Annuities for Dummies

Wooden mannequin near tower of cubes with word INCOME on table against light background

If you are considering purchasing an annuity, you need to understand the intricacies of this often complex retirement investment before making a final decision.

You will need to assess your situation. 

Ask yourself what you need from a retirement investment – beyond receiving a decent annual interest rate of return and an adequate monthly payout.

Here are a few basic guidelines for understanding what you need to consider before deciding on an annuity.

Choose a Financial Advisor Specializing in Annuities

Due to the complexities of annuities and their variance from other types of investments, it is a prudent move to find an independent fiduciary financial advisor who specializes in annuities.

What Is Your Risk Tolerance?

Perhaps the most critical question you must ask yourself is what your risk tolerance is. Some people cannot cope with the ups and downs of the stock market. If that is you, you probably want to opt for a safer type of annuity, such as a fixed annuity. 

If you are used to market fluctuations, then an indexed or variable annuity may suit you better.

What Are Your Needs?

Estimate your monthly living expenses before deciding on an annuity. Identify all sources of income you can expect before relying on a potential monthly annuity payout. Once you have determined how much you need at a minimum, you can inform your financial advisor so they can find you a suitable product.

Don’t Assume You Will Die Young.

Despite significant medical advances in the last century that have significantly increased humans’ average lifespan, most people underestimate their lifespan – often by several years. Look for annuities with extended retirement funding. If you are married, consider a joint and survivor annuity.

Get A Medical Checkup Before Purchasing an Annuity

While there has been plenty of medical advances, it is a good idea to get a checkup with your family doctor before purchasing an annuity. If you have a medical issue that may potentially decrease your lifespan, quite a few impaired-risk annuities may be suitable for you. The advantage of these types of annuities is you may be eligible for larger monthly payments.

Protect Yourself from Inflation

The inflation rate not only plays an integral part in the economy, but it can directly affect your monthly living expenses over the length of an annuity term. The standard benchmark for the average annual inflation increase is roughly 2%. However, in 2021, inflation has skyrocketed by over four percent in the first half of 2021 alone. The rising cost of living needs to be factored into your monthly annuity payout. An income annuity with an inflation rider can help offset these costs.

Don’t Purchase an Annuity Until You Understand It Fully.

For the most part, annuities are complicated investments that are usually sold by insurance companies rather than banks or brokerages. Because of this, even seasoned investors struggle with the complexities of these products and the often-confusing language found in an annuity contract. 

It is generally considered good practice not to buy or invest in any product you do not fully understand. An independent fiduciary advisor can not only find you a great product, but they can explain everything about the investment to you in detail.

Watch Out for Fees

Annuities are famous for having hidden fees. Variable annuities are primarily known for having the most fees. Make sure your advisor explains any potential fees you may expect throughout the annuity term and how they may counter any potential additional gains.

Choose a Top-Rated Insurance Provider

Always purchase an annuity from a top-rated insurance company. Ratings are an essential tool to utilize when shopping for an annuity sold from an insurance company. Rating Companies grade insurance companies differently, using slightly different scales – some use standard letter grades while others use gradations such as AAA or A++. Ultimately, you want a company rated A or better.

Don’t Ever Be Rushed into a Decision.

Purchasing an annuity is one of the biggest and most important decisions a retiree may make. If you followed the very first rule of finding a trustworthy independent fiduciary advisor who specializes in annuities, then you have nothing to worry about. But if you ever find yourself in a situation where you are being rushed to sign a contract before you understand and are committed to it fully, find a new advisor. Choose wisely.

Previous articleRetirement Annuity
Next articleRegistered Index-Linked Annuity
Claude Saravia is a retirement, investment, estate planning and currency exchange writer who has been writing about personal finance for over a decade. He has worked directly with some of the largest currency exchange firms and insurance brokerages in North America, prior to switching his focus towards becoming a financial writer. Claude is a graduate of Humber College in Toronto, Canada where he studied journalism and finance. Originally from New York City, he now lives in Arizona with his wife and three dogs.


Please enter your comment!
Please enter your name here