How to Shop for an Annuity

This post is reprinted from Financial Awakenings, a blog by Rick Kahler. Kahler is a financial advisor. You can find his weekly column here

If you’re shopping for an annuity, then, what should you look for and look out for?

First of all, do your own research. Carefully read everything a salesperson gives you, but get some independent information as well. A good start is an internet search for “annuities pros and cons” to get some pros-and-cons.jpgbasic facts.

Some of the benefits of annuities are:

• Tax-deferred growth

• No income restrictions or limits on contribution amounts

• Guaranteed lifetime income

Some of the drawbacks are:

• High fees and sales commissions

• Payments are taxed as ordinary income rather than capital gains

• High penalties, taxes, and surrender charges if you take money out early

• Paying for life insurance you may not need

• The guaranteed income may be significantly less than what a diversified portfolio may yield

• Unlike most retirement plans, contributions are not tax deductable

Second, ask specific questions about fees and commissions. Insist on having the numbers set out clearly so you know exactly what the annuity will cost you each year in addition to the initial premium. Be sure you know the financial penalty for getting out of the annuity. If the salesperson brushes you off with vague or confusing answers, take your business elsewhere.

Third, comparison shop. Check out annuities from several companies, including brokerage firms like Vanguard, Ameritas, or T. Rowe Price, to compare rates, costs, and benefits. But don’t stop there. Compare the annuities to other investments, such as 401(k)’s, IRA’s, and mutual funds, to decide whether the annuity is the best place to put your money. Many investment advisors recommend that you not even consider annuities until you have maxed out other tax-deferred options like IRA’s and 401(k) plans and you are in the top income bracket (currently 35%).

Fourth, get independent advice. Before you sign any annuity contract, have it reviewed by someone you trust who is familiar with investments and has no interest in the transaction except your well-being. From my perspective, of course, ideally this would be a fee-only financial planner. If you don’t have a financial planner, you might get advice from an accountant, an attorney, or a trusted and knowledgeable family member or friend.

Always remember two basic precepts: the more you educate yourself, the less you can be taken advantage of, and beware of anything that sounds too good to be true.

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