Five questions to ask before buying an annuity

VaselineAugust 26, 2024

0 4 minutes read

Five questions to ask before buying an annuity

An annuity is a long-term investment that is expensive and sometimes impossible to cancel. Make sure you do your due diligence before you sign on the dotted line of a contract by asking your advisor these questions.

1. How does an annuity help me with my retirement goals?

Start by asking your advisor to justify how an annuity improves your financial plan first, says Kelly LaVigne, vice president of consumer information at Allianz Life. If you consider one as an investment, what additional returns and benefits do you get over simply investing through retirement plans and brokerage accounts?

This discussion is even more important if you’re considering an annuity to turn some of your nest egg into future income payments, because the annuity will lock in that money. “Your advisor should have software that estimates the likelihood of success for your plan with and without annuity income,” says LaVigne. In other words, how likely are you to have enough income to last you the rest of your life?

Subscribe to Kiplinger’s Personal Finance

Be a smarter, more informed investor.

Save up to 74%

Sign up for Kiplinger’s free e-newsletters

Profit and prosper with the best expert advice on investments, taxes, retirement, personal finance and more – straight to your email address.

Profit and prosper with the best expert advice – straight to your email address.

The software will take into account how you currently stack up with spending, savings and other sources of guaranteed lifetime income, such as Social Security and a pension. “Is there a major improvement with the annuity? Otherwise, it might not make sense,” says LaVigne.

2. What are returns and performance guarantees?

A fixed annuity shows exactly what interest rate you would earn over a period of years, making it easy to compare companies. Top options currently pay over 6% per annum. You can also easily compare income annuities. Each insurer will tell you how much they will pay in annual pension income based on your principal.

A fixed index annuity has returns based on a market index like the S&P 500, with limits on your gains and losses. A variable annuity invests your money in mutual funds. While your return depends on the market, the variable annuity can offer some guarantees. For example, it promises a minimum retirement income regardless of investment performance.

Variable and fixed index annuities are complex and should be compared with the help of a professional. “The insurer provides a prospectus but it is heavy reading. An advisor can walk you through the details,” says LaVigne.

3. What are the fees?

Fees depend on the type of annuity and the insurer. fixed annuities tend to have little or no fees. Variable and fixed index annuities can be significantly more expensive.

Annuity may have a redemption fee. If you cancel before an agreed number of years, the insurer will deduct a percentage of your balance, potentially 7% or more. It’s a trade-off with returns. “The longer the surrender period, the better the deal,” says Joel Russo, founder of NJ Retirement Planning in Sea Girt, N.J. Some insurers will let you take out a percentage of your money without early penalties, such as be up to 10% per year.

Ask your advisor if they earn commissions for selling the annuity. If so, what measures do they take to prevent conflicts of interest? Also check about non-financial incentives, such as the advisor qualifies for free travel by selling annuities.

Riders are extra benefits you pay to add to your contract, reducing your yield or income. A few might be worth the investment.

You could add a cost of living plan so your pension payments grow over time. Instead, your payments start lower. “It usually takes six or seven years before you start collecting more than without a rider, but after a 30-year pension, inflation protection makes sense,” says Allianz Life’s LaVigne.

A long-term care subscription increases payments from your annuity income if you need long-term care. You can also purchase an enhanced death benefit, so more money goes to your heirs after you pass away. Alternatively, you could set up a joint lifetime income. Payments continue as long as you or the other person is alive. A joint annuity might be a good idea if you are married or have a long-term partner.

5. How does the annuity company behave?

As you compare product details, pay attention to the insurance company itself. Check customer satisfaction ratings using services like JD Power and the Better Business Bureau.

You should also raise your credit rating for financial stability from agencies like AM Best and Moody’s. Ideally, the carrier should have a credit rating of A- or higher, showing strong financial stability.

If you buy an annuity from an insurer that goes bankrupt years later, your state guaranty association reimburses you, but only up to your state’s coverage limits. You may not get all your money back and the full benefits promised. “Go with carriers that have been around for a long time with a high rating, even if carriers with lower ratings may offer better deals,” advises Russo, the New Jersey retirement advisor.

Note: This article first appeared in the Kiplinger Retirement Report, our popular monthly periodical covering the key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement tips this is on the money.

VaselineAugust 26, 2024

0 4 minutes read

1. How does an annuity help me with my retirement goals?

Vaseline

Related Articles

Chesley Taft & Associates LLC Raises Share Holdings in iShares Global Energy ETF (NYSEARCA:IXC)

Institute for Wealth Management LLC. Increases stake in Mondelez International, Inc. (NASDAQ:MDLZ)

Bitcoin Sells Pressure Risk As $1.7B In BTC Latent Moves Over 2 Days

Gold price loses ground despite growing Fed rate cut bets and geopolitical risks