3 Important Questions to Ask Before Buying an Annuity
Annuities can be a great financial tool for providing guaranteed income during retirement. However, they can also be somewhat complicated to understand – especially since there are hundreds of different products out there to choose from, each one with different features, riders, and benefits. With all of the options available to you, deciding on an annuity can be very confusing. How do you determine which annuity is best for you – or even if annuities are right for you in the first place?
First of all, we recommend you start by asking yourself 3 important questions:
1.) Do You Need Guaranteed Retirement Income?
For the vast majority of future retirees, supplementary income beyond just Social Security will be needed – especially as the pension becomes less and less common. Most people today have the majority of their retirement savings in non-guaranteed buckets, such as market-based qualified plans or Roth IRAs. While these are the most common retirement options offered to employees, they certainly don’t provide any guarantee of future growth – let alone future income.
For most people, the main function of an annuity is to provide a guaranteed source of retirement income that you can count on, regardless of what’s going on in the financial markets. However, even if you don’t need the income, annuities can still be a great way to shelter some of your assets from market risk.
2.) When Will You Need The Income?
Some annuities provide immediate payouts, while others may not start until sometime in the future. Before buying an annuity, you will need to think about when you want the income to start, so that you can choose the type that will best meet your goals. Remember that once you buy an annuity, you typically cannot access the cash value until it annuitizes without penalties and charges, so you will be giving up liquidity and flexibility during this time period – which is probably the main drawback to annuities. Also keep in mind that when interest rates are low, annuity payouts are usually lower as well, so if you’re planning on buying an immediate annuity, you may want to buy several over the course of a few years to compensate for possible fluctuations in interest rates. (To calculate how much income you may be able to receive from an immediate annuity, you can use an annuity calculator.)
3. What Type of Annuity Makes Sense For You?
As we mentioned before, there are a number of different kinds of annuities. One important distinction to be aware of is variable annuities versus fixed annuities. While variable annuities tend to be very popular among those who sell them, we prefer to error on the side of caution, and typically advise fixed types of annuities for our clients. After all, if you are looking for something that will provide you with guaranteed income, why would you want to invest in something that isn’t guaranteed? Many of these variable annuities are also very complex, difficult to understand, and may have high associated costs.
Annuities may be a very valuable piece of your retirement income puzzle, but you will most likely require expert guidance to understand which one is the right fit for you, and make sure you are not purchasing something that does not fit your needs.
If you have questions on annuities, one of our retirement income specialists would be happy to provide some guidance. Just call 614-536-0088, or fill out our Contact Form and someone will contact you shortly.