How to Access an Annuity

An annuity is a type of insurance that allows you to plan for retirement by providing a regular income for you in the future in exchange for either a lump sum investment now, or a series of smaller monthly payments made over time. This money is invested over the life of the policy and you, the annuitant, will eventually be able to get a stream of income paid to you according to agreed terms. It is natural to try to find the best annuity on the market, but if you are not factoring yourself into the equation first you could be going about assessing annuities in the wrong way. The following are a few things you should consider.

What is the Risk versus the Return?

An annuity is an insured investment which makes it great for those with a lower risk tolerance, but it also means you can generally expect lower returns on your annuity than if you took the same money and invested in the stock market for the same period. While an annuity as an investment class may be a fairly safe investment, different insurance companies invest their portfolios differently, so if you have a low risk tolerance you should look at the company’s track record and consider how they will invest your contributions.

Consider the Length of the Investment

An annuity is most beneficial when it is started several years ahead of the estimated retirement goal. The exception to this rule is an immediate annuity where a lump sum of money is invested to provide a stream of smaller monthly payments. Another point to note is that, different annuities will provide income for varying lengths of time so before you commit to one it is wise to check the terms. You should estimate a longer life span to err on the side of safety.

Assess Your Liquidity

Since an annuity requires a monthly payment to sustain it, it makes sense to ensure you are able to meet the expected amount every month. It is only possible to get the promised level of income if you hold up your end of the contract by contributing the payments every month without fail.

Understand the Charges and Fees

Annuities have associated fees. This is a fact that cannot be ignored and the more you familiarize yourself with the different types of fees you can incur, the less likely you are to have to pay them. By educating yourself on all the expenses upfront you are also better prepared to choose an annuity that may be more profitable in the long run, since different annuity products have different fees.

Will Your Family Benefit?

Finally, it is important to find out if your annuity will continue to provide for your family after you are gone. If you have loved ones to take care of this is an essential piece of information. “Joint and survivor” annuities are best in this instance.

All annuities are not created equal. While you may be eligible for a tax deduction regardless of your annuity type, there are a number of different factors that can make one annuity more attractive than another. The trick is learning to identify these factors and then making the right choice for your needs.