My Neighbor Says I Need an Annuity. Do I?

You’re not taking financial and legal counsel from your neighbor, are you?

Perhaps he or she told you that you need to get an annuity. Do you even know what this is? If not, you could make one of the worst financial mistakes of your life. You don’t want to do that, do you?

Even though your neighbor has good intentions, you should speak with a financial advisor who can explain what an annuity is and how it works.  Below we will give you some basic information on annuities.  If you don’t know about annuities dos and don’ts, you may inadvertently create money problems for yourself .

Do I Need an Annuity?

 According to Investory.gov, “An annuity is a contract between you and an insurance company that requires the insurer to make payments to you, either immediately or in the future.” You can buy an annuity through a single payment or a series of payments. Your payout may be one-lump sum or a series of payments over time.

Most people buy annuities to manage their retirement because they provide:

• Recurring payments for a specified amount of time. This could be for the rest of your life, or your spouse or partner.
• Death benefits. If you die before you receive payments, your beneficiary receives a specific payment.
• Tax-deferred growth. You only pay taxes when you withdraw money from your annuity.

Based on the above information, you may ask yourself, “Do I need to buy an annuity?”

Do you have guaranteed income from several different sources? This could be your 401(k), pension, rental property, a multi-level marketing business, franchise, stocks, etc. If you have other income in addition to your full-time job, you probably don’t need an annuity.

If you don’t have a traditional pension, a 401(k), or any other funds coming in each month, you may consider purchasing an annuity. Why? Because you would receive a fixed monthly payment in retirement and have peace of mind that you have some income each month.

Are There Different Types of Annuities?

 You can buy three types of annuities: Fixed, variable, and indexed. Here’s a breakdown:

 Fixed Annuity

An insurance company gives you a fixed amount of periodic payments at a minimum rate of interest. State insurance commissioners regulate fixed annuities. You’d have to check with your state insurance commission about the risks and benefits and to confirm that your insurance broker can sell insurance in your state.

Variable Annuity

With a variable annuity, an insurance company will give you the choice of directing your annuity payments to different investment options, typically mutual funds. Your payout varies depending on much you contribute, the rate of return on your investments, and expense. Variable annuities are regulated by the SEC (Securities and Exchange Commission).

Indexed Annuity

An indexed annuity is a combination of insurance products and securities; the surrender period is around 7 to 10 years. An insurance company gives you a return based on a stock market index, such as Standard & Poor’s 500 Index. State insurance commissioners regulate indexed annuities.

What Are the Pros and Cons of an Annuity?

 Pros of Purchasing an Annuity

• It’s good for those who want to retire but are worried about their retirement funds running out and want a stable income.
• It’s good for healthy individuals who may live longer than people in their age group.

Cons of Purchasing of Annuity 

• The benefit dies with you.
• If your annuity dies with your death, it may negatively affect your heirs.
• Once the money is turned over, you lose access to the principal – there’s no turning back. If you become sick or have an emergency, you may not have any funds.
• You can’t control the amount you put into your annuity – the guaranteed income may be less than what you expected.

Consult a  Financial Advisor about Getting an Annuity

If you look at an annuity from an investor’s perspective, this may not be a good enough reason to buy one because it’s a contract between you and an insurance company. Even though it seems like a good investment, this doesn’t mean you should spend your money.

If you don’t have guaranteed income from multiple sources, but you want a steady payout during your retirement, you may want to consider buying an annuity.

Whatever you do, don’t sign anything without getting the facts. Why? Because you could make a costly financial mistake and lose money that you may need in the future.

Want information about the estate planning documents you may need? Watch this video!