Annuities will always be popular because they offer investors a guaranteed income stream. But there is a reason annuities have a terrible reputation. If you choose the wrong annuity, you may spend too much on costs or lose your entire investment. Keeping this in mind, here are five mistakes to avoid when acquiring an annuity. Selecting the Incorrect Insurance Provider Annuities function by investors purchasing an annuity from an insurance provider and turning the money into periodic payments that can last a lifetime. Investors can buy one in a lump payment or over time, and in exchange, they receive a fixed, variable, or indexed rate of return. However, the annuity will only be as good as the insurance provider. You will not receive compensation if the insurer cannot pay the claims for any unexpected cause. This is why it’s essential to pick an insurer with a high rating from AM Best, Standard & Poor’s, or Moody’s, three organizations that evaluate insurance companies’ financial stability. It is critical to ensure that the annuity provider has an “A” rating from AM Best2, an “AA” rating from S&P3, or an “Aa” rating from Moody’s. Not Paying Attention to Fees Nothing is free in life. That steady source of revenue will be expensive. Your level of diligence determines the fee. One of the most common mistakes annuity shoppers makes is failing to pay close attention to the fees associated with the annuity. Like other financial products, annuities include various fees, charges, and commissions that investors must be aware of. Mortality and expenditure costs, administration fees, surrender charges for withdrawals above the agreed-upon limit, investment management fees, and expenses for optional riders are the most prevalent fees. Understanding the fees each insurance provider charges will allow you to conduct an apples-to-apples comparison and avoid annuity packages with high fees. It’s wise to consider the overall total expense, not just one component. This is because, while one cost may be lower in some situations, the overall expenses may be higher.
Getting Misunderstood in Translation Because of the various varieties and industry lingo, annuities can be difficult. To mention a few, there are fixed annuities, variable annuities, index returns, mortality costs, and surrender charges. There are also different ways to be paid out, depending on whether you are collecting for your entire life or for a set amount of time. Although becoming familiar with an annuity’s ins and outs can be scary, failing to do so could cost you a lot of money. If you choose the wrong annuity for your specific scenario, you may not receive the proper payout.
Ignoring the Effects of Inflation With an annuity plan, you pay now in exchange for a guaranteed future return. However, investors often fail to account for inflation when acquiring an income-generating investment instrument. If your returns haven’t kept up with inflation, your investment will be worth less when it’s time to cash out. Investors can either draw out more annuity money by calculating how much they need and adjusting for inflation or buy an annuity that includes inflation protection.
Failure to Compare Prices Failure to shop around before acquiring an annuity is one of the worst things an annuity buyer can do. Every insurance company will have annuity plans with fees, terms, and surrender charges. Some companies will charge a higher commission than others. There are significant disparities in annuity types and investments and the company’s size. Some insurance businesses will be more financially stable than others, while others may be more speculative. However, if annuity investors do not compare prices, they will be unaware of this. Evaluate at least three insurance providers to make an informed and sound conclusion.
In conclusion Annuities appeal to many retirees because they provide a consistent and guaranteed income stream during retirement. However, not all annuity providers are made equal, so they will offer different plans at varying prices. Not to mention that not all insurance companies are on equal financial footing, which may put an investor’s money at risk. Investors must understand how an annuity works and the various expenses, engage with a reputable insurance provider and do the essential comparison shopping to get the best annuity for their specific needs.
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Bio:
For over 30-years Joe Carreno of The Retirement Advantage has been a Federal Employee Retirement System specialist (FERS) as well as a Florida Retirement System specialist (FRS) independent advocate. An affiliate of PSRE (Public Sector Retirement Educators), a Federal Contractor & Registered Vendor to the Federal Government, also an affiliate of TSP Withdrawal Consultants. We will help you understand your FERS & FRS Benefits, TSP & Florida D.R.O.P. withdrawal options in detail while recognizing & maximizing all concurrent alternatives available.Our primary goal is to guide you into retirement with no regrets; safe, predictable, stable, for life. We look forward to visiting with you.
Disclosure:
Not affiliated with the U.S. Federal Government, the State of Florida, or any government agency. The firm is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Although we make great efforts to ensure the accuracy of the information contained herein we cannot guarantee all information is correct. Any comments regarding guarantees, safe and secure investments & guaranteed income streams or similar refer only to fixed insurance and annuity products. Fixed insurance and annuity product guarantees are subject to the claimsâ€paying ability of the issuing company. Annuities are long-term products of the insurance industry designed for retirement income. They contain some limitations, including possible withdrawal charges and a market value adjustment that could affect contract values. Annuities are not FDIC insured.
