Annuity Investment Tips

An investor who goes shopping for annuities for the first time might stop dead in the middle of the financial-products store, paralyzed by confusion and indecision. The imposing array of products, housed in colorful packaging with complicated wording and directions on the back of each box, are enough to daze and confuse anybody. Fortunately, a pleasant and productive experience awaits those who apply basic common-sense shopping principles to annuity investment. That’s lucky, since most people know shopping much better than they know investing.

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Annuities are the Gift That Keeps on Giving

The unique feature of annuities is their ability to provide guaranteed income for life. People shop to fill a need. If security is that need, head straight for the annuities aisle. In particular, retirees can take the proceeds of their qualified company plans – 401(k)s, Simple IRAs and such – to the annuity store and buy immediate annuities. Employers can shop for immediate annuities to fund defined-benefit pension plans. Even governments – not ordinarily considered careful shoppers – should consider immediate annuities as alternatives to increasingly-costly retirement systems now supported by transfer payments.

Don’t Spend the Grocery Money

Investors looking for liquidity should shun annuity investment and shop elsewhere. Annuities are retirement-oriented vehicles that include surrender charges for early withdrawals and another feature guaranteed to induce buyer’s remorse – a 10% penalty levy imposed by the IRS for distributions taken by holders younger than 59 ½. Aside from the modest provision annuities make for liquidity, plan on leaving annuity investment expenditures in their wrapping until Christmas comes and the accumulation period ends.

Buy Age-appropriate Gifts

There’s an annuity investment for just about every stage in life; just be sure to match the two correctly. Variable annuities are a suitable gift for young investors; given enough time, tax deferral can outweigh the cost and tax drawbacks of annuities. The stocks in variable-annuity portfolios are great for growth-oriented, risk-tolerant younger investors. Shop for fixed annuities to modify portfolios and prepare retirement income during the run-up to retirement. Indexed annuities are for those who still need growth but also need security and protection of principal; these are good gifts for retirees.

You Can’t Be too Careful

In addition to their conventional, traditional uses, annuities can make great specialized gifts, too. Many states exempt life-insurance assets from liability judgments. Many business owners and professionals face the constant danger of lawsuits that would impoverish them. Careful investigation might uncover a great gift idea for an endangered investor who can hold wealth in the form of an annuity.

The Only Certain Things in Life are Death and Taxes

A byproduct of annuity investment is the death benefit included in most contracts. The beneficiary will usually have a choice between lump sum benefit and assuming ownership of the annuity. Other beneficial options are available, so explore this provision before leaving the store.

Annuity investment funds accumulate tax-deferred, a benefit that increases in proportion to the tax rates paid by the holder during accumulation. On the other hand, annuity distributions are taxed as ordinary income, a drawback that increases proportionate to the tax rates paid by the holder during distribution (which should be during retirement). Unlike many other assets (such as mutual funds and real estate), annuities do not receive a step-up in cost basis at death, so beneficiaries are liable for taxes owed by the purchaser. Death and taxes aren’t fun, but annuity investment shoppers should be mindful of their implications during the shopping trip.

Don't Just Shop, Implement a Solid Retirement Strategy

Purchasing an annuity is a big decision. Online research is a good start, but prudent investors should discuss all their options and risks with an independent financial advisor. Request a free, no-obligation consultation today, along with a report of current rates on brand-name annuities.

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Everything Has a Price

Annuities are famous for being complicated and for having high costs. The two go together. The complications are provided mostly by features designed to safeguard investors’ principal and put a floor under their returns. The cost of creating and administering these provisions must ultimately be passed on to the buyer. That is no reason not to learn the costs and make a thoughtful buying decision.

Management fees of variable annuities, administration fees of indexed annuities, sales commissions, the costs of options, riders (such as Living Benefits) and guarantees – all these are part of the price of annuity investment. Whether the costs are worth the benefits will depend not only on objective factors such as those listed above, but also on subjective ones. The value of security, the risk of principal loss, the discomfort of having money tied up – these assessments require personal evaluations that cannot be made by outsiders. All that can be said is that the price of annuity investment should be determined at the outset. Better a case of sticker shock now than years of buyer’s remorse later.

A Guarantee is Only as Good as the Guarantor

Guaranteed features – minimum credited interest rates, accumulations, withdrawals, income, death benefits and more – are another defining feature of annuities. Annuity guarantees depend on the ability of the insurance company to pay out money to underwrite those guarantees, which in turn depends on the financial strength of the company. Four ratings agencies specialize in rating the financial strength of insurance companies: A.M. Best, Standard & Poor’s, Moody’s and Fitch. Each has their own special code for labeling and ranking the companies they rate. A careful annuity shopper will check the rating of any insurance company whose product he or she is considering.

Read the Fine Print

The information needed by the careful shopper is available in the annuity contract or prospectus. Insurance policies and security disclosure documents are not light reading, but annuities are not products that should be bought sight unseen. Even an individual fully conversant with basic product features would need to peruse an annuity contract to learn specific details of those features, which can vary considerably from one product to another. One example is the guaranteed interest rate of a fixed annuity. It is common for the initial guaranteed rate to hold only for the first year, with the insurance company having the right to alter the fixed rate each year at discretion. Another feature worth looking for is the bailout provision, allowing the holder to withdraw from the contract without penalty if subsequent credited rates fall more than 1% below the initial one.

Successful annuity investment shoppers don’t have to know annuities – they just have to know how to shop.

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