An annuity can be a good retirement investment if you select the annuity correctly. Many times investors enter into this type of retirement planning unsure about the product they are purchasing.
This can lead to great disappointment when retirement arrives. Understanding what an annuity is and how it works as a retirement account will enable you to make the right choice.
When looking into annuities for retirement there are 10 things that you must consider:
- Understand what an annuity is. An annuity is not an investment plan, it is an insurance policy. Insurance companies are the only type of business that can offer this type of financial product. The insurance company will take the money you pay into this policy and invest it accordingly. As the beneficiary of this policy you will receive a monthly payment from that investment for the rest of your life, once the payments begin. However, you will not be entitled to any dividends or other financial gains made from those investments.
- Understand the different types and compare annuities. The two most common types of annuities are the fixed annuity and the variable one. A fixed annuity will pay you a guaranteed amount each month for the rest of your life based on the amount you invested. Variable ones pay a varying amount depending on how the market is doing. Fixed annuities, once payments have begun, pay a specific amount indefinitely.
- Know the fees associated with an annuity. There are charges issued by the insurance company for maintaining your account. These fees may need to be paid separately once a year or may come out of your payment as a monthly processing fee. When you are looking into a fixed annuity you should compare maintenance fees among companies. While there are generalized costs that people expect to pay, these fees are not regulated and can range significantly in price among the different companies.
- Familiarize your self with the tax consequences. Annuities are a retirement account and therefore fall under specific tax guidelines. Make sure you know, and can afford the taxes that will be due upon the account.
- Acquaint your self with how the payments are to be made and when you will start receiving these payments. This will be very critical when you invest in a fixed annuity. If the monthly payment will not meet your needs you may have to look into another investment product.
- Make sure that the policy has, or offers, inflation protection. As everyone knows, the price of consumer goods will always continue to rise. You have to make sure that the policy will adjust your monthly payment in accordance to these cost of living increases. Purchasing inflation protection may result in a higher initial purchase price, but is well worth the protection.
- Make sure you understand the annuity contract completely. Some contracts only offer death benefits if the insured specifically requests these benefits. Failure to obtain this benefit forfeits your principal to the insurer upon your death, not to your beneficiaries. Other terms and conditions specific to your particular policy will be contained in the contract. Read it carefully.
- Annuities are not insured by the FDIC or any other government agency. This is something that all people must realize and understand completely. If the insurance company that you have your annuity through goes bankrupt, you have lost your investment with no recourse. It is imperative to research the company you are purchasing from before you buy the policy. Purchase only from a financially stable company that has had a significant track record in the industry.
- Annuities should not be the only retirement account you have. While annuities are a terrific opportunity to guarantee yourself a lifetime income, they cannot be your only investment. Once you have invested that money into the account it is no longer liquid. If any event takes place that you need to have fast access to cash you will not be able to use this account.
- Consult with a non affiliated financial advisor. A financial advisor that is not interested in selling you any particular policy will help you find the perfect retirement product. Financial advisors are experienced in creating retirement wealth and their expertise should be fully utilized.
Following these simple, yet logical, steps should help you invest into your retirement with confidence.
Authored by: Lisa Cintron is EVP at AdvisorWorld and OnlineAnnuityRates and a professional financial blogger. She has been published in Technorati.com, WiseBread.com, Examiner.com and many more.