Tips for Deciding on an Annuity

If you're considering an annuity, take a serious look at your personal situation. Examine the following points when shopping for an annuity to see what type best fits your needs or if you should even get an annuity:

  • Assess your needs. After you estimate your living expenses in retirement and identify all sources of income, you'll know whether you'll need an income annuity.
  • Consider your options if you don't have a traditional pension. Like most people, you may not retire with a traditional pension. But you can use an income annuity to build a do-it-yourself pension.
  • Get familiar with your "risk tolerance." Determine what risks you can tolerate and which ones you can't. For example, if a 500-point drop in the Dow doesn't deprive you of sleep, then you probably don't need a life annuity.
  • Expect trade-offs in risk and reward. Annuities are insured investments, which means they protect you from some of the risks that accompany investing. But greater safety often means smaller gains, so some risks may be worth taking.
  • Count on living longer. Don't assume you'll die young — most people underestimate their lifespan by several years, and half of all 65-year-old Americans will live past age 83. Look at annuities that can help with extended retirement funding.*Guard the womenfolk! Women tend to outlive their husbands, and therefore have a much greater risk of running out of money during their lifetimes. That's why prudent couples buy "joint-and-survivor" life annuities.
  • Protect yourself from inflation. The rising cost of living can erode your purchasing power in retirement. An income annuity with an inflation rider or a variable income annuity can help.
  • Look at how much you need to spend. An advanced life deferred annuity (ALDAs) is an inexpensive way to guarantee yourself an income in late retirement while pumping up your spending power in early retirement.
  • Get a discount for less-than-ideal health. If you think you'll have a shorter-than-average lifespan, check out "impaired risk" annuities. They'll give you bigger-than-average monthly payments.

How to Be Annuities-Savvy

Annuities are complex but useful financial tools. Be aware of the latest annuity trends when you are buying and make sure you stay aware so your annuity continues to benefit you in the best way possible. The following checklist shows important reminders for you to track annuities:

  • Recognize that the annuity world changes. For example, deferred annuities used to be purchased mainly as a tax dodge by people in the upper tax brackets. In the future, income annuities will likely be purchased by Baby Boomers who want a guaranteed lifelong paycheck. Keep on top of the trends, and you'll be able to make adjustments to ensure that your annuity stays on top of them, too.
  • Get creative with your annuities. You may be able to maximize your income in retirement with a combination of two or three annuities. This path takes research and planning, but it can pay off!
  • Decide how much money to keep outside an annuity. When you buy an annuity, leave some money in more liquid investments so you can meet emergency expenses. If a salesman urges you to put all your money into an annuity, get a second opinion.
  • Plan for trade-offs in risk and reward. Annuities are insured investments, which means they protect you from some of the risks that always accompany investing. But insurance costs money, and the fees can eat up a good chunk of your returns.

How to Shop for an Annuity Contract

If you've made the decision to look for an annuity contract, keep this list on hand and cover every option it gives, so you can be confident you're staying on top of the annuities game.

  • Find an annuity-savvy adviser. Income annuities aren't yet widely used, so not many advisers or brokers understand them. Try to locate a professional who does.
  • Look for a strong insurer. Always buy your annuity from a financially strong insurance company with "Superior," "Excellent" or "Strong" ratings from the major rating agencies.
  • Read the prospectus before you buy an annuity. Annuity contracts offer guarantees, and guarantees are always accompanied by complex exclusions and restrictions that may appear only in fine print.
  • Buy only what you understand. Some annuities are more complex than others. Don't buy one (or any other financial product) that confuses you. What you don't know may come back to haunt you.
  • Be wary of excessive fees. Variable annuities offer attractive options, but the options aren't free. Try to get the benefits you need at a reasonable price.

What should I think about when shopping for an annuity?

An annuity definition is only one thing you'll need to know.There are manyissues you'll need to think about before you purchase one, like:

  • What the fees and charges will be. Your costs can have a big impact on the performance of your annuity, and costs vary widely among different companies.
  • Who issues the annuity. Annuities are insurance products, and the issuer is responsible for the guarantees it makes to you. Look for stable, responsible companies that are highly rated.
  • How you want your annuity invested. With a fixed rate, you know exactly what your annuity will earn every year. Variable annuities offer access to portfolios covering all of the major asset classes, with the potential for earning a market return.
  • How much flexibility you need. Income annuities can provide secure, stable income butoffer little if any access to your savings. Deferred annuities with lifetime withdrawal benefits typically provide a lower guaranteed income butoffer greater access to your investment.
  • If you're looking for an income annuity, how long you want your payments to last and when you want them to begin. Some income annuities offer the option of receiving payments for your lifetime or for a fixed number of years. Typically, payments can start as soon as 30 days from purchase, as late as your 85th birthday, or on any date in between.