The Top 10 Questions You Must Ask BEFORE You Buy An AnnuityQUESTION #1 What will I be using the annuity for? Variable annuities are one kind of annuity that is often sold as the perfect investment because they can keep your money growing in the stock market while also structuring your nest egg for income. The problem is the guarantees needed for the income side of things restrict the investment side of things, so what you might end up getting is a very expensive compromise. If income is your goal, ask about a fixed or indexed annuity. QUESTION #2 Where is the money coming from for the annuity? If you are you investing in a variable annuity using the money you have already saved up from an existing retirement plan such as a 401(k) or IRA, you might want to slam on the brakes. These savings vehicles already offer you tax-deferred benefits, so there is no reason for you to pay the fees charged by a variable annuity to give you benefits you already have. Another kind of annuity might be able to give you more of what you need for much lower fees. QUESTION #3 How much risk do you want to take on? This question is a relative to question number one, because if you answered income, then your risk appetite may have changed. Once you start relying on your nest egg for your income needs, losing money that can’t be so easily replaced is a game changer. Many investors aren’t aware that in a variable annuity, even IF your income is guaranteed, your actual account value may decrease if the underlying mutual funds perform badly. QUESTION #4 How do the income and death benefit features work? Inside any annuity, when you add an income benefit or a death benefit that enhances the growth of your annuity, you basically create a separate account. To explain the way this feature works, we call this account the “funny money” account, because you can’t actually access the money in this account the way you can access your actual policy value. This is where things can get especially confusing with variable annuities because the enhanced growth rate from these features does NOT guarantee the rate of return for the underlying fund investments. QUESTION #5 How much are the fees? It is standard in all annuities to be charged a small percentage – around 1.25% – for the income and death benefit features that offer guarantees. Variable annuities, however, have a whole other host of fees that come with their investment including the M&E risk charge, administration charges, sales charges, and the charges associated with each of the underlying mutual funds. Understand that these fees work directly against any earned returns, furthermore, they are deducted from your account even when you lose money. QUESTION #6 Do you have access to your money? Most annuities are long-term commitments, so in most cases, it is not advisable to put ALL of your retirement money into a contract unless you first examine your liquidity needs. Liquidity refers to an investment’s ability to give you free access to your money quickly and easily. Most kinds of annuities offer you 10% free access to your funds, but with many variable annuities, we find in the fine print of the prospectus that even accessing these penalty-free amounts or withdrawing your Required Minimum Distribution IRA money can change the terms of the contract and even cancel the guaranteed growth rate. QUESTION #7 Is the bonus credit really a good deal? Many annuities offer a signing bonus that gives investors a percentage bump when they make a large deposit into an annuity. These bonuses can be alluring, but watch out. This seemingly generous “gift” is often canceled out by higher fees and charges elsewhere. QUESTION #8 How much income will I actually get? Continuing the above conversation, bonus credits are often used to distract investors from the real concern – the percentage of your income payout. If you are using this annuity to structure your guaranteed income, then a higher bonus amount might come at the expense of a lower income payout. Be sure to ask this question, because once your money starts growing on that “funny money” account, you may not be able to access that bonus money except as income.
QUESTION #9 When will my income payments start? Most people don’t realize they can choose when to stop or start their income. Many variable annuities require that you wait at least 10 years before receiving the income, especially if you want to take advantage of the enhanced growth rates. If you need to access you need to access your income sooner than that, a different kind of annuity might be better suited for your situation. at are the tax consequences of purchasing this annuity? Have you consulted with a tax adviser and considered all the tax consequences of purchasing an annuity, including the effect of annuity paQUESTION #10 Do I have to annuitize my money? To annuitize is when you trade in a sum of money for a regular income payment. If you understand how traditional pensions work, then you get the idea. Once the money is annuitized, you can’t take it out and go buy a condo with it. Annuitizing is also an irreversible decision that results in you losing control of your money. There are annuities available today that can give you regular income payments without annuitization. We have helped families from all over the country get these Top 10 questions answered before they buy an annuity. If you need help getting answers to these questions so you can be sure you’re buying the right annuity, feel free to reach out to us. As always, you don’t have to worry about a high pressured sales pitch, just straight answers to point you in the right direction.