Deciding whether to keep your retirement savings in accounts like IRAs or 401(k)s versus transferring those funds to an annuity is a question many people face as they approach retirement. Before we jump in, remember you don’t have to choose one or the other—each option offers unique benefits, limitations, and risks. In order to come to a solution that works for you, it’s important to weigh the pros and cons of these options, but in a way that prioritizes your personal goals. Let’s take a closer look at these two options:

Q: What’s the difference between a retirement account and an annuity?

A: A retirement account, like a 401(k) or IRA, is an investment account that offers tax-deferred growth. You manage your investments (or your plan does), and distributions are taxed as income. Furthermore, they tend to offer “unstructured” income in the form of withdrawals from the account, which could be comprised of anything from sales of stocks and bonds to dividends or uninvested cash. You may have been contributing to these throughout your working years due to their advantages as savings accumulation tools, but they aren’t always the complete solution for generating reliable income in retirement.

An annuity is an insurance contract, not an investment. Not all annuities are tied to market movements, and some of the most recognizable ones are not tied to market performance at all. You give an insurance company a lump sum or series of payments, and they agree to provide income for life or for a certain period of time in return. This means, regardless of market conditions or timing when you need income, you receive a predictable stream of income, typically based on a principal amount that isn’t affected by market downturns. While some annuity contracts do aim to emulate a market investment, most actually don’t.

Q: What are the pros of keeping my money in a retirement account?

A: Retirement accounts can offer:

• Flexibility – You can access funds (with some restrictions) or change investments whenever you’d like.
• Potential for higher returns – Since retirement accounts are tied to the markets, they may outperform annuity guarantees, though returns are not certain and principal investment is not protected.
• Tax-advantaged growth – Roth and traditional accounts can be withdrawn tax-free or contributed to tax-free, respectively, as long as they comply with their account rules and regulations.
• Low fees – Many 401(k)s and IRAs offer low-cost investment options.

Q: Why would someone consider using an annuity instead?

A: Some people value:

• Regular income (for life or a period) – Knowing exactly what you’re getting each month can be useful for budgeting and covering essential expenses in retirement.
• Longevity protection – Payments can sometimes last for life, regardless of how long you live. So, you don’t have to worry about running out of money.
• No contribution limits – Unlike IRAs or 401(k)s, some annuities allow you to contribute large amounts.
• Principal Protection – Unlike an investment, most annuity contracts protect your principal payment, meaning market fluctuations don’t impact the return you generate or the savings you aim to protect and grow.

Q: What are the drawbacks of annuities?

A: Some things to watch for:

• Fees – Annuities often come with administrative fees, commissions, and rider charges. Like any financial service or tool, it’s important to be well informed of these fees and what they pay for.
• Complexity – Because of the different types, features and fee structures, annuities can be difficult to understand, but with the help of a fiduciary who is obligated to act in your best interest, an annuity’s customization options may align more closely with your specific goals than a traditional investment account.
• Lack of liquidity – Withdrawing early may trigger surrender charges.
• Inflation risk – Unless the annuity is indexed or rises in some way over time, fixed payments could lose value over time.
• Credit risk – Your payments depend on the financial strength of the insurance company.

Q: Are there any cons to keeping my money in a retirement account?

A: Yes. Here are some things to keep in mind:

• No guaranteed lifetime income – You must manage withdrawals yourself and may run the risk of outliving your savings.
• Market risk – Most retirement accounts are exposed to stock and bond market fluctuations. A market downturn just before or during retirement could reduce your portfolio’s value and long-term income potential.
• Self-Management – You’re responsible for investment choices, rebalancing, and withdrawal decision

Q: Can I use both retirement accounts and annuities together?

A: Sure! There’s no rule that says you have to pick one or the other. For example, you could:

• Keep your retirement account invested for growth and flexibility.
• Use a portion of your savings to buy an annuity that helps cover essential monthly expenses.

A blended approach can provide a balance of market growth potential, flexibility, and guaranteed income. But it depends on your risk tolerance and personal financial situation.

Need help comparing options?
A financial advisor can help you cut through the complexity. We can help you compare options, review income projections, and determine whether annuities complement your retirement plan. Schedule a consultation today for your next step.

TLDR (Too Long; Didn’t Read)

Deciding between keeping your money in retirement accounts like IRAs/401(k)s or using annuities isn’t an either/or choice. Retirement accounts offer flexibility and growth potential, while annuities offer predictable income and longevity protection. Many people benefit from combining both. A financial professional can help compare fees, risks, guarantees, and income projections to see what fits your retirement goals.