When used the right way, annuities are a great way to create income and protect your money in retirement. They can also be complicated products, so it’s important to ensure that you are purchasing the best annuity for your personal financial planning. In the Forbes Magazine article “Annuities: How To Protect Yourself And Get a Good Income,” Larry Light summarizes advice from certified financial planner Jeff Rose. He says that one of the most important things to remember is that annuities can be the perfect product in the right situation, but purchasing the wrong annuity for your situation can be costly. An annuity expert can help you determine whether an annuity is right for you and if so, which product is best. Mr. Rose offers five things to consider when looking at an annuity.
First, consider the length of the term. Immediate annuities are purchased with one lump sum and you start receiving payments right away. Deferred annuities are funded from when you purchase your product until your estimated retirement age. You’ll predetermine when you start receiving income from a deferred annuity. You have three choices when it comes to how long your income payments can last. The first choice is to receive guaranteed lifetime income that will not pass anything to your heirs upon death. The second is to receive guaranteed income for a specific length of time. If you die before that time frame, your income will be paid to your heirs until the term is up. There is also a combination of those two where you receive guaranteed income for life, but your heirs can receive income payments if you die before a pre-determined guaranteed time frame.
Find out your surrender charge time frame and the percentage you will be charged if you withdraw money too early. Some surrender charges can be as high as 10% of your annuity value. Most surrender charges go away if you don’t withdraw money in the first few years, so stick to the plan and use your annuity as you set it up. Annuities also usually allow you to withdraw 10% of the value in either the first year or after the first year. Know your surrender charges and surrender time period up front so that you don’t lose out on money with unnecessary fees.
Be sure to use an advisor that not only knows a lot about annuities, but that also knows a lot about your individual situation. They need to ask if you are only looking for income for yourself or if you want to provide for heirs as well. They also need to know how much risk you are willing to take on with your investments and what other types of investments you hold. Your other sources of income have to be accounted for when planning for an annuity. Consider Social Security, pensions, rental income and any other sources that you will have coming in. You need an advisor who is looking out for your best interest, not their own commission.
Know all of the parts of your annuity and how they function. Fixed annuities pay a fixed interest rate over the life of the annuity. Variable annuities place your money in sub-accounts and can provide higher returns than fixed annuities, although they come with more risk. Indexed annuities link your returns to a stock market index, but offer a guaranteed minimum return in the case of market declines. Each type of annuity comes with a prospectus of details, so be sure that you know how yours will function and even how it is different from the other types of annuities. They all have benefits and drawbacks so you have to weigh the value that you will receive.
The final point to consider is whether or not your annuity is guaranteed. Since annuity products are not federally insured, there is an inherent risk that the insurance company offering your guarantees will become insolvent. Research the strength of your insurer through reputable agencies like A.M. Best or Fitch Ratings. Most states also offer a guarantee up to a certain amount of money, usually $100,000. If that is the case in your state, purchasing multiple annuities for that amount can safeguard your money even more. There are a lot of moving pieces when it comes to annuity products. Go over your own annuity checklist. Do your research, use a reputable advisor and make wise decisions when it comes to purchasing an annuity. They can be one of the best ways to guarantee income and protect your savings for the future if you make the right annuity choice.