Annuities are one of the most popular investments made by investors under 44 years of age. But young money-makers should consider the common mistakes others often make to ensure their investment pays off.
1. Selecting an Annuity Provider Rate Alone
Image via Flickr by 401(k) 2013
It’s important to find an annuity with a competitive rate, but this shouldn’t be your own consideration.
Independent ratings agencies can help you rank annuity providers on a range of important factors. Selecting one with a high overall grade will give you confidence in your money’s safety and the promised returns.
Look for an annuity provider with a reputation for superior customer service, as you’ll want a firm you can easily liaise with for the life of your policy. Also consider a provider with a secure website for monitoring and managing your annuity when it’s convenient to you.
2. Failing to Read and Understand the Annuity Contract
Some annuities have basic plans and make simple promises. Others are so complex even trained financial professionals struggle to understand them. It’s crucial to make sense of the fundamentals of annuities you’re planning to invest in.
You may be asking yourself, “How does an annuity work?”
To answer this question, read your annuity contract carefully, including the fine print. Ensure you understand all the terms you read and carefully consider any clauses. For example, some annuities will pay “life and ten years certain” while others guarantee your payments for “ten years certain”. These clauses sound similar, but they’re very different. Life and ten years will pay you for the longer period of ten years or the length of your life, while the ten years certain policy will only issue payments for ten years. The policy you choose could make a massive difference to you and your loved ones.
It’s a good idea to note any points you find confusing as you read through your contract so you can raise them with your insurer later. Your financial adviser is there to answer any questions you have about your annuity portfolio. If after a thorough debriefing your head is still spinning, find another annuity rather than laying your money down.
3. Investing Too Much Money
It’s true that the more money you invest into an annuity, the more money you’ll receive back in yearly payments. However, the inflexibility of these investments makes it vital to avoid overspending.
Once you pay for an immediate annuity, you can’t retrieve your lump sum. Deferred annuities offer a little more flexibility, but if you withdraw more than five or six percent annually, depending on the policy, you’ll put your earnings at risk.
One of the best ways to decide how much to invest in an annuity is to work backwards. Calculate your expenses during retirement and subtract any money you’ll receive from social security or a pension. Only invest enough money to fill that gap. Boost your portfolio by investing additional amounts into more accessible options like interest-bearing accounts and term deposits.
4. Picking the Wrong Payout Type
Consider your own circumstances, rather than simply the amount of any payouts, when determining which annuity’s the best for you. A single-life version is common for immediate annuities. While these payment rates are generous, they’ll stop once you pass on. How would your spouse cope should that occur? It may be better to accept the lower payouts of a joint-life annuity to provide extra security for your loved one.
Some annuities will also pay out for a certain number of years, regardless of whether you and your spouse die during this period. An annuity with this structure could provide extra peace of mind for your children.
5. Failing to Annuitize the Annuity
Annuitizing your annuity can be thought of like “flipping the switch” on your policy. It’s the process which converts your annuity from the accumulation phase to the payout phase.
Many annuity holders never annuitize. Instead they hold an annuity for a period of time, then withdraw their money and take it elsewhere. However, financial experts say that annuitizing “can significantly reduce the failure rate of that portfolio to produce required income over a required period of years.”
6. Switching to a New Annuity
If you bought an annuity in the late 1990s to mid-2000s, you probably got a great deal. The market downturn of 2008 saw insurers raising annuity fees and lowering annual withdrawals by around one percent, and they’ve stayed at these levels ever since. New annuities simply don’t offer the value to consumers of older ones. You may also be charged hefty surrender fees if you move to a new annuity.
Be suspicious of anyone who attempts to persuade you to switch to a newer annuity. Insurance brokers earn new commissions whenever you buy a new annuity, so they’re likely to be looking out for their interests rather than yours.
Entering into the annuities market knowing the mistakes others have made is the best way to reap the rewards of your own investment.
This post was included at:
Carnival of Retirement at The Frugal Toad
Yakezie Carnival at Rather-Be-Shopping
Finance Carnival for Young Adults at Mom and Dad Money
Carn of MoneyPros at Mo’ Money Mo’ Houses
Carn Financial Independence at Carnival of Financial Independence
Carnival of Financial Planning at This That and the MBA
Carnival of Financial Camaraderie at Faithful With a Few