Annuities may be a beneficial way to help secure your retirement and achieve peace of mind. But how do you go about buying an annuity? To maximize the value of your account, you need to make sure you are choosing the right annuity type, provider, and contract terms.
In this guide, we’ll go through key steps in buying an annuity. We’ll cover how to choose an annuity product based on your personal financial situation and goals. You’ll also learn about important questions to ask providers before signing on the dotted line. Finally, we’ll go through the buying process itself so that you can move forward with confidence.
Why Buy an Annuity?
Among the various options for retirement planning, annuities stand out as a unique offering with many benefits. Annuities work by providing a stream of income for a certain period of time, or even for the remainder of your life, in exchange for upfront contributions. There are several reasons why you might choose to buy an annuity:
- Guaranteed income: One of the main reasons people buy annuities is because they provide guaranteed income. Annuities offer a variety of terms around how much income you’ll receive and over what period of time (say, over 10 years or the rest of your life).
- Funding safety: Between the unknown fate of Social Security and cycles of stock market turmoil, many pre-retirees seek ways to save that are a “sure thing.” Fixed and indexed annuities are issued by insurance companies, which guarantee your premiums against loss of principal.
- Tax deferral: Annuities offer the potential for tax-deferred growth. This means the money in the annuity can grow without being subject to income tax until it is withdrawn. In some cases, annuities can also be funded with pre-tax dollars. This can be especially beneficial for people in higher tax brackets, as it can help them save more for retirement.
- Inflation protection: Some annuities may include inflation protections like gradually increasing payouts or capital gains opportunities, which can help maintain your income’s purchasing power over time. This option is typically offered as a rider with extra cost.
- No contribution limits: Some retirement savings accounts, such as 401(k)s and IRAs, limit how much you can contribute per year. This can make it more challenging to build savings enough for retirement, especially as you get older. Annuities have no contribution limits, whether you have $50,000, $100,000, or even $500,000 you want to save for later.
Note: All Guarantees are subject to the claims-paying ability of the insurer.
When To Purchase an Annuity
Buying an annuity can be beneficial at many points in your life. Deciding when to purchase an annuity depends on your personal financial situation, retirement savings goals, and other factors.
It’s also important to note that annuities are long-term financial products, and there could be surrender charges, early withdrawal fees, and additional taxes if you try and access your money before the end of your contract. This can make them less flexible than other financial options, and they may not be suitable for people who need access to their money in the short term.
- 20s and 30s: Closer to the beginning of your career, you can use annuities to help build up savings habits. You can choose annuity products like fixed-indexed annuities to protect your retirement savings while still benefiting from market gains.
- 40s and 50s: During the peak of your working years, tax-deferred annuities can help you save more money for a higher income in retirement with a lower tax burden.
- 60s and beyond: If you haven’t bought an annuity already but have savings in a 401(K) or IRA, transferring a significant portion of your savings to an annuity can protect your retirement against market volatility. It also gives you the option of turning your retirement savings into a lifetime income stream you can’t outlive.
Annuity Costs and Fees
While some kinds of annuities are “fee-free,” others can include management and surrender charges.
For example, variable annuities are typically sold as a security, rather than an insurance product. These annuities may be susceptible to the same kinds of management fees as mutual funds and other managed investments.
Many annuities feature surrender penalties when withdrawing more funds than contractually allowed before the annuity reaches maturity. Most contracts allow for 10% of the funds in an annuity to be withdrawn without penalty every year. It’s important to understand the fees and withdrawal requirements of any annuity before making a purchase.
Some annuities offer optional riders that can provide enhanced income, death benefits, long-term care benefits, or terminal illness protection. There may be additional premiums associated with these options.
Choosing the Right Annuity
There are many types of annuities to choose from, each with its own unique benefits and payment structures. Remember that annuities may also come with a wide range of rider options, like death benefits for your spouse or other beneficiaries. Some common types of annuities include:
- Immediate annuities: Immediate annuities begin making payments to you anytime within 12 months of your purchase.
- Deferred annuities: Deferred annuities have the power to grow your savings over time before you start receiving payments and paying taxes on your earnings.
- Fixed annuities: Fixed annuities come with a guaranteed rate of return for a guaranteed period of time.
