What To Avoid With Annuities

Retirement should be a time to enjoy yourself. You shouldn’t have to wonder whether you’re going to get hit with surprise fees or that you’re going to be charged a penalty for accessing your annuity too quickly.

Retirement should be a time to enjoy yourself. You shouldn’t have to wonder whether you’re going to get hit with surprise fees or that you’re going to be charged a penalty for accessing your annuity too quickly. Annuities can be great retirement vehicles but there are things you need to avoid when purchasing them. You just need to know when you’ve found the right annuity quote that fits your retirement needs. 

In this article, we’re discussing the things you need to consider while buying an annuity. Following these instructions will help you prepare for retirement with a clear conscience about the road ahead for you. Continue reading to learn all there is to know about what to avoid when it comes to annuities. 

Investing Too Much Money 

Annuities can be a great source of lifetime income, but they can also be inflexible. Immediate annuities typically pay out more interest than CDs and fixed investments. However, to get the extra money for income, you have to give control of your money to the annuity manager. That’s why advisors typically only advise you to put 25-30% of your assets in immediate annuities. 

Picking The Wrong Type Of Payout 

If you choose an immediate annuity, a single-life payout version will afford you the highest annual payout. In a single-life immediate annuity, your payout stops when you die even if your spouse is still alive. If you want your annuity to take care of your spouse, you might be better off taking an annuity that features a lower payout but continues for their lifetime. 

Not Comparing The Type Of Payout Amounts 

Immediate fixed annuity payouts are easy to compare. You simply determine how much you’ll receive each year for the amount you invest based on your age and the type of payout you select. However, there can be a wide range of payout amounts depending on the company you choose. You can work with an insurance broker or annuity company to compare payouts for several insurers. 

Picking The Wrong Type Of Payout Guarantees 

Instead of an immediate annuity, you can choose a deferred variable annuity with payout guarantees. You typically buy these types of annuities around ten years before you retire. These annuities let you invest in accounts similar to mutual funds and they can increase the amount of interest earned in your annuity. You will have to pay for guarantees on your principal in these annuities and the guarantees tend to cost around 0.95%-1.65% of your investment per year. 

Annuities with guaranteed minimum benefits require you to annuitise your account in order to receive the promised lifetime income. This means you will eventually need to convert the account to an immediate annuity and give the annuity company control of a lump sum. Annuities with guaranteed minimum withdrawal benefits pay income for life based on your initial investment. They can also increase your guaranteed payouts based on the highest point of your investments. However, they will usually pay less than the guaranteed minimum benefits. 

Switching To Another Type Of Annuity And Giving Up Valuable Guarantees 

Older versions of variable annuities with payout guarantees often promise a certain amount but take 6% of your guaranteed amount every year. Newer versions often cap guarantees at 5%. Your guaranteed value can also be much higher than your actual account value. In a down market, these types of annuities become more valuable. 

If you cash out the annuity or switch to another one, you’ll only get to take the actual account value rather than the guaranteed value. You may also have to pay a surrender charge of 7% or more if you change your annuity within the first seven to ten years.

Withdrawing Too Much Money 

Variable annuities with guaranteed minimum withdrawal benefits typically let you take out 5%-6% of the guaranteed total value each year. If you take more than that, you might risk your guarantee. Before withdrawing more than the permitted amount, you should find out how the extra withdrawal will affect the guarantee.

Ignoring The Lender’s Financial Strength Rating

No matter the type of annuity you get, you’re counting on it paying out for the rest of your life after retirement. That could mean that you’re relying on the annuity for twenty or 30 years after. Choosing a company with a solid financial foundation rating is essential. You should choose from insurers who have A ratings or better if you want the best annuity products for your retirement. 

Not Paying Attention To Fees

Haste is never a good idea when it comes to choosing your annuity product. Your guaranteed stream of income can be costly when you don’t perform due diligence. One of the biggest mistakes an annuity shopper can make is failing to understand all of the associated fees with their product. Most financial products have associated fees, charges, and commissions. 

The most common fees are mortality and expense fees, administrative fees, and surrender charges for withdrawals. Regardless of the types of fees associated with your annuity, you must understand all of them if you want to be confident when buying your annuity. Understanding the annuity in its entirety will help you compare annuity products thoroughly.

Communication Breakdowns

Because annuities can be complex, it’s easy to get lost and make a quick decision if you don’t have the right annuity consultation. With terms such as fixed vs. variable, immediate vs. deferred, and qualified and non-qualified funds, it helps to have a trusted advisor at your side to explain everything. When you don’t choose the right annuity for your unique situation, you probably won’t get your intended payout. 

Conclusion: What To Avoid With Annuities

Annuities can be excellent financial products for your retirement plan. But as with any other financial decision, their outcome depends on how thorough you are with your planning. If implemented incorrectly or hastily into your retirement portfolio, annuities can quickly cause more harm than good. Because there are a lot of contributing factors to annuities, you should consider consulting an annuity professional to walk you through the best annuities for your situation. These professionals will be able to guide you to the best annuity for your preferences so you can enjoy your retirement to its fullest. 

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