Is Annuity Right for You? 20 Facts You Need to Know Before Retirement

20 Facts About Annuities That Every American Over 40 Needs to Know

As we approach retirement, ensuring financial security becomes a priority. Annuities are often considered a solution for guaranteed lifelong income, making them an appealing option for those looking to secure their future. However, before committing to an annuity, there are important details to consider.

Key Points:

• Annuities offer guaranteed income but come with potential costs and restrictions.
• Reviewing paperwork and seeking expert advice is essential when considering an annuity.
• Be cautious about unexpected expenses like surrender charges or insurance commissions.

20 Important Annuity Facts for People Over 40

1. Ask For Help
   Annuities can be complex, so it’s important to ask for help when reviewing terms. A financial advisor or lawyer can ensure that you fully understand the details before committing.
2. Three Types of Annuities
   There are three main types of annuities:
   • Fixed annuities provide a guaranteed rate of return.
   • Variable annuities depend on the performance of investments.
   • Indexed annuities are tied to a market index like the S&P 500.
3. Free-Look Period
   You have a 10-30 day window after signing to cancel your annuity without penalties, known as the “free-look” period.
4. Annuity Protection
   Annuities don’t have the same protection as a bank account. Coverage depends on state guarantees, but there’s no FDIC protection if the issuing insurance company fails.
5. 401(k) Rollover
   You can roll over a 401(k) into an annuity without triggering tax penalties. This is a helpful strategy for those over 60, especially if you plan to begin payouts at 65.
6. Insurance Companies Only
   Annuities are offered exclusively through insurance companies, so make sure to work with a licensed provider if you’re interested.
7. 10% IRS Penalty Rule
   With a deferred annuity, withdrawing before age 59.5 results in a 10% IRS penalty in addition to regular taxes. After 59.5, you’ll pay taxes on withdrawals, but no penalties.
8. Commission Costs
   When purchasing an annuity, commission fees can range from 1-10%. For a $200,000 annuity, this could mean an additional $20,000 in fees.
9. Adding Riders
   Annuities can be customized with riders, such as a long-term care rider, to increase payouts and help cover medical expenses.
10. Long-Term Commitment
    Annuities require a long-term commitment. Your money is typically locked in for 15-25 years, with early withdrawals incurring penalties.
11. Beneficiary Requirement
    Every annuity requires you to name a beneficiary, ensuring they receive the death benefits after your passing.
12. No Deposit Limits
    Unlike 401(k)s and IRAs, annuities have no limits on how much you can invest, allowing you to contribute as much as you can afford.
13. Fixed-Rate Interest
    Fixed-rate annuities provide a guaranteed return for a set period, though companies typically only guarantee rates for up to 10 years.
14. Liquidity Issues
    Annuities are not liquid investments. You cannot easily access your funds, and if you need to withdraw early, you may face surrender charges.
15. Life Expectancy
    The amount you receive from an annuity depends on your life expectancy. Two people investing the same amount may receive different payouts.
16. Customizable Plans
    Annuities can be customized with various features like survivor benefits or inflation adjustments, allowing for tailored long-term coverage.
17. Inflation Concerns
    Indexed or variable annuities might grow with the market, but they may not keep up with inflation, potentially reducing your purchasing power.
18. Surrender Charges
    Surrender charges can be as high as 10% if you withdraw funds in the first 7-10 years. This can significantly reduce the value of your investment.
19. Guaranteed Income
    One of the main benefits of annuities is the guaranteed income they provide. For example, investing $200,000 in a fixed annuity at age 65 could provide a reliable monthly income for life.
20. Lower Fees
    Some annuities charge high fees, especially during initial sign-ups or if you add features. However, certain annuities charge no fees, so it’s important to compare options.

Annuities can be a useful tool for securing lifelong income in retirement, but they come with important factors to consider. Be aware of the fees, liquidity issues, and long-term commitment involved before making a decision. Make sure to consult a financial advisor to ensure that an annuity fits your retirement plan.