Daily Money - Retirement’s Great Unknown: Annuities

You don’t know what confusion is until you try to understand annuities. Most people saving for retirement know that these financial products provide an income stream in their non-working years (good) but also have a lot of fees and clauses (less good). In other words, annuities can be great for retirement, but many people hesitate to learn enough to buy one.

Annuities are an insurance contract. The insurer most commonly provides for a series of payments at regular intervals throughout retirement. The buyer pays either an up-front lump sum or a series of premiums over time.

Annuities generally come in one of three main types:

• Fixed interest annuity — earns a guaranteed fixed rate of interest
• Fixed index annuity — can earn interest based on an external market index. Since you’re not actually participating in the market, the money in your annuity isn’t at risk.
• Immediate annuity — purchased with a lump-sum payment and pays an income stream that starts almost immediately

Once the money goes in, you can’t touch it or break the contract without paying stiff penalties — that’s known as the surrender period, and it can last 10 years or more. Surrender fees start out at around 10% and generally decline each year.

Your retirement strategy doesn’t have to be either/or. You can incorporate annuities into your planning to get the benefit of guaranteed income while investing in traditional investments through a 401(k) that allow you to diversify and, generally, get a better return.For more on using annuities in your retirement planning, read Money reporter Mary Ellen Cagnassola’s story.

— Jill Cornfield, deputy editor

Not many people are able to contribute the maximum amount — $22,500 in 2023 — to their 401(k)s. But fewer women than men are putting in money at that level, according to a recent Bank of America study: just 7%, compared with 10% of men. Here’s how average 401(k) balances looked at the end of 2022:

• Men: $89,000
• Women: $59,000

• Should you flee to cash to avoid market downturns? Remember: no risk, no reward.
• Millions overlook this tax credit, which essentially pays you to save for retirement.
• We’ve all heard how important it is to have a purpose in retirement. Here are actionable tips for how to find one. (podcast)

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