As a fellow entrepreneur, I know securing income streams for retirement is tough when so much money gets reinvested into growing your business. Annuities seem appealing to supplement Social Security because they promise guaranteed lifetime income. But are fixed annuities the right solution for small business owners planning their next chapter?
Fixed annuities offer notable benefits but also key downsides to consider carefully based on your situation.
The Pros Can Provide Peace of Mind
What if you could count on fixed, predictable payments on top of Social Security to cover essential living expenses?
With a fixed annuity, insurance companies guarantee minimum interest rates of 3-4% even if markets tank. Compare this to average annual CD returns hovering around 0.50% over the last decade. While less than historical market returns, fixed annuities provide reliable growth without downside risk.
Once you annuitize payments usually after age 591⁄2, this lump sum converts to a personal pension. Imagine knowing exactly how much gets deposited into your account each month for life. For self-employed individuals used to income fluctuations, this consistency allows better retirement planning.
In 2022, the average annuitized payout equals $7,593 per year in retirement income. What could you do with an extra $633 per month?
Fixed annuities also let savings grow tax-deferred. Upon withdrawal, gains get taxed as ordinary income. But this deferred taxation helps your money compound faster without yearly tax bills eating away at interest.
But Limitations Exist Too
Every product has its downsides, so weigh these cons against your personal priorities.
Surrendering an annuity early leads to steep surrender charges, often around 10% in the first 5 years. Consider this an early withdrawal penalty limiting access to your money.
By design, fixed annuities limit participation in stock market returns which historically average around 10% annually. So while your money won‘t lose value like in 2008, you sacrifice potential gains during bull markets.
Over 20-30 years of retirement, even low inflation adds up. But fixed annuity payments stay constant, slowly decreasing in real value every year. Protect against this erosion of purchasing power by also investing in stocks.
Strike the Right Balance for Your Goals
As with most big money decisions, finding the middle ground leads to the best outcome. I suggest my fellow Main Street entrepreneurs take this balanced approach:
Secure enough guaranteed fixed annuity income to cover 70-80% of basic living expenses, then invest the rest in stocks for growth potential and inflation protection. This blended strategy creates a smart personalized plan.
Are you still unsure if fixed annuities suit your retirement plans? As someone grateful for the freedom entrepreneurship provides, I‘m happy to offer my insights. Let‘s chat 1-on-1 about your questions.
