5 Tips for Finding the Best Annuity for You
To benefit from an annuity, it’s important that you choose one that aligns with your financial and retirement goals. With multiple annuity types available, it can be overwhelming to choose the right one. Fixed annuities, which pay a guaranteed rate of return, are a great option for those looking for guaranteed income during retirement. This makes fixed annuities ideal for investors with a few years until retirement. We have compiled a list of tips to help you find the best annuity for you.
Establish Your Retirement Goals
Understanding your retirement goals is the first step to finding the best annuity. Consider your ideal retirement age and how much you’ll need to save to retire comfortably. A retirement tool can help you calculate your assets and expenses to understand your financial needs in retirement better. An annuity can be a great retirement planning tool, but you’ll want to determine when your policy will begin issuing payments to ensure they align with your plans.
A deferred annuity begins paying out at a later date. An immediate annuity begins issuing payments shortly after you make a single premium. A deferred annuity may be ideal if you have a few years before retirement, whereas an immediate annuity might be preferred if you’re nearer to retiring.
Knowing when you plan to retire is essential since many annuities have surrender fees. You pay these fees if you withdraw from your account before the completion of the accumulation period.
Determine Your Risk Tolerance
Determining your risk tolerance can also help you choose the right annuity. While risk tolerance levels vary depending on many factors, including age, current investments in your portfolio, and retirement plans, some annuities carry more risk.
A guaranteed or fixed annuity is a financial tool that pays a fixed rate of return, regardless of market performance. A variable annuity pays returns based on the market. While a variable annuity may allow you to earn more, it also increases the risk of losing money. Many people nearing retirement enjoy the guarantees of a fixed annuity, primarily since it protects them from a volatile market.
Identify Your Payout Preferences
Determining how you prefer to receive annuity payouts can also help you choose the right type of annuity. The most common annuity payout options include lifetime, guaranteed, or joint. A lifetime annuity issues the policyholder income payments for life. Some lifetime annuities can also transfer payments to your beneficiary if your policy outlives you.
A guaranteed payout is available for a minimum number of years, depending on the annuity type. This payout schedule is usually somewhere between five to 20 years or is a period certain, which means it pays a guaranteed payment for life. A joint annuity pays for the policyholder’s or spouse’s full life.
There are also differences in payout types. Whereas many annuities issue monthly payments, some may offer the option for a full payout at one time minus fees.
Compare Quotes Between Providers
Once you decide on an annuity type and payout, you’ll need to choose the right provider. Always choose an annuity from a company with good financial standings and ratings. Compare rates among providers to find the best one. Paying specific attention to agency ratings from AM Best and Standard & Poor’s (S&P) can provide you with valuable information to choose the best annuity provider.
It can also be helpful to review specific details, including minimum contributions and fees of each annuity, to help make your decision. Choosing an annuity with a timeline that fits your needs is also crucial. Most annuities charge high fees for withdrawing your funds before the contract matures. Additionally, you may also be subject to tax penalties if you withdraw funds from an annuity before retirement.
Consider Available Funding Options
There are also differences in how you can fund different annuity types. Choosing an immediate annuity requires a lump sum payment. You can contribute to a deferred annuity through a single lump sum payment or monthly income premiums. The annuity type available to you may depend on your current assets’ liquidity.
If you have savings that are easily accessible, purchasing an immediate annuity may be an option. If you prefer to contribute to an annuity through smaller monthly payments, deferred may be a better choice. A deferred annuity also offers tax deferment benefits. Deferring annuity payments until you retire and are in a lower tax bracket can reduce your tax liability.
Annuities can be an excellent retirement planning tool. Considering your retirement goals, risk tolerance, payout preferences, and funding options can help you choose the best annuity. Consulting with a financial adviser can also be beneficial in identifying your retirement goals and creating a contribution or investment strategy that helps you meet them.