Senior citizens over 65 years may be concerned about outliving their retirement funds with no way to replenish them. If you’re thinking about buying an annuity, do your homework first. If you choose the wrong one, you could end up paying too much in fees, or worse, and you could lose your money entirely. This article will cover five mistakes to avoid when purchasing an annuity. Excessive Investing While annuities can provide additional income during retirement, they can be rigid. Immediate annuities typically outperform other fixed investments in terms of payout. According to immediateannuities.com, if you invest $100,000 in an immediate annuity, you can receive approximately $6,912 per year. However, to receive this additional income, you must give up control of your money. You can’t take your lump sum ($100,000) back once you’ve given the insurer your immediate annuity. Even if you have a deferred annuity, which allows you to withdraw money after you have invested it, you risk losing your income guarantees if you withdraw more than 5-6% of your guaranteed annual value. This is why you should consider how much of your retirement funds you want to invest in an annuity. Working backwards is a good rule of thumb for determining an annuity investment amount. Add up your expected retirement expenses, subtract the money you’ll receive from guaranteed sources like a pension or Social Security, and invest the difference in an annuity. The remainder of your money can then be kept in other investments where it is still accessible. Choosing the Incorrect Payout Keep in mind that the highest payout option is not always the best option when it comes to annuities. A single-life version of an immediate annuity will provide you with a large annual payout. However, if you die while your spouse is still alive, the single-life immediate annuity continues to pay, which is inconvenient if your spouse is reliant on that income. In this situation, it is preferable to accept an annuity with a lower payout that will last the remainder of your spouse’s life. Suppose a 65-year-old man invests $100,000 in an immediate annuity. If he buys a joint-life annuity, his annual payout will drop from $6,912 to $5,800. Ignorant of Annuity Fees Annuities come with various fees, which you should be aware of before investing. Some of the fees associated with a typical variable annuity are as follows:
- Underlying fund expenses: The fees and expenses are associated with a mutual fund investment. This cost is in addition to any fees levied by the issuer.
- Administrative fees: You may incur paperwork, recordkeeping, and other administrative expenses. This could be a once-a-year flat fee or a percentage of your account’s value.
- Mortality and expense risk charge: Typically, this fee equals 1.25% annually or a portion of the value of your account. This fee compensates the insurer for the risk assumed by the annuity contract. The fee profit is used to pay a commission to the company or the individual who sold you the product.
- Fees for additional features: You may be charged for features such as a guaranteed minimum income benefit or long-term care insurance. Other fees may apply.
- Penalties: You might incur a 10% tax penalty if you take money out of your annuity before you turn 59. This penalty is in addition to any income taxes owed.
- Surrender charge: The cost of withdrawing some or all of the principal amount before the annuity’s surrender period expires is known as a surrender charge. A surrender period is typically six to eight years after the annuity is purchased. Withdrawing or selling funds too soon incurs a surrender charge, lowering the value of your annuity.
Selecting a Wrong Annuity Provider When an individual purchases an annuity from a provider, the funds are invested to earn a rate of return (fixed, variable, and indexed). But when you retire, the annuity is converted into regular payments for the rest of your life. However, if an insurer cannot make payments for any reason, you will not receive your money. That is why selecting an insurer with a high rating and a proven track record is best. Choosing a provider with an “A” rating indicates that the company has a good reputation. All variable annuity brokers, dealers, and investment advisers must be registered with the Financial Industry Regulation Authority (FINRA). Visit FINRA’s BrokerCheck website to learn more about the credentials and history of a brokerage firm or individual broker. Perform a name or registration number search. BrokerCheck also provides links to the websites of state regulators, which can help you make an informed decision. Failure to Consider Inflation Annuities are investment vehicles that promise a return on your money at a future date. As a result, it is critical to account for the ever-increasing inflation rate. If you do not account for inflation, your money will be worthless when you withdraw it. To address this, calculate how much you will require and then adjust the figure for inflation or purchase an annuity with built-in inflation protection. An inflation-adjusted annuity’s payments are adjusted for inflation each year based on the annual increase in the cost of living (U.S.). As inflation rises, the benefit amount is automatically increased. Is Purchasing an Annuity a Good Investment for Me? Most seniors should only consider an annuity after they have exhausted all other tax-advantaged investment options, such as IRAs and 401(k) plans. If you have extra money to invest for retirement, the tax-free growth of an annuity can make sense, especially if you are in a high-income tax bracket. Remember that any earnings you withdraw will be taxed as ordinary income.
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After spending many years studying information technology, specializing in web development, digital marketing, and search engine optimization (SEO), I enjoy applying my skills and experience in helping others achieve their goals online.As a marketing specialist at Credkeeper, I help people get the most out of their online reputation. Your prospects perform Internet searches for your name before they buy from you. What they see on the first page of Google outweighs almost all other marketing! What do people currently see when they search your name on the Internet?If you would like to know more about Credkeeper and what we can do for you, feel free to reach out to me!
