If you are about to retire and you are looking for an additional income stream to support your life style, buying an annuity might be the best thing for you. However, annuities are more complex than most financial products. This is why it is so important to understand fully how the annuity works before entering in such contract.
In order to help you making your decision, we have highlighted the top 5 point to consider prior to buy an annuity:
#1 Don’t Invest if You Don’t Understand
Most annuity contracts show several pages of complex financial terms and it’s not always easy to navigate through this language when you are not familiar with it. An annuity contract can include several clauses that will enable the contract to become more flexible according to your need. This also means you will require additional information to understand it.
As a reference, you can check out our Annuities Explained section where you will find answers too many questions. Reading and doing further researches is your best ally to fully understand how annuities work. The information is there, it’s only a matter of taking the time to read it.
#2 Maybe You Need More than One Annuity
Depending on the structure of your financial plan, you may request different level of income stream at retirement. This may include that you will buy various annuities to meet your need instead of going for a simple life annuity. For example, you may want an annuity that will pay X amount per month while both your spouse and yourself are alive. In the event of one of you passes away, you may require a smaller amount of monthly payments.
You can build your custom annuity plan with a combination of deferred and immediate annuities. Before you make any purchase, take the time to define your need and plan how you can meet them with a “package” of annuities.
#3 The Devil is in the Details – Beware of the Costs
There is no free lunch in finance. Remember that line before you sign up for any financial products. When it’s too good to be true, it is because it is too good to be true! Annuities are no exception. It is wonderful to expect a monthly payment for the rest of your life, but this contract incurs costs as well.
We all expect the insurance company making a few dollars out of the contract. After all, we all need to pay for our bread and butter, right? But it doesn’t mean you need to be ripped by your life insurance agent who sells the annuity contract. Ask about the annual costs, fees and management expenses you might pay. This is definitely something to highlight with deferred variable annuities since they are linked to an investment in the stock market.
#4 Survivor Annuities are Best Value
If you purchase a life annuity based on your life alone, everything is gone once you pass away. This may complicate things for your surviving spouse… especially if you die at 65 and your spouse goes up to 90!
The survivorship option is often overlooked by investors while it should probably be the very first thing to look at.
#5 Don’t Put All Your Eggs in the Same Basket
When investors start learning about annuities, a part of them want to cash all their investments and buy a huge contract right away. They think there is nothing better than receiving a guaranteed pension for the rest of their life.
But what if you want to buy a new car, a boat or go on vacation?
What if you want to make money gifts to your heirs while you are live?
What if you need an extra $20,000 per year for medical support?
If you have frozen all your assets into an annuity, you will not be able to recuperate your money to receive a lump sum payment. Once the contract is bought, you are set to receive an amount each month but you won’t be able to withdraw $50,000 in one shot.
The liquidity of an annuity is not to be neglected.
You Don’t Have Questions? Think Again!
Buying an annuity could be the best or the worst financial move you will ever do. For some investors, it is the best product around as it ensures a pension for life. But it doesn’t mean that everybody should buy an annuity. If you don’t have any questions and you are ready to buy your contract, think again. Take the time to think about everything that could happen in your life and see if the annuity still stands.