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Annuities are a contract with an insurance company that any prospective retiree can purchase for guaranteed income. They can be bought in a series of payments or in one large payment, and the insurance company sends payments periodically over a set time frame.
While they can help to create an income stream in retirement, they’re not always the right move. They can have a number of fees and penalties involved that can make them a poor choice for some.
However, if you think an annuity is a good fit for your retirement plan, there are three obvious signs, according to financial planners.
1. You’ll likely live a long life, and you’re worried you’ll outlive your money
Annuities make sense if you expect that you’ll live a very long life.
“When I think about whether an annuity can make sense, number one would be if living a long time is a possibility and it really worries you,” said financial planner Brian Walsh of SoFi.
Added Walsh, “The primary benefit of an annuity is having an income stream for the rest of your life,” so if you’re someone who’s worried about outliving your money, an annuity can bring peace of mind.
While spending all your money during your lifetime isn’t necessarily a bad thing (so long as you’ve planned for it), an annuity can provide some stability for anyone who doesn’t feel comfortable with that plan.
2. You’ll struggle without the structure of a paycheck
Whether you’re afraid you’ll spend too much or too little in retirement, an annuity could help you have more control.
“Sometimes people don’t do a great job of managing their expenses when they just have a bucket of money to take out of, or it just seems very off to them because they had a paycheck every two weeks for years, and now they don’t,” Walsh said. “In those situations, using an annuity to kind of create that regular income stream … could be beneficial.”
3. You’re a very conservative investor
If you’re incredibly conservative with how you invest and don’t mind that you may not get the best returns, the security of an annuity might be worth the sacrifice.
Financial planner John Bovard of Incline Wealth said that for some clients, an annuity helps them feel like they’re taking less risk.
He told Insider about one client who decided an annuity was right for her: “She didn’t want to take extra risk, and she didn’t want extraordinary returns. We knew exactly how much money she needed to live off of,” he said. The annuity helped her reach her retirement goals and feel more secure.
Walsh agreed that conservative investors might be the right candidates for an annuity. “Annuities do provide some additional security that can make people feel better. That could be beneficial as opposed to leaving all of your money in cash,” he said.