Understanding Annuities and Choosing the Right
One for You

I have always found understanding annuities somewhat tricky.  When I did the research for my own retirement planning, I came across the following types of annuities:

  • Fixed annuities
  • Variable annuities
  • Tax-deferred annuities
  • Equity indexed annuities

You have probably run across even more.

The names are usually descriptive of the features of these annuities. I found that some are ideal if you are already retired, while others are good to include in your retirement planning.

I also realized when I discussed these with my financial advisor that some features come highly recommended while others do not. 

So I decided I’d better get the lowdown on annuities so I could weigh the features and compare providers.

Understanding Annuities Question #1Should you choose a fixed or variable annuity?

This is the first question you should ask when you are considering including annuities as a part of your retirement planning.  Fixed annuities mean a predictable and guaranteed income through investments in bonds, which are fixed income products.  If your goal is retirement planning, these are good options. You also have the choice of contributing extra funds towards the annual cost-of-living increase or inflation.

With variable annuities, your income will fluctuate because investments are in mutual funds. Your income depends on the performance of these funds. Obviously, variable annuities are risky, unless you have the expertise and experience to choose your investments well. If not, stay with fixed annuities for a steady, reliable income.

Understanding Annuities Question #2How does a lifetime annuity differ from a term annuity?

Lifetime annuities, as the name implies, give you an income for the rest of your life.  The best scenario is that you could end up earning more than you paid into the annuity if you live a long time.  I hate to burst your bubble, but it could be just the opposite in the event of an early death.  Some annuities, however, give you premium protection through which you or your heirs will get back at least what you put in.

If you are looking for added income apart from your Social Security and pension plan, lifetime annuities could be a good option for you, since you know that your basic expenses will be taken care of.

Term annuities, on the other hand, give you income for a specific timeframe. For most people, when they retire, lifetime annuities are a good option, since you can be confident about an income for the rest of your life.

Understanding Annuities Question #3How to Assess and Compare Annuities

Here are some factors I looked at:

  • A company with a high rating and good reputation: I wanted to be sure that they would be around when I retire, which is about 20 years from now.
  • Premium protection: To guarantee that I got back at least what I invested. If something happens to me, my heirs will continue to receive the payments.
  • Joint or survivor benefits: I wanted to customize my annuity so that my family is covered.
  • Tax implications: Buying an annuity with qualified retirement savings, which could be an IRA or 401k, would save me money on taxes.  I only pay taxes on the annuity income.

Once I got this information, I had more or less decided what type of annuity to buy. But two questions bothered me. What would happen to my annuity if I died suddenly? I found that this depends on the contract. If death occurred with a guaranteed savings annuity, my beneficiaries would receive the full balance of my annuity, which is the money I invest as well as the interest I earn.

I also wondered, looking at the bottom line, what savings would I get from an annuity that I might miss elsewhere?

If I bought a guaranteed savings annuity, I would not only enjoy guaranteed growth but also assured minimum interest rates, risk free investment and tax-deferred compounding.

If you would like more information, get in touch with the experts.


Return from Understanding Annuities to Annuities


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