If you’re a senior considering purchasing an annuity, congratulations! An annuity can be a fantastic safe money option that provides a reliable income stream in your retirement years.
However, annuities, while they are indeed a powerful tool in retirement planning, are also somewhat complicated. Before contacting an annuity specialist, it’s wise to do some research yourself. One place to begin your annuity education is to understand some of the most common mistakes annuity purchasers make.
Failure to understand what you want your annuity to do. Many people experience monetary losses in retirement simply because they have no clear vision of their relationship to their money and their feelings about risk. You must evaluate your attitudes and beliefs about money and assess your current and future needs honestly. Not only will gaining these clarifications help you evaluate annuity contracts, but it will also help you make more informed decisions about other aspects of your financial life. Remember that you should always buy any financial product for what it will do for you, not for what a salesperson tells you it might do.
Buying the first annuity you see. Even when you have a clear idea of what you want your money to do, you can quickly become overwhelmed by all the options available. If you want an annuity anchoring the safe money part of your portfolio:
- Look at different companies and compare their offerings before making a decision.
- Shop around and check out the issuing company’s reputation and rating.
- Don’t settle for the first offer you get.
Not learning annuity basics. As I mentioned, annuities can be complex. That’s why an annuity specialist who takes time to understand your individual needs and make suitable recommendations is worth their weight in gold. That said, it’s still beneficial to learn some of the essentials of annuities before speaking to an advisor. For example, you should know the types of annuities available, including fixed, variable, and indexed contracts, and understand the pros and cons of each. You don’t need to spend hours becoming an expert. Learn enough to ask the right questions and feel more confident during the sales process.
Understanding some annuities have fees. Certain annuities have fees that could potentially affect your account’s value. If your advisor recommends this kind of annuity, you should understand all the associated costs and any impact on your savings.
Not understanding how annuities are taxed. Tax-deferred annuities give you a way to reduce your taxable income by using pre-tax funds to purchase them. When you start withdrawing money, your annuity will incur taxes, regardless of the type purchased. How much your tax bill is will depend on whether you bought an annuity with pre-tax or after-tax dollars. You must know the tax implications before buying any financial product, including an annuity.
Putting ALL your savings into one basket. Seniors who discover annuities sometimes become enamored with the product’s ability to create guaranteed lifetime income, protect principal, or provide for long-term care needs. Those are fantastic benefits gained from adding an annuity to your retirement plan. However, it would be best if you didn’t become so drawn to annuities that you over-invest. Portfolio diversification is wise in any financial life phase, particularly in retirement. A general rule of thumb is to invest no more than 75% of your assets into an annuity.
Failure to understand surrender charges. Many annuities come with surrender charges that kick in if you cash out before a specific time. Make sure you know of any charges or fees before making a purchase.
Not knowing your distribution options. Annuities come with different distribution options. Each option has pros and cons that could impact you, your spouse, and any beneficiaries. Sit down with your advisor and have them carefully explain each distribution choice and its implications.
The bottom line: Annuities are often an ideal addition to retirement portfolios. However, they’re not suitable for everyone, and mistakes when buying annuities are common. Make sure you partner with a fiduciary retirement and income planner who can help determine if an annuity is right in your situation. If you’d like more information, contact my office, and we’ll help you get the answers you need.