Annuities For Dummies Cheat Sheet

If you’re considering an annuity, take a serious look at your personal situation. Examine the following points when shopping for an annuity to see what type best fits your needs or if you should even get an annuity:

• Assess your retirement needs. After you estimate your living expenses in retirement and identify all sources of income, you’ll know whether you’ll need an income annuity.
• Consider your options if you don’t have a traditional pension. Like most people, you may not retire with a traditional pension. But you can use an income annuity to provide pension-like income.
• Get familiar with your risk tolerance. Determine what risks you can tolerate and which ones you can’t. If stock market volatility bothers you, guaranteed income from an annuity can reduce your reliance on the stock market.
• Expect trade-offs in risk and reward. Annuities are insured investments, which means they protect you from some of the risks that accompany investing. But greater safety often means smaller gains, so some risks may be worth taking.
• Count on living longer. Don’t assume you’ll die young. Most people underestimate their life span by several years. Half of all 65-year-old Americans will live past age 83. Look at annuities that can prevent you from ever running low on money.
• Consider the different average life expectancies of men and women. Women tend to outlive their men, so couples in which one spouse is a woman should prefer joint-and-survivor life annuities rather than single-life annuities, all else being equal. Such contracts provide income for as long as either spouse is living, and the “survivor” will most likely be a woman.
• Protect yourself from inflation. The purchasing power of money drops 20 percent to 30 percent every ten years. You can hedge inflation risk by buying a ladder of income annuities.
• Look at how much you need to spend. A deferred income annuity (or a tax-favored qualified longevity annuity contract [QLAC], for individual retirement account [IRA] money) can guarantee you an income in late retirement while giving you more financial freedom in early retirement.
•  Get a discount for less-than-ideal health. Income annuities aren’t just for people whose parents lived to 100. Even if you expect a shorter-than-average life span, there’s an annuity for you.

Not all annuities are alike. Different types of annuities serve different purposes for different kinds of people at different stages of their lives. The best annuities are those that are the easiest to understand. You’ll be able to find the right annuity by heeding the tips in the following checklist:

• Recognize that the annuity world changes. When interest rates go up, fixed annuities tend to become more attractive. When rates go down, variable annuities begin to look more attractive. When income tax rates go up, high earners look to annuities for tax benefits. Keep the big picture in mind when shopping for an annuity.
• Understand how “survivorship credits” (mortality credits) work. When you receive lifetime payments from an income annuity, the income includes some of the savings of fellow annuity owners who have died before you. That extra credit, a result of longevity risk pooling, is unique to annuities.
• Get creative with your annuities. You can make your retirement financially more secure by combining investments and home equity in a holistic income plan.
• Decide how much money to keep outside an annuity. You should reconsider before putting more than 50 percent of your savings into an annuity. If an agent or adviser urges you to put all your savings into an annuity, get a second opinion.
• Plan for trade-offs in risk and reward. Most annuities are investments with insurance features. Don’t expect them to lower your financial risk and raise your financial returns at the same time. No annuity lets you have it both ways.

If you’ve made the decision to look for an annuity contract, keep this list on hand and cover every option it gives, so you can be confident you’re staying on top of the annuities game:

• Find an annuity-savvy adviser. Insurance agents and financial advisers tend to specialize in either annuities or investments, respectively. Try looking for one who knows how to combine the two in retirement.
• Look for a strong insurer. The longer you plan to own your annuity, the more important it is for you to buy it from a life/annuity company with A-level strength ratings from AM Best and the other major rating agencies.
• Read as much as you can about an annuity before you buy. Annuity contracts offer guarantees, and guarantees are always accompanied by complex exclusions and restrictions that may appear only in fine print.
• Buy only what you understand. Some annuities are more complex than others. Don’t buy one (or any other financial product) that confuses you. What you don’t know may come back to haunt you.
• Be wary of excessive fees. Variable annuities tend to have lots of visible fees, while fixed annuities tend to have implicit fees that are “built into” their yields, payout rates, or crediting formulas. Don’t let the benefits blind you to the fees.