Top Mistakes of Annuity Owners
Annuities are an excellent means of investing for the future, but there are some things to avoid.
Buy With the Right Intention
First, an annuity is intended for retirement, so don’t buy one with the idea of funding your child’s college education. There are heavy fees and penalties for taking the money out early. Next, do you homework – don’t just accept the word of one insurance broker as to which annuity is best for you. Remember, they get paid a commission for every sale they make, and some annuities pay them better than others. That’s not conducive to getting an honest opinion from them.
Monitor Your Investment
Always remember that an annuity is like any other investment, you need to pay attention to it. Don’t buy it and forget it. Read your statements and keep an eye on how it does over time. If necessary, speak to your broker about changing to another one if the return starts to fall off. And keep an eye on its liquidity date. Once it reaches full maturity, don’t ignore it. Again, ask around, and see about changing it to a higher interest rate or some other type of annuity is advisable.
Other Potential Pitfalls
Beware of the so-called bonuses that variable-rate annuities can offer. While they may defer the costs of surrendering your old annuity; in the long-term, management fees can eat away at that bonus.
Many variable annuities have what are known as sub-accounts; a money market being the most common. A common mistake people make is to put some of their money in the money market account, and then just leave it there, not making the most of what this annuity offers. Here again, keep an eye on how the different accounts are doing, and move some of your money around in the various sub-accounts. One caveat: most annuities have a limit on the number of times a year you can do that and not have any tax implications.
Some fixed annuities, offer a high interest rate the first year, but then ask you to trust them to have an equally good rate for all subsequent years. This is an old trick, so don’t fall for it. You may find yourself stuck with an annuity that you can’t surrender for several years, with a very low interest rate. Be sure your fixed annuity has a bailout provision, which allows you to change to a different annuity free of charge if the rate ever falls more than 1% below what was initially guaranteed.
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