Annuities: Is it time to give yourself a pension?

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If you have a parent who retired with a pension, you’re probably a bit worried if you have to depend only on the amount that’s in your 401K. Why? Pensions guarantee a specific amount of money each month when you retire. 401Ks don’t. They’re investment plans where the amount that’s in the account can run out in retirement if you haven’t saved enough or due to stock market value changes. That doesn’t mean they don’t have value, but it does mean you may want to diversify your retirement savings. Thus, you may want to think about an annuity, a pension plan you purchase on your own.

While you should contact a financial advisor to learn more, here are answers to four questions about annuities to get you thing about them.

What exactly is an annuity?

An annuity is an insurance product that pays you a specific amount in retirement monthly. The exact amount you get may be determined by factors ranging from how much you put in to the type of annuity you choose.

Will the annuity you buy pay you throughout retirement?

This answer varies. Some annuities last for a specific number of years. For instance, you could purchase one in which you receive a payment of $1400 per month from age to 65 to age 85. You could also get one that doesn’t begin until age 75, but pays you a higher amount. Other annuities can begin at age 55 or 65 and last forever. When purchasing annuities, you’ll have to decide what’s best for you. Picking an annuity that doesn’t start making payments until you reach a more advanced age is a good option for individuals that are worried about their 401k funds running out if they live a long time. 

Where do you buy them?

You buy them through financial professionals. Always choose a financial professional who can explain to you all the details so you understand.

Are they expensive?

Fees vary from product to product. Ask your financial advisor about the fees involved in the product you choose. However, the easiest way to compare annuities costs to other investments is based on the amount you’d get in retirement. After all, fees aren’t so important if you still make more money off of it. Have the financial advisor compare this option with that of investing the same amount for the same period of time in your 401K. More than likely you’ll be best off with some of each kind of investment.