Don’t Buy An Annuity Until You Do Your Homework

homeworkWhile annuities are not right for everyone, they certainly take the worry out of outliving one’s savings in retirement for many people.  In “7 tips to avoid annuity headaches,” Melody Juge of Marketwatch offers a word of caution before making the decision to purchase an annuity.  Ms. Juge feels the same way about annuities as I do.  They can be an excellent source of guaranteed lifetime income for retirement, but they are not the best product for every single person.  You must carefully weigh your options and your personal situation before making the decision to put a lot of money into an annuity product.  The article offers seven tips for ensuring you are making the right decision with your annuity product.

Know what your trade-off is for putting your money into an annuity.  Whether making a 401k transfer or using money from an IRA or CDs, make sure that using that money to purchase an annuity is best for your individual situation.  Often, it is.  It is crucial to have a good understanding of the annuity contract.  The longer it is and the more legal language involved, the harder it can be for both you and your advisor to know the ins and outs of your annuity products.  Get an understanding of surrender fees, caps, participation rates, optional riders, guarantee rates, and everything else involved.  A good advisor wants you both to understand all of the contract details so that you know you are getting the annuity that will secure your finances in retirement.

Something that isn’t often considered is breaking up your total annuity amount into smaller purchases.  This allows you more control once you are ready to start receiving income.  For instance, if you are buying a $200,000 annuity you can instead purchase two $100,000 annuities.  In the case that you don’t need all of the income at once, you can delay one of the annuities without going against any of the rules in the contract.  Please don’t put all of your retirement savings into your annuity purchase.  In addition to the guaranteed stream of income you’ll get from your annuity, you need savings that you can access easily in case of an emergency.  In all stages of life, maintaining an emergency fund is critical.  Don’t buy an annuity because of the promised bells and whistles offered to you.  Make sure that the benefits offered meet your specific needs, whether it be to have an income stream for 5 years until you can receive full Social Security benefits or to supplement your pension and Social Security income for the rest of your life.

Whatever you do when considering an annuity purchase, be sure to work with a professional.  Make sure that they are knowledgeable in both the insurance and securities aspects of annuity products, depending on which specific annuity you choose.  Working with a pro and choosing a stable insurance company are crucial to maintaining your income stream and having the finances you need.  Don’t make an annuity decision without careful consideration.  In annuities, as well as in life, if it seems too good to be true it probably is.  Buying an annuity from a dinner seminar when they only highlight the positive aspects is not going to feel good once you know all the details.  Annuity products are insurance against outliving your savings or running out of money in retirement.  Each additional benefit costs more, so make sure to pay only for what you need.

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