You’ve probably already asked yourself Question Number One,
1. Should I buy an annuity?
And if you’ve done even a simple Google search to start answering this question, you’ve already discovered that there is a lot of information out there – but not all of it is helpful or accurate. And you’ve probably got even more questions now, right?
Don’t worry – we’re here to shine a light on the right questions to ask a financial advisor to help you decide if an annuity is a right choice for your retirement plan.
But first, some basics.
2. What is an annuity?
An annuity is an investment product that you buy from an insurance company. You’ll purchase the annuity with a lump sum payment, in exchange for their guarantee to pay you a monthly, or yearly, payment. Learn more about what annuities are
3. What type of annuities are available?
Annuities have become more complex over the years, but you’ll most likely be looking at one of two common options – a fixed annuity or a variable annuity. A fixed annuity offers a guaranteed payment, dependent on the projected returns of the provider’s investments, and the holder’s life expectancy. This is a great option if you’re looking to buy an annuity as a long-term, stable investment. On the other hand, a variable annuity gives the provider the ability to invest in stock and fixed-income accounts, so the annuity value will change with fluctuations in the market. The payouts for a variable annuity can change on a yearly basis, but there is the potential for a higher return over the long-term. See all types of annuities
4. How can I make sure I’ll receive my promised benefits?
Like any investment, buying an annuity does come with some risk. However, there are many ways to diminish this risk so you can feel confident in your purchase. One important step is to review the credit ratings of the insurance company, or companies, that you’re interested in purchasing an annuity from. Each of the financial rating companies, like Standard & Poor’s or Moody, have their own rating scale, but in general, look to purchase from insurance companies that hold ratings of A++ or AAA. This rating system extends to the salesperson you’re working with – make sure they can provide you with an AM Best rating.
5. How much does an annuity cost?
The cost of your annuity will depend on plenty of factors – like whether it’s immediate or deferred, or if you’re purchasing spousal protection. Administrative fees and other internal costs will also be included, so you’ll want to review each of these fees closely with your advisor.
6. Will the movement of the stock market affect how much my annuity is worth?
Yes, if you have a variable annuity its value will be impacted by changes in the stock market. When determining if a variable annuity is right for you, be sure to factor in any related fees that you are paying – like administrative or asset management fees. Those fees will be deducted annually from the total value of your annuity, so if you do incur some losses during a flat market year, it’ll be that much more of a pinch when those fees are included.
7. Will inflation impact my annuity?
It can, but there are annuities available that protect for inflation. It will lower your annual payments at first, but in the long run (15+ years), an ‘inflation adjusted’ option is a good investment.
8. What’s better – an annuity or a mutual fund?
It’s not so much about better as it is about what’s going to work for your specific circumstances. An annuity can cost more than a mutual fund, but it also offers guarantees that aren’t offered with a mutual fund – like a minimum death benefit or creditor protection.
9. Do I need to work with a financial advisor to buy an annuity?
It’s not required, but it is recommended. As their popularity has grown, annuities have become more complex financial products. To make sure you’re getting the best value for your investment, and that the annuity returns will meet your financial needs during retirement, it’s best to discuss the details with an experienced, licensed advisor.
10. When do you want to start receiving income from your annuity?
With an immediate annuity, you’ll start receiving payments, typically on a monthly basis, that will last for the remainder of your life. You’ll pay a premium rate for this, which will vary depending on your age when you make the purchase and life expectancy.
A deferred annuity is different in that you won’t see a return right away. These types of annuities are paid out on an annual basis and are a good option if you’re looking for a long-term investment. Before making any decisions, speak with an experienced financial advisor.
These questions will help guide you in choosing if an annuity is right for you, and if so, which one will suit your financial needs for years to come.