An annuity should not be compared to a stock market investment because in most cases its use differs. An annuity is ideal for guaranteeing an income, whereas the stock market cannot because its value may go down.

 

When determining how much to put into an annuity, it's important to know how much of a gap exists between guaranteed income such as Social Security or a pension and future expenses after accounting for inflation. Often, it makes sense to stagger annuities so that every 4-5 years a contract can be exercised to supply additional needed income.

 

Frequently multiple companies are used because it's smart to find the "sweet spots" for each company. For example, one company may offer the largest payout if the annuitant waits five years before beginning the income stream. A different company may pay more if the annuitant wants ten years. So, if the purpose of a second or third annuity was to add income to keep up with inflation, a deposit of a lesser amount would be required.

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When evaluating the income a contract will produce it's important to recognize what's important - the amount of cash an income stream will produce. This can be confusing because a company may brag how large the account will become that is used to calculate the size of the payment. However, if the percentage payout is low, it may not be the best contract to choose. So, only compare the amount of income that will be paid to an annuitant after a certain amount of time.

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Annuities can be a great addition to a retirement plan for people wanting: (a) secure, risk-free growth, (b) a guaranteed income stream available immediately or increasing by waiting to later, and (c) as a safe vehicle for legacy planning.