Annuities are a popular but complex and frequently-misunderstood retirement product. The main appeal of an annuity is that it offers you fixed income for (usually) the remainder of your life. Also, annuities are guaranteed, which nearly no other investment product is. The problem is, while this payment won’t fall, it also won’t increase with inflation, which means the purchasing power will erode significantly over time. Also, while the money that you put into an annuity isn’t taxable when you get it back, the gains you receive can be taxed.
- Fixed income annuity payments decline in real value over time because they are not adjusted for inflation.
- Annuities come with both direct costs (i.e, fees) and opportunity costs of forfeiting the potentially greater earnings of other investments.
- The primary benefit of annuities is that their guaranteed income absorbs some of the risk you take with other investments.
“It is sometimes said, humorously, that the greatest value of an annuity is the steak dinner that it comes with.”