3. Inflation risk. While some annuity plans are adjusted (at least partly) to offset the effects of inflation, most are not. The reality of a fixed-payout annuity is a steady loss of purchasing power. If you invest the money on your own, you have a good, but by no means assured, chance of investing it so that it will keep up with inflation.
4. Anticipated income. Generally, annuity payouts give you less income than you could make if you were investing the money on your own. Reason: The payout schedules tend to be figured very conservatively to minimize the annuity company's future financial risks. In plain English, this means that the company is betting you’ll live to 200. Find out the exact monthly or quarterly stipend you'd receive from an annuity and compare this figure to your anticipated rate of return if you were investing the money on your own.
5. Mortality risk. Traditionally, annuity payments stop when you die. So, if you die prematurely, your estate is considerably poorer than it would have been if you'd taken a lump sum. Note, though, that many annuity plans - both the corporate type and the kind you buy on your own – offer some sort of provision for this event, although at a price. Typically, it's a continuation of some lesser stream of payments for the benefit of a surviving spouse, or the option of receiving a lump-sum payout of a portion of the money that was originally put into the annuity.
Each payout method has advantages and disadvantages, and no financial decision is "either/or." I have found that many retirees will benefit from taking an annuity for part of the money and investing the rest.
If you do decide on an annuity, be sure to shop around. Don't assume that the first annuity you come across or your employer’s annuity is the best. It may not be, in which case you can take the lump sum and roll it over into a better annuity, but make sure the annuity is backed by a highly rated insurance company.
If you decide to invest the money on your own, make sure you examine the best way to put more of your retirement dollars in your pocket and less in Uncle Sam's. A conversion of these assets to a Roth IRA may help you hold on to more of your hard-earned cash.
All the information presented on AARP.org is for educational and resource purposes only. We suggest that you consult your financial or tax adviser with regard to your individual situation. Use of the information contained in this website is at the sole choice and risk of the reader.
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