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Common Annuity Mistakes and How to Avoid Them

Tips for a rock-solid retirement.

Before selecting any retirement income vehicle, first determine how much “protected” income you will need. Calculate how much you need to live on and subtract pensions and Social Security. This will help to determine if an annuity is a good option to help provide needed income during retirement. Putting too much in an annuity can be a mistake – as well as not putting in enough. 

A common mistake is to make a buying decision based on an income illustration. These illustrations are hypothetical.

Another common mistake involves not checking the ratings of the insurance company that issues the annuity. The company’s well-being can determine whether the money will be there when you need it.

Here are a few other mistakes to avoid when purchasing an annuity:

Not considering an annuity inside a qualified retirement plan: A known disadvantage of owning an annuity inside of a qualified account is that the tax deferral benefit one receives in a non-qualified annuity is not an incremental benefit since all qualified accounts receive a tax deferral. However, what can make any annuity more suitable for a qualified account is a feature called a Living Benefit, which is designed to provide income for the rest of the owner’s life. Income is mandatory in all IRAs at age 70 ½ in the form of required minimum distributions (RMDs). In combining a mandatory income distribution product (IRA) with an Income for Life vehicle (Variable Annuity with a living benefit at an additional cost), you’re able to participate in the market through subaccounts and, for a fee, you’re shifting risk from yourself to an insurance company.

Not owning an annuity because they are too expensive is a myth: If the idea of a living benefit providing an income stream for life sounds too good to be true, often it’s not. However, it is too good to be FREE. For many, the cost of ensuring a stable income stream no matter what the stock market does during your retirement may be worth the cost. Just make sure you know exactly what the additional cost is AND what the value is to you before you decide if it is worth it.

No Liquidity: Liquidity must be considered when investing in a Variable Annuity. Many VA’s will not charge up front commissions. However, they generally come with back-end surrender penalties if you withdraw before the stated holding period (generally four to seven years calculated as a specific percentage that declines over time). One feature that most insurance companies provide is a 10 percent annual penalty free withdrawal. Qualified withdrawals prior to age 59 ½ are subject to 10 percent tax penalty.

Before purchasing an annuity, carefully consider its investment options’ objectives, and all the risks, charges and expenses associated with it. ­

About the Author: Saul Simon is a Certified Financial Planner™ and is the author of the book Simon Says; Love Your Legacy, a consumer’s guide to protecting and transferring wealth to the next generation.


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