Annuity Investment Mistakes to Avoid
Making investment decisions has never been an exact science, nor is the process the same from one individual to the next. There are many variables that need to be factored, both from the standpoint of your individual situation and in the consideration of specific investments. The objective is to match your needs, priorities, preferences and tolerance for risk with the appropriate investment alternative; not an easy task considering there are literally thousands of investment products from which to choose. Because it can be both expensive and troublesome if a mistake is made, it is important to exhaust all efforts in avoiding them in the first place. Here are some major mistakes people can make with any investment decision, but particularly with annuity investments:
Mistake #1: Not having clearly defined investment objectives
It’s one of the worst mistakes you can make with any investment. But, with an annuity, you may have to live with it longer unless you want to pay a hefty surrender fee. Before considering any investment, it is vitally important to know exactly what it is you want to accomplish, including a specific time horizon and an accumulation amount framed in the level of risk you are willing to tolerate. Only then will you be able to match your needs to a particular investment.
Mistake #2: Investing in something you don’t understand
It is said to be the key to Warren Buffet’s success. He never invests in anything he doesn’t fully understand, from top to bottom. Having read this report, you may have a better understanding of annuities than most people, but each annuity contract is slightly different. You’ve learned that annuities have many moving parts, and they tend to move differently from one contract to the next. You’ll know when you have a complete understanding of a product when you can explain it in terms an eighteen-year old can understand it.
Mistake #3: Investing with a clear strategy
In the right situation, an annuity can be an ideal investment, but any investment needs to be considered in the context of an overall investment strategy. Making investments on an ad hoc basis, or without consideration for other investment needs, such as liquidity needs, or tax implications, or diversification needs, or allocation requirements, can lead to disappointing results in the long term. An annuity should be considered as one component of a coordinated strategy that addresses all of your objectives.
Mistake #4: Failing to shop and compare
Most annuities are sold, not bought meaning investors are generally introduced to annuities by a sales person or financial planner who recommends the product. That would be OK if you are presented with a number of product choices and all of the features and benefits are clearly explained and compared. Often times, the product is the only one that they offer and it may not be the most competitive product on the market. Once you learn how annuity products work, you should be able to conduct your own comparison and evaluation. With the advent of the Internet and online annuity comparison sites, it’s as easy as screening products by different features, rates, fees and options. You can quickly narrow your choices from among hundreds of annuity products. Time invested: A few hours. The value to you: Priceless.
When you do meet with a financial professional, it is important to establish his or her qualifications and credibility as an objective provider of sound annuity advice. Be prepared to ask these 10 tough questions:
- How many years of experience do you have?
- What are you credentials?
- What are the fees, caps, spreads, and surrender charges?
- What happens at death?
- Is there any risk of loss of principal?
- What’s the maximum annual withdrawal?
- Is there a confinement waiver for long term care needs?
- Who’s going to service my account?
- Is my account protected against inflation?
- What financial institutions are standing behind these guarantees?
Mistake #5: Shopping rates instead of companies
When you begin your search for annuity products, you are likely to come across promotional ads blasting high yield offers and other tempting features. In an extremely competitive market, life insurers must be able to get your attention, so they will often times promote high initial rates, high participation rates (indexed annuities) or low surrender fees. It is important to remember that annuities are long term investments, and what happens in a product in the first year or two, may not make much of a difference over the long run. The more important consideration is whether a company will still be in a financial condition ten or twenty years out to be able to back its guarantees and meet its obligations.
Currently, there are about 30 life insurers that offer annuity products with financial ratings of “A” or better. These companies have been assigned that rating by independent rating agencies who scour the financials of these companies to evaluate their financial strength and their ability to withstand adverse economic conditions. With so many top rated companies offering competitive annuity products, there is little reason to consider companies with lower ratings. Consider starting your search at the top and then compare rates and fees.
Fixed annuities are long-term investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2024 Advisor Websites.