8 Tips When Thinking About An Annuity

Be smart about an income annuity purchase by understanding the pros and cons

wooden blocks spelling out the word tips
In the market for an annuity? Don't forget these tips.

By Nimish Shukla, CFA

When it comes to whether or not to purchase an annuity, let’s just say it’s complicated. A host of academics, policymakers, and respected financial professionals have urged people against buying variable and indexed annuities. But most of those same people talk about the important role that income annuities play in many retirement plans.

Whether to buy an income annuity is one of the most complex and important decisions you’ll make. Do it right and you get objective confirmation from a trusted source that you’re a fit, get the best price on a highly rated insurance company, and be able to complete the process in no-time flat. All without ever having to talk to a sales guy. Do it wrong, and, well, we all know the horror stories...

If you’re thinking about an income annuity, follow this advice:

  1. Don’t dismiss annuities just because of what you hear in an advertising campaign. Ken Fisher and others spend a lot of money telling people that annuities are bad. This is the kind of oversimplified marketing campaign that grabs your attention but doesn’t tell you the whole story. More here about why to question Ken Fisher’s fear mongering ads. Even Fisher himself admits the kinds of simple annuities on our platform are “OK.”
  2. Find out if you’re a fit for an income annuity. We’re biased in this regard because we have the most widely used annuity advice tool available. Use it to get a 1-10 score that factors in your age, life expectancy, risk, assets, spending, and income. All in about five minutes.
  3. Strongly consider a deferred income annuity (a product with a predetermined guaranteed payout that you buy now and have the income start later). Doing this will make your money go further, probably a lot further. Deferred income annuities are sometimes called longevity annuities, longevity insurance and a subset are also called Qualified Longevity Annuity Contracts (QLAC). Here’s a glossary of commonly used annuity terms.
  4. Resist the urge to add lots of features or riders to the product you purchase. Additional riders decrease your payout and reduce the impact of the longevity protection you’re looking for.
  5. Don’t go with an insurance carrier that has a credit below A ( according to A.M. Best). You’re buying this product for the guarantee. Make sure it’s a real guarantee. More on credit ratings here.
  6. Avoid anything labeled “proprietary” or anything you can’t understand yourself.
  7. Variable annuities and indexed annuities rarely make sense. If you want market upside, be in the market in low-cost index funds or mutual funds. If you want protection from market downturns, supplement the market part of your portfolio with simple income annuities. Don’t try to do everything with one product because you’ll end up with a product that doesn’t do anything well.
  8. Arm yourself with information. There are lots of other reliable places to get informed, like Morningstar and Forbes. We also have a lot of information (start here) on our site to help you learn about your options.
  9. Finally, if you’re looking to figure if an annuity is right for you, just click on the button below.

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