Annuities are great for that phase of retirement planning when you shift from incubating your nest egg to distributing it. You’ve got a large sum of cash just waiting for you to withdraw it, but are you sure your lump sum will sustain you and your family as you leave the workforce. Annuities provide supplemental income that will take the financial stress and worry out of your golden years. Here are 5 mistakes to avoid with your annuities.
Accepting Buyback Offers
The stock market just isn’t what it used to be. During the 1980s and 90s, the US stock market saw considerable growth and surplus. Interest rates were high and wealth was easier to cultivate. But ever since the dot-com bubble and the housing crisis, insurance companies and other financial markets have been recovering from shell-shock and are now less likely to give the same great offers older annuities provided. Some insurance companies offer to buy back your policy for a greater sum of money than you originally invested. This might seem like a good idea, but in the long run you won’t make nearly as much as you would have had you kept that old annuity. If you’ve got a rate you’re happy with, stick with it!
Withdrawing in Excess
The goal of an annuity is to stick around and portion out your payouts over a long period of time. Many of them place restrictions on just how much you can withdraw in order to keep this income machine financially viable for the insurance company involved. Many annuities tend to cap their withdrawals at 4% to 6% of its guaranteed value. Depending on the fine print of your individual annuity, you could see significant cuts to the value of your original investment and/or the amount of money you can take out each year without penalty. This is why it’s always a good idea to supplement your annuity with money on the outside and not rely entirely on its payments.
One huge mistake people make with annuities is not taking into consideration what impact inflation will have on their quality of life 10 or 20 years down the road. The US economy has averaged about 3.22% inflation per year since 1913. If you don’t put enough money into your annuity, you’ll be living on the same level of payments for the duration of your plan or life, whichever ends first. Even though your payments may sustain you now, if they don’t grow over time, you’ll soon be living in poverty. Deferred variable annuities with payout guarantees help your investment grow like a mutual fund. Ideally this means you’ll beat the inflation curve and continue to receive payments that maintain the standard of living you’re used to. Fisher Investments’ pros and cons of annuities can help you navigate problems like these.
Putting Too Much Money In
While annuities do provide stable, predictable income that grows your investments, they are notorious for being inflexible, as well. This is especially true for immediate annuities. In deals like these, you’ll get higher rates of returns than savings accounts and CDs, but in return you give up unrestricted access to that money. Once you give money to an insurance money, you’ll never get it back, at least not at the same time. Danger persists too for deferred accounts which, as mentioned above, will penalize you if you take out more than your annual cap allows. Just remember, annuities are great ways to supplement retirement, but should not be relied on entirely for their survival.
Using an Annuity as Collateral
Chances are if you’ve done your homework and planned for retirement properly, you won’t need a loan. But if such a circumstance arises that you need to borrow money you don’t have, think twice before you use the value of your annuity as collateral. For example, if you paid $100,000 up front and your annuity is now worth $150,000, the IRS will treat that collateral assignment as a distribution, meaning the money you earned after you invested that $100,000 could be treated as taxable income.
You’ve worked hard to accumulate your wealth over the course of your life. Choosing the right annuity to invest in requires careful time and effort. If you want to live out your golden years in style, an annuity may be your solution, but always remember that even sound investments like these bear some sort of risks if you don’t understand them.
Author Bio: Steven Richmond is a newspaper reporter from Lake City, FL.