- Indexed annuities: Indexed annuities offer a guaranteed minimum rate of return, plus the potential for a limited upside growth based on the performance of one or more underlying stock market index(es).
- Variable annuities: Variable annuities are an insurance product with investment potential offered by licensed securities agents. The premium goes into investment sub-accounts that come with additional fees and expenses to manage them. Like mutual funds, they are susceptible to market changes but may offer additional benefits through annuity riders which also cost additional premiums.
How to Buy an Annuity
Annuities are often misunderstood and can be complex, but the purchasing process doesn’t have to be. Follow the steps below to ensure you make the right annuity purchase to help secure your retirement.
1. Research and Compare Annuity Providers
Annuities can be purchased from insurance companies, brokerage firms, mutual fund companies, and banks. When choosing an annuity provider, consider the following factors:
- Financial strength and stability: Given the long-term nature of annuities, it’s important to assess the financial strength of your prospective annuity provider. High ratings from established agencies such as AM Best, Standard & Poor’s, Moody’s, and Fitch Ratings indicate a company with strong financial health, suggesting it is more likely to fulfill its contractual obligations over time.
- Product selection: Select an annuity provider that offers a wide range of annuity products to choose from. This will give you more flexibility to find the right annuity for your needs now and evaluate different options as your life stage and goals change.
- Customer service: Choose an annuity provider with a good reputation for customer service. This is important in case you have any questions or problems with your annuity down the road. Consider how you want to be able to reach your provider or get updates on your account. Some annuity owners want to be able to hop on the phone or have an in-person meeting, while others enjoy digital tools and agent chat applications for quick service.
2. Complete an Application
Once you have chosen an annuity provider and product, you must complete an application. The application will ask for basic information about you, such as your name, address, date of birth, and Social Security number. You will also need to choose how you want to fund your annuity and how you want to receive your payments.
3. Review and Sign the Contract
Once you have completed the application, the annuity provider will send you a contract to review and sign. The contract will detail the terms and conditions of your annuity. Be sure to read the contract carefully before you sign it. If you have any questions, ask the annuity provider to explain them.
You’ll want to get multiple quotes before signing a contract. This can help you compare how similar products from different providers would operate, and help you identify all premiums and fees.
4. Fund Your Annuity
Once you have signed the contract, you must fund your annuity. You can typically fund your annuity with a lump sum or a series of payments. The annuity contract will lay out the timeline and amounts for premium payments.
5. Start Receiving Payments
If you have purchased an immediate annuity, you will start receiving payments anytime within a year. For deferred annuities, you’ll start receiving payments once the account reaches its maturity date and is annuitized.
Questions To Ask Annuity Providers
When evaluating different annuity providers, have this list of questions handy, so you can ensure you get all the essential information you need to make a smart choice.
- What is your financial rating strength? Any company with an AM Best rating of B+ to A is typically a solid bet. Always ask and double-check their ratings by visiting the AM Best website.
- How experienced is the provider with annuities? You want to make sure your annuity provider is well-versed in a variety of annuity options and has a history of helping pre-retirees and retirees secure their retirement using annuities.
- What are the withdrawal options? You’ll want to know how much money you can take out of your annuity without incurring a penalty, both before and after the annuity matures. (Tip: Annuities will waive all surrender fees at the annuitant’s death, so your named beneficiary can receive the full value of the annuity without any reduction in funds.)
- What interest rate will I receive? This is important for fixed-rate annuities.
- Does the provider offer purchase bonuses to incentivize annuity buyers? These are real money bonuses and can be added to your account; however, make sure you understand exactly how the bonus will be applied. In almost all cases, the bonus is credited over time, and as long as you fulfill the period of the annuity contract, the bonus is yours. Still, you should always ask for an explanation and the details.
The Role of an Annuity Expert
While annuities offer financial security during retirement, they require careful research and consideration. A successful retirement strategy isn’t solely about selecting the right annuity; it’s about ensuring it complements your broader retirement strategy.
As you navigate the complex terrain of annuities, an annuity agent can be an invaluable asset. They can clarify complexities, help you compare different annuity products, evaluate providers’ financial strength, and ensure your choice aligns with your retirement goals. Their expertise can empower you to make informed, confident decisions about your retirement income.
Ready to explore how an annuity can enhance your retirement plan? Don’t navigate this journey alone. Get in touch with a licensed expert today.
