Top five mistakes to avoid when buying an annuity

Investing in annuities can be a hot-button issue for some people. Some financial advisors love them and some hate them. I am an investment agnostic. I prefer to take a balanced approach while investing for retirement. I would likely recommend a combination of safe and smart-risk options.

This is especially important for those who are in or beyond the 11 critical years of retirement. Those years are the first five years, the year of retirement and the first five years after retirement. Investment decisions made during this retirement are critical to maintaining your best lifestyle once you enter the “red zone” distribution phase. I’ve compiled the five biggest mistakes I’ve seen retirees make when buying an annuity.

buying a variable annuity

variable annuities May look good on paper, but they are fraught with the odds of retirement. Although some initial guarantee is given, your money is still at risk of market volatility, which means that your principal could be lost to market volatility. In addition, the fees inside most variable annuities are very high. variable annuity fees may exceed 4% annually. fixed index Annuities can provide similar performance over time but with no market risk and very few fees if any.

Not Using an Independent Consultant

There are two types of consultants: captive and free, Captive agents are usually employees of an insurance company and are therefore allowed to offer only that company’s products. This limits their ability to put you on the plan that is best for your situation.

On the other hand, independent consultants are able to represent different companies. This allows the consultant to shop the market for you based on your specific needs. Most independent agents (though technically agents of the carriers they represent) consider themselves to be working for the client and not the insurance companies. This eliminates any conflict of interest arising out of captive employment status.

Using a Financial Advisor Who Isn’t a Fiduciary

Under captive and independent, there are two subcategories that are important to the consumer: fiduciary and non-judicial. Trustworthy advisors are always held to the legal standard of making recommendations in the best interest of the client, regardless of what may be best for the advisor. non fiduciary Agents and brokers are held to a low “suitability” standard.

The suitability standard states that a broker may sell a product to a consumer that is “good enough” but may pay a higher commission to the broker. For example, a consumer tells his broker that he wants to invest in a small-cap mutual fund. There are many funds in the market that would fit this description. The non-trusted broker has narrowed them down to two that would be suitable for the client. One has reduced fees for the client but also gives a lower commission to the broker. Fund number two has higher fees for the client, but also pays higher commissions to the broker.

Depending on the suitability standard, the broker is allowed to place the client in a higher fee, higher commission fund, even though the lower fee fund will probably perform better. A fiduciary advisor would be duty-bound by law to recommend low-fee funds because it is in the best interest of the client.

Pay Fees for Annuity Riders You Won’t Use

Fee is the enemy of performance. As mentioned above, variable annuities can have very high fees. However, fixed and indexed annuities are not free of fees. Most of the fees inside fixed annuities are associated with alternate rider Which can be added to the base annuity chassis. most common rider Fixed and indexed annuities have added lifetime income riders and increased death benefit riders. Both of these riders are useful and the charges are reasonable if your objective of buying an annuity is a lifetime income or an increased death benefit.

If that’s not your goal, you’re wasting your money. Let’s say you’re only interested in a safe way to get a reasonable rate of return for a set number of years, then you may want to transfer the flexibility to a different investment vehicle. You already have a lot of income from other sources and enough life insurance to cover all your final expenses and legacy plans. In this case, adding a lifetime income rider to your fixed annuity for a fee of 1% would be a waste of money.

Buying an Annuity from an Insurance Carrier That Doesn’t Specialize in Annuities

There are many insurance carriers that offer annuities. Some of these companies specialize in annuities and others, although they may be great companies, only offer annuities as a subsidiary product. their registry (mathematicians who price products) Focus more on the company’s primary product lines, such as Whole Life or Medicare supplements.

A carrier whose sole focus is annuities has actuaries who specialize in the annuity field. In fact, most annuities are designed by third-party actuarial firms. This allows the carrier to focus on the administration of plans, and the management of investments and customer service, rather than spending valuable resources on the continual development of new products.

Buying an annuity or any other investment is a big decision and requires a lot of careful planning. Most annuities have surrender charge Schedules built into contracts. These schedules can cause high fee To apply if the annuity owner had to surrender (cancel) the contract before a pre-determined time – usually ten years. This means changing your mind can be very costly.

Therefore, if you are considering adding an annuity to your retirement portfolio, it is in your best interest to seek the advice of a reputable, local and independent financial advisor who adheres to the fiduciary standard. Make sure they are able to explain your options to you and that you fully understand the annuity contract. Finally, don’t be afraid to get a second opinion if you’re at least unsure. After all, it’s your money and your future.

The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice related to your specific situation.

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