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5 Reasons to Have an Annuity Savings Account

December 22, 2010 · 59 comments

in Personal Finance

I hope you enjoy the following guest post by Lisa Cintron on behalf of OnlineAnnuityRates.com.

It is becoming more and more common for people to decide to open up an annuity savings account in order to prepare themselves for the future.  There are good reasons for this.  Saving for the future is important, especially since Social Security is unlikely to pay for all of the costs associated with retirement.  Here are five reasons that it is a good idea to open an annuity savings account.

1. Guaranteed Income

This is perhaps the number one reason that people invest in an annuity savings account in the first place.  There are several ways in which your funds can be annuitized so that you are guaranteed never to outlive your money.  It is surprising how many people end up outliving their retirement funds, especially as life expectancy is on the rise.  Many annuities allow you to avoid this from every occurring.  It is also possible to set up joint-life plans, or plans that will continue to pay out for a certain number of years regardless of whether or not you pass away in the meantime.

2. Tax Benefits

An annuity savings account earns interest without being taxed.  This means that you not only earn interest, and interest on interest, but you earn interest on funds that would otherwise have been taxed.  This means that your funds will grow at a much faster rate.  You do not have to pay any taxes on the growth of the annuity until you start receiving payments.

3.  No Annual Fees For Fixed Annuities

Unlike mutual funds and some other types of investments, there are no annual fees that you have to pay in order to maintain your investment. Avoiding paying fees on something that is supposed to be earning you money is obviously a good thing.  The majority of fixed (which includes equity indexed annuities) have no up front charges that you are required to pay in order to set up the annuity savings account. This is why fixed annuities are a great deal, all of the money starts working for your right away. On the other hand, variable annuities often do charge upfront fees, and may charge annual fees as well since they are investing your money (often in a mutual fund).

4. Medicaid Benefits

When annuities are turned into income, they are no longer considered an asset.  You can not receive medicaid unless you have spent down all of your available assets.  Since an annuity is not included in these assets, you can receive medicaid assistance.

5. Not Public

When you open up an annuity, you are setting up a contract between you and the insurance company. You pay them a premium, which could be a lump sum, or could be a series of payments.  In exchange, the insurance company agrees that it will pay a specific amount to you in the future.  When it comes to funds that you want to invest but don’t need to be able to withdraw from until the future, this is one of the best places to put your money. Much like a life insurance policy, you can also name your beneficiaries.  When you die, the funds are transferred to your beneficiaries without probate.  This is a good way to transfer funds privately.

From Kris:  Are annuities a part of your retirement portfolio?  I currently do not invest in an annuity, but it is something I may consider as I get older.

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{ 54 comments… read them below or add one }

Money Reasons December 22, 2010 at 6:41 am

Good points, especially when one gets out past their 50s…

I’m not quite ready yet to take the annuity plunge, but once I hit that magic 50 age level, I will definitely start to check the annuity option out!


Kris December 22, 2010 at 8:39 am

MR – Just save so much money before retirement that your annuity can be your ‘fun money’. 🙂


The Grouch December 22, 2010 at 7:45 am

I’m not an annuity expert, but no annual fees for a fixed annuity? Is that right? Annuities are notorious for having high fees.


Kris December 22, 2010 at 8:38 am

Grouch, I thought the same thing when I read the post. However, FIXED annuities generally do not charge separate fees (some may charge a nominal annual fee that quite often can be waived). It doesn’t mean though that any fees are not baked into a reduced interest rate being offered.

Variable annuities are a totally different story…


First Gen American December 22, 2010 at 1:26 pm

Everybody seems to be talking about annuities lately. It kind of scares me handing over a big chunk of money to someone and assuming they will still be around when I need them. Can these types of organizations go high and dry and go bankrupt? I’m just wondering how much of a guarantee there really is.


Kris December 23, 2010 at 1:33 pm

Sandy, I don’t think annuities are guaranteed. It would probably be safest to go with the most reliable provider around. (You know, like how Lehman brothers was… 🙂 )

I don’t plan on investing in an annuity unless I have so much money lying around that I don’t mind losing it. I do think it can be a great income stream, but you could also invest in other vehicles too.


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