In the world of financial planning and retirement, the biggest question isn’t just “What are annuities?” The main question is, “Why are people buying annuities, and then looking for structured settlement cash outs?” The simple answer here is that annuities aren’t always the greatest investment, and many people only find out about the downfalls of their annuity after buying it. For starters…
- First of all, inflation is naturally going to occur no matter how much you invest or how strong the economy is; settlement annuity payments rarely — if ever — take inflation into account when calculating the monthly payments you’ll receive. In other words, although you’ll get the same amount of money each year during retirement, you won’t be able to do as much with it.
- It’s possible to buy an annuity that gives increased payments over time — these are called percentage increasing annuities, and although they seem to solve the problem of inflation, the remaining problem is that you’ll end up getting much smaller payments at the outset (and if you happen to die soon after you start receiving payments, you’re out of luck).
- In fact, as grotesque as it might sound, the issue of how soon you (and/or possibly your partner) die after you start receiving settlement annuity payments can be a major problem, too. Level annuities promise to give you payments each month until you die, but if you happen to pass away just a year or two after you start receiving your money, then the rest of your investment will go to the annuity/pension company. Fixed annuities give you a bit more control over your money by promising a specified amount each month until your money runs out, but if you happen to out-live your money, then you’re left to your own devices as far as finances go.
- Taxes are another problem: although your lump sum investment won’t be taxed while it sits in your account, once you begin receiving payments, those payments will be taxed just like a regular paycheck would be. Unlike a regular paycheck, the most common annuities aren’t adjusted for inflation (and consequently for tax increases), meaning that it’s incredibly difficult to plan for how much money will be taken out of your regular payments.
So what do you think? Are these downfalls still pretty minor, compared to the benefits of annuities? Or are they enough to convince you that annuities are the worst? More on this topic.