The benefit of a fixed annuity is the potential for a guaranteed payment.
Regardless of whether the economy or markets are performing well or poorly, an annuity pays a minimum amount of income every month.
But before you rush off and buy into one, you may want to determine that your expectations are realistic.
You see, no single investment, including an annuity, is perfect.
All investments have their downsides, and annuities are no exception to the rule.
A big downside to annuities is the expense.
A fixed annuity typically pays out no more than 5% of its principal each year.
To receive $2,000 a month in income at that rate, you would have to invest $500,000.
Of course, this example is hypothetical and does not represent any particular product.
You also have to factor fees into your annuity expectations.
The more guaranteed features an annuity offers, from inflation adjustment to joint survivor benefits, the higher the fees generally are.
And as with mutual funds, these fees are embedded in the annuity itself, in the payouts.
Additionally, annuity distributions are taxed as ordinary income, which can be taxed as high as 35% compared to 15% for capital gains in a brokerage account.
So your annuity income could very well be reduced by more than it would have been if the same distributions had been paid out through a brokerage account.
That doesn’t mean annuities should be avoided. They offer benefits that other investments don’t.
The key is to keep your expectations realistic. Understand in advance how much the annuity can be expected to provide in income, as well as how much it is costing you in fees and taxes.