Investing in Annuities: Pros and Cons

Choosing the right time to annuitize can help you get the most out of your annuity. Panchenko Vladimir/Shutterstock

An annuity is a financial product sold by an insurance company. It’s an insurance contract. It works by you paying a premium, just like you would for any other insurance product. Then the company makes payments to you. These payments can be immediate or deferred.

Annuities are often used when planning for retirement. The lure of future guaranteed income is strong. But are they the right move for everyone? What are the pros and cons of purchasing an annuity?

Pros

Guaranteed Income for Life

There is a steady stream of income available for retirement. This income can last a lifetime. This makes it a great vehicle to avoid running out of money before you pass.

Defer Taxes on Investments

Some annuities defer taxes until you start withdrawing. The theory is that your ordinary income will be lower in retirement than when you were working.