What Annuity is Best? A practical guide in determining what annuity is right for you.
Selecting an annuity as the foundation for your future retirement plan can be a big decision. With a bit of research online, you will quickly discover that there is no shortage of individuals with opinions, market philosophies and contradictory statements on the annuities that could be right or wrong for you. Annuities for most people were designed with conservative intentions, allowing investors to participate in long term savings plans within tax friendly vehicles that guarantee no loss to principal or earnings. The exception to this rule is the variable annuity, a securities product utilized by investors who prefer access to the stock market, and are prepared to risk part of their principal in return for the chance of higher interest rates. Too often in the financial press though, the variable annuity incorrectly becomes the figurehead for all annuities, diminishing the value other safety-based products can offer to individual retirement plans. Annuities provide many real advantages, ranging from competitive guaranteed interest rates, to guaranteed monthly income payments for life, to the often cited tax deferral advantages of compounding both principal and interest rates over long periods of time in preparation for future retirement distributions. The following guide has been written with these philosophies in mind, and represents some of the basic principals we utilize when helping individuals get the most from the selection of their financial planner. Select Your Financial Planner Carefully There are two basic types of financial planners available when it comes to helping seniors select annuities: those that exist only to sell the products that their parent company creates, and those that remain independent to ensure they have access to the widest possible range of financial products to serve their clients. Restrictive affiliations and objective advice do not normally go hand in hand, as it can limit the guidance and direction you receive for some of life’s key financial decisions. Make sure the planner you select has broad experience with numerous companies and annuity products.
Ask the Right Questions When Needed For individuals not born into the financial planning world, an annuity can seem to be an intimidating investment product - complete with its own language, jargon and special conditions. Asking the right questions can ensure you get the most from your annuity investment, and that any special features, guarantees, or benefits you are expecting are included right where they belong. Ask your planner to:
- compare the features and rates of multiple annuity plans
- review the annuity provider for safety and performance
- identify the guaranteed minimum interest rates
- discuss the interest rate renewal terms and history
- clearly identify the term of the annuity product
- specify any surrender periods or surrender charges
- divulge any hidden charges or undisclosed fees
- illustrate options for withdrawal provisions
- identify expected penalties and fees for early distribution
- communicate again what options exist upon maturity
In short, never accept any conditions, terms or contractual language that you are unhappy with, unsure of, or not totally 100% clear on. If your financial advisor is not able to satisfy your basic requirements for complete understanding, or you are confused about decisions they are making on your behalf, find a new planner.
Understand Your Risk Tolerance Calculating personal risk tolerance based on your retirement objectives is a large part of determining what the best annuity is for your future. Many people long satisfied with the security and minimum growth of CDs and savings plans have found tremendous long term advantages within fixed, immediate and equity indexed annuities. The tax deferred benefits, combined with security of principal and guarantee of interest rates, allows you to effectively plan and know what assets will be waiting when you need them. However if you prefer the excitement of the stock market, enjoy managing your assets, want long term growth strategies, and don’t mind the risk of losing money in exchange for the opportunity to earn higher interest rates, a variable annuity could be right for you. Determining your personal risk tolerance can occasionally be as easy as looking at two of the most common investor types:
- Investor one may have a sizable sum of assets, and use securities (stocks, variable annuities and mutual funds) to maximize growth of his money. A smaller percentage of his portfolio is invested within conservative products (CDs, bonds, fixed annuities), designed to balance out risk with guaranteed earnings in the event of unexpected market changes.
- Investor two may have a smaller sum of money, invested in a way that ensures they will never lose their principal or earnings, as the only thing guaranteed for them in life is that they will likely need every dollar of their money to ensure they don’t outlive their savings.
Do Your Homework Before Buying Variables If you have reviewed all of your options and believe that the variable annuity may be ideal for your unique circumstances, ensure the planning firm you select is up for the task of preserving your wealth and serving your interests. Investigate their performance history, fund selection, management tenure, fund features, client philosophies, and account benefits. If you are selecting a dedicated wealth specialist for your asset management, don’t automatically judge them due to high fees. If one variable annuity is charging 3% in annual fees, with a management team that has a 5-year track record of 14% per year to investors, and another variable only charges 1% in fees, but they are averaging 6% per year, which would you rather own?
Ultimately your decision to use an annuity will come down to what you want to achieve with your investments. An individual age 59 with $150,000 in their life savings may have a totally different risk tolerance than a 52 year old with $900,000. Contact us today to arrange an objective interview with one of our planners. |
