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6 worst annuity mistakes to avoid

6 worst annuity mistakes to avoid

People planning for their post-retirement years often look towards various investment avenues to save money for a stable and comfortable life later. How well or poorly one manages their money during their working days decides the level of comfort they will have once they have retired. Among the many great investment avenues for the long term, annuities are a solid option. To get the best out of them , one must avoid these six common mistakes .

Investing too much money in annuity
Despite how great they are in accumulating money for future use, annuities have a reputation for being somewhat inflexible. Immediate annuities help return more ROIs than interest on CDs and similar fixed investments. The only catch is that investors have to give up control over their money to get the extra income. This is ensured when the investor gives their insurer a lump sum amount for an immediate annuity and the former cannot take it out at any point. In the case of deferred annuities, while people can withdraw cash as per their wants after they invest in them, the income guarantees are reduced once the withdrawals exceed a certain limit.
For this reason, putting too much money into an annuity plan can result in a serious cash crunch/loss of liquidity for investors.

Not naming one’s spouse as a beneficiary
For married retirees, a joint-life annuity is a great plan as it ensures a steady income in almost all scenarios. The benefits of having a joint-life annuity are that spouses can continue receiving money even after their life partner’s demise. But to take advantage of that, investors need to name their spouse as the beneficiary. Not doing so is a major mistake for multiple reasons.
When a joint-life annuity exists with an IRA as a beneficiary, the investor’s spouse only gets the actual value of the investment after the investor’s death. On the other hand, if a joint-life annuity names the investor’s spouse as a beneficiary, then the same regular payments will be sent to them even after the investor’s demise. The payments will not cease until the rest of the spouse’s life. Naming a beneficiary in an annuity plan is an essential thing to do. Not doing so causes people to lose a lot of money for themselves and their spouses.

Taking extra withdrawals
A guaranteed annuity involves a set percentage of money that investors can withdraw or take in distributions annually. Certain service providers set this percentage at 5%, but certain annuities allow investors to take more. This habit of “taking out more” money can be problematic for investors as it can slash their guaranteed value that is receivable later.
Users who take out only as much money as within the set percentage will get the guaranteed annuity value that remains essentially untouched for the entirety of the plan. Essentially, when that withdrawal amount increases by a few thousand dollars, the future usability of an annuity reduces significantly.

Ignoring the costs
Annuity costs vary with different kinds of plans. Not considering this factor can cost investors in the present, later in life, or during the life of the annuity plan. Annuities include several types of costs, including broker fees, commissions as high as 10%, and other related expenses. This is why investors must ask for rates upfront and shop around for the best annuity rates before putting their money in a plan. To save on broker fees, investors do not even have to purchase plans from brokers. Instead, they can buy immediate annuities from online annuity shopping services and variable annuities through companies that offer that service.

Switching to another annuity midway
Certain older variants of variable annuities offer payout guarantees that ensure the investors receive a set amount of money annually throughout their lives. Older annuity plans often let investors take about 6% of the guaranteed amount each year. On the other hand, the newer ones cap this percentage at 5%. So, by switching the annuity plan, people get less money every year.
Switching to another annuity midway while one is already running results in people losing out on several benefits one plan provides and the other may not.

Picking the wrong kind of payout
The type of payout one takes depends on one’s marriage status. Single-life immediate annuities offer the highest annual payout. However, these benefits stop when the investor dies. For married people, this means the spouse stops getting the benefits after the primary investor’s death. So, it makes sense to purchase joint annuities in which the spouse continues to receive money even after the death of the central investor. A joint annuity is one of the best investment avenues available as it covers entire families, not just individuals. Picking the wrong kind of payout results in one being unable to give monetary benefits to their entire family and, by extension, being unable to make the most of their life’s savings and assets.

Another major mistake people make is not recognizing if an annuity is owner- or annuitant-driven. Who drives an annuity plan is key to the benefits people can get from the personal annuity plans they choose for themselves and their loved ones.

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