Annuities are either products that retirees love or products which they despise.
With so many different varieties of annuities, it is easy to see why.
There are five simple strategies you can easily adopt prior to purchasing an annuity in order to maximize your retirement potential.
Simplicity
Annuities can be easy or they can be complicated. It is important for your sake (and for your money) that you understand exactly what you are getting into before you sign a contract.
After all, this is your retirement we are talking about. You worked your whole life for this. You want a good product which will give you a decent rate of return in conjunction with a livable monthly income stream. Incorporating additional features such as long-term care can be beneficial as well.
A general rule of thumb is that the simpler the annuity is, the better off your retirement funds will be in the long run.
Unfortunately the best-selling annuities – fixed-indexed and variable annuities – are usually the most complex. These products often come with expensive bells and whistles that sound good at first but can be detrimental to your retirement savings.
When it comes to annuities, simplicity usually is the winning strategy to adopt. The simpler the annuity, the cheaper it usually will be as well.
What Type of Funds to Invest?
A simple strategy to utilize when investing in an annuity is to invest qualified funds (401K, IRA, 457B, 403B, etc.) instead of non-qualified funds (cash or liquid funds such as stocks).
Investing qualified money often lowers any fees or taxes as opposed to investing cash or general savings (non-qualified monies). States that charge premium taxes on annuity investments often charge much less for qualified investments as well. The savings can add up quickly and increase monthly payments substantially.
Annuity Type
To truly maximize your annuity’s potential, the type of annuity you purchase plays a major role in what type of production you can expect.
Investing in fixed annuities usually means a rate of return that is far from glamorous, rivaling CD rates. This usually means barely keeping up with the inflation rate. However, it also means that the rate is guaranteed with no potential for losses even if the stock market crashes overnight.
Alternatively, variable annuities offer the most potential for capital gains which can push your retirement from just good to fantastic. You will find that when you meet with an advisor, they will often recommend variable annuities. While not all agents are paid via commissions, there are only a small minority which are only fee-based. Commissions for variable annuities can go as high as 6%. Therefore, an agent who sells a variable annuity valued at $300,000 stands to earn up to $18,000 in commission. Alternatively the commission on a fixed annuity maxes out at 4% and is usually much less than that. That would drop the potential commission to $12,000. The $6,000 difference is a down payment on a car or a lovely two-week vacation in Bermuda.
With all of that said, it is important to note that historically the stock market always rises but with a stock market crash every ten years or so. Had you bought a ten-year variable annuity in 2007, you would have won in the long run. Ten years ago the Dow Jones sat at 13,264.62. At the end of April 2017 it stood at 20,941.51. That is an increase of 7676.89. But we also had a crash in 2009 with the low point reaching 6547.05.
The key to the variable annuity is setting up your income stream at the signing of the contract which continues to yield the monthly or quarterly income regardless of a crash or not. But as with all things in life, the devil is in the details.
Understand the Fee Structure of Your Annuity Contract
The cost of owning an annuity can vary widely from product to product. Not understanding how fees are distributed can lead to unexpected surprises which cut into your living expenses. Fees are usually most complicated with variable annuities and to a lesser-extent with fixed-indexed annuities. Fixed annuities on the other hand are usually fairly straight forward.
While variable annuities offer the most potential for gains, they can offer the greatest potential for losses as well. This doesn’t even factor in the fact that the fees with variable annuities are often over the top. These annuities have premiums which are indirectly invested in market investments, so they can and usually do incur sub-account fees.
Simple fixed annuities are usually the most straight-forward product with the least amount of hidden fees. This is because the interest rate is calculated with agent commissions and costs to the insurer factored in; therefore, fixed annuities generally are a what-you-see-is-what-you-get product.
Research and Compare Rates
Above all, make sure you research the products available in your state thoroughly. Always shop around. It is easy to go for the first product that sounds good. Sometimes it just sounds too good to be true. Sometimes the salesman will try to push the product on you for .
The bottom line is even if it sounds like a great product, it does not hurt to see what other products are available.
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