Annuities can have a lot to offer in retirement, but they are quite often misunderstood. Nathan Bachrach and Ed Finke said that “Annuities are (a) misunderstood retirement ‘security blanket’ in their Cincinnati.com article. The biggest problem facing the current generations is that they no longer receive the pension income that their ancestors did in the past. Since most companies are no longer providing defined benefit plans where they handle all of the investments and administration, workers now have to handle those things mostly on their own with defined contribution plans like 401k’s. This problem can sometimes be solved by an annuity product, an insurance contract that can create a pension-like stream of income during retirement. There are, however, some annuity companies and unethical salespeople that are taking advantage of Americans’ fear of outliving their savings with annuities that don’t fit the particular person’s goals very well.
An annuity is a contract between you and an insurance company to pay you periodic payments after you purchase your product with either a lump sum or a series of payments. The article’s authors say that annuities are one of the most misunderstood but frequently purchased products. It’s important to make sure that you are getting exactly what you want when you purchase an annuity product. A fixed income annuity functions just like a pension because it guarantees you a rate of return and payout over time. But sometimes people think that they are getting a simple fixed annuity even though they are getting a more complex indexed or variable annuity product that looks similar. These products can offer guaranteed lifetime income streams which are valuable to retirees, but you have to know exactly what you are getting. You have to take into account your liquidity and your exact long-term income needs. The authors aren’t saying that indexed or variable annuities don’t offer value, but that too many people get into these contracts without knowing exactly what they entail.
Commissions can be high with annuities that carry income riders, so if you are purchasing one of these products you have to make sure that it is in your best interest rather than being sold to you for your salesperson’s commission. Make sure that a lower cost annuity would not actually be a better fit for you. It’s also important to be aware of the surrender charges and annual fees associated with your income annuity product. Surrender charges are there to protect annuity companies. Annuity holders should not plan on accessing any annuity funds above the yearly payouts because the charges are hefty. Keep emergency funds in a more liquid account separate from your annuity. Also take note of all annual expenses because each additional annuity rider adds on more to that number. These are important things to consider with each annuity.
The article’s authors recommend a low cost fixed annuity product from a highly rated insurer to add pension-like income to your retirement plan. They also say to look for annuities that have short surrender periods and pay low commissions. That would be the most useful annuity for the biggest group of consumers. The other types of annuity products have their place in the industry as well. Indexed and variable annuities work in many retirement income plans. It’s just crucial to understand their nuances and speak with an annuity expert to ensure that you understand the surrender charges, commissions and annual costs. If you are looking to use an annuity as your retirement security blanket, do your homework before purchasing one so that you find an annuity that works for your individual needs.
Written by Rachel Summit