6 Top Tips for Buying Annuity in 2016
Planning for retirement is essential, even if you are incredibly wealthy or a direct descendant of Uncle Scrooge. Retirement planning consists of considering several financial options — annuity being one of them. The kind of annuity you choose and other annuity decisions will either serve you extremely well or extremely poorly.
Let’s check out 6 tips if you are purchasing an annuity in 2016.
- Consider an Immediate Annuity
An immediate annuity is usually a good idea for those who are nearing the age of retirement. You can purchase an annuity with a lump sum of money, after which you will receive regular payments every month. Immediate annuity is a good option for all those who haven’t saved considerable funds for their retirement or if the annuitant wants a spouse to receive a steady income in a situation where the spouse outlives them. You can choose whether you want a fixed amount for a certain period of time (having higher monthly payments) or receive a fixed amount for an estimated lifetime (which has lower monthly payments). In the case of a variable immediate annuity, the payment amounts will fluctuate based on the performance of the underlying options or sub-accounts.
- Choose Annuities Suited for You
There are a variety of annuities to choose from, so it is essential that you do the homework before deciding on one. Different type of annuities include:
- Immediate (paying you immediately) or Deferred (payments start at some point when you are older)
- Fixed (payments of a fixed value) or Variable (payments that are tied to the performance of the market)
- Lifetime (payments until death) or Fixed-period (payments for a determined/fixed period of time)
Consult with the experts before you choose the option that best suits you.
- Keep the Option of “Longevity Insurance” Open Longevity insurance, also known as deferred annuity is a smart option for many. It is fixed annuity that starts paying after a few years instead of paying immediately. Usually, the insurer agrees to pay when you turn a certain age. Deferred annuity protects you against the risk of running out of money later in life. If you are sure of earning ample income for at least the next 15-20 years, then go for longevity insurance. It will start paying you in 15-20 years, ensuring that you have a continuous income flow. In most cases, deferred annuities will cost less as compared to immediate annuities because they allow the insurance company to invest your money for a long time before they have to start paying you.
- Go with Highly Rated Insurers It is crucial to remember that any annuity is only guaranteed as long as the insurer remains solvent. This is why you should always look for highly rated insurers. You can further reduce your risk by dividing the annuity money between several insurers.
- Convert an Asset Into an Annuity It isn’t unusual for a person to have several financial assets amassed by the time they retire. These assets can be turned into annuity payments. For example, if you have a cash-value life insurance policy or money in your 401(k), you can exchange the insurance policy tax-free for an annuity or choose for the money in 401(k) to be paid out in the form of annuity respectively.
- Laddering Annuity Purchases Laddering is a good strategy, particularly in low-interest rate conditions. In this method, you can buy annuities that start the monthly payouts and mature at different times. For example, you can purchase an immediate annuity to pay immediately and continue for 5 years, one which delays the beginning of annuitization for five years, pay for ten, and another that will begin in fifteen years and run for their lifetime. The premium principal can grow in a tax-deferred manner and you can receive higher monthly payouts during later years of retirement by delaying the annuitization of a second and third annuity.
Other tips include purchasing several smaller annuity contracts instead of one large annuity. It is equally important to explore other options such as dividends and social security too instead of focusing on just annuities.