People who are approaching retirement age may prefer purchasing an immediate annuity instead of investing in a deferred annuity. Immediate annuities begin to issue payments shortly after the initial investment is made. Deferred annuities have a waiting period during which the annuity will accumulate money prior to issuing payments. However, these annuities may be converted to an immediate annuity if the account holder changes his or her mind and wants to begin receiving payments. Both immediate and deferred annuities can be fixed, variable, or a combination of both.
A major disadvantage to having an annuity is the hidden fees that are often involved in investing in this type of product. Most annuities are sold by insurance brokers, who collect a commission. People who wish to withdraw money from an annuity within the first few years will often be subjected to a surrender charge, which may range from seven percent to as much as 20 percent of the account value for withdrawals that are made within the first year. The fee gradually declines and reaches zero after several years.
While investing in an annuity can be a good strategic investment move, clients should do thorough research prior to deciding to invest. Annuities are most appropriate for people who have maxed out their 401(k) and IRA tax advantages. People who are in a high income bracket and have extra money outside of a 401(k) or IRA to put away for retirement may wish to seriously consider investing in an annuity.