It depends on what you want the money to do. Annuities are end-of-working-life solutions. If you have read this far, I’m sure you have heard of the 4% rules in financial planning. It states that if you start taking 4% out of your investments each year after you retire, you will never outlive your money. Well, maybe that was true when that 4% rule theory was developed, but not anymore. Yale has has said the number should now be 2.38%. Others have calculated similar numbers.
There is a second, rarely talked about risk with mutual finds for retirement. SEQUENCE risk. It’s what happens right before you retire. For example, if you retired a month or two before the Great Recession, and your investment followed the market and lost 50%, you would be virtually guaranteed to run out of money if you started taking out 4% of your funds every year. It’s pure math.
Annuities avoid that risk. You lock in your gains with an annuity and can actually take out more than 4%, if you have a rider. If you are entering the retirement RED ZONE, which is 10 years before your target retirement date, you can get an annuity that guarantees the amount of monthly income you will draw on will go up by a minimum of 6% per year. Those riders cost a little bit of money, usually around ½ of 1%, but they are well worth it. Once you retire, the amount you have accumulated becomes secondary to the income it safely generates.
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