuity to some extent, these add-ons and enhancements typically cost more money. So, in order to alleviate some of these annuity risks, the consumer must invest more.
Another annuity risk is that the consumer simply does not have an opportunity to make much money on their investment. Therefore, they cannot continue to build their savings. For example, with a fixed annuity, the consumer is not able to make any money off of their investment. So while the consumer is guaranteed their income, they run the annuity risk of not ever being able to make more money off of their investment. Lastly, annuities are notoriously inflexible. This means that the consumer is unable to make any changes to their annuity, including payouts and enhancements, once the annuity has been purchased. Therefore, an annuity risk exists if the consumer finds themselves in a position where they need to change their retirement options.
Regardless of what the consumer needs and wants, they should always consult with an independent financial adviser. A specialist or expert can ensure that the consumer has all of the information needed to make the best and most unique decision for their particular situation.