Annuity investments are payments made to an insurance company to save for retirement. The actual annuity is not the savings, but the pension you purchase with the proceeds of your savings. This provides you with a guaranteed monthly income until your death, and potential other benefits according to your specific type of annuity and the country you live in.
If you have a 401K, you can use the sum paid out to purchase an annuity. This will likely be the biggest single payment you will make in your entire life. If you have been paying annuity investments to an insurance company, either individually or through your employer, the same situation applies. If you also have an IRA the same will likely apply.
Here are a number of Dos and Don’ts that should help you make the most of your investment and your annuity. These include investments to save for the annuity you will purchase to provide you with a retirement income in addition to dos and don’ts for the annuity itself.
Do’s of Annuity Investments
1. Invest in a 401K: If your employer offers a 401K to which they also make a contribution, then do make sure that you join it. Even if you have a personal IRA, you should not leave your employer’s money on the table. One of the immediate advantages of a 401K is that it is taken from your gross salary – income tax. However, once you eventually use the proceeds, you are taxed on it, so tip #2 is:
2. Consider a Roth 401K: This is the same as a regular 401K, only your contributions are taken after tax. What this means is that if you use your 401K to purchase an annuity on your retirement (59.5+ years old for a 401K) you will not be taxed on your pension payments. With a regular 401K you will be taxed. Whichever of the two alternatives you choose, you still pay tax, but the chance you take is how much tax in each case.
You might live to a very old age, in which case the Roth 401K would be the better, or you might not in which case the regular 401K might be the better of the two. Tax rates could change – if up, then the Roth 401K works, but if down, then the regular 401K is financially the more beneficial. Your problem is that you cannot foresee these events, which is why many people mix the two: they pay a proportion into each of them.
3. Invest in an IRA: Whether that is a regular or a Roth IRA is once more your choice, the difference between the two being the same as for a 401K. Many people that can afford it have saved for an annuity using both an IRA and a 401K, and a few invest four ways: a regular and Roth alternative with each of them. By saving using both an IRA and a 401K, you will make the best use of your cash in annuity investments.
4. Save some cash: Do not use all your 401K and IRA to purchase an annuity. Retain part of it as a lump sum in case of emergency. Most people earn less from their annuities when they retire than when they were in employment, and it is useful to have a lump sum of cash invested in a rapid access account.
5. Increase your contributions: Try to increase your contribution by 1% each year, or at least apportion part of any salary increase to your annuity savings. If you are able to make occasional payments, pay part of any bonus to your annuity savings.
6. Take professional advice: Do not make your decisions without taking professional financial advice. When you do so, make sure that advice comes from an independent financial advisor, and even then try at least two and compare what they advise. Most people are amateurs in the world of investment and annuities and they require advice. They are at the mercy of those trying to sell them financial products, and those with large lump sums from a lifetime of saving in a 401K and/or an IRA are prime targets.
You must make sure that you are taking the right advice, and while the opinion of one independent financial advisor might be useful, you should consult at least two so you can compare what they say. If there is any significant difference between their respective advice, then continue until you find a degree of consensus. Remember: once you agree on an annuity, you are stuck with it for life.
Don’ts of Annuity Investments
1. Do not trust anyone: Finance is a cutthroat business, and you should never take the advice of anybody without getting another opinion – or several! ‘Independent’ financial advisors are being paid a fee by companies for whom they introduce business. He who pays most will receive most business! So as has been said, and will be again, never accept your first offer, either for investing or to purchase an annuity.
2. Don’t annuitize immediately: If you can afford to wait a year or two, your annuity will be greater than if you purchase it immediately. Your age is an important factor in the monthly payment your annuity will provide. Others are the total sum you have paid in and the interest rate at the time you buy the annuity.
One solution to the possibility of interest rates dropping while you delay buying your annuity is to purchase a part annuity on retirement and the rest some years later when you are older and the interest rates are possibly higher. More on this with respect to inflation in item 3 below.
3. Don’t ignore inflation: A fixed annuity might give you a higher pension to begin with, but if you live as long as you hope to, your monthly income will be devalued with inevitable inflation. Either make sure your annuity rises with inflation or the cost of living or make sure you have a secondary income. You could also use only part of your IRA or 401K and use the rest to purchase another annuity later in life.
4. Don’t do what your friend does: Do not follow your friend or colleague in how you buy your annuity. What works for one person might not be best for you. Take professional advice so that your annuity suits your specific circumstances.
5. Don’t accept the first offer: you are not obliged to buy an annuity from the insurance company holding your savings, 401K or IRA. Shop around and find out what your options are. Go for the option that best suits you.
6. Don’t forget your spouse or partner: if you have a wife, husband or partner who will be dependent on your income, consider buying a joint life annuity. This will cost more, but will guarantee payment to the surviving partner.
You can take your annuity as a pension or a lump sum, or a combination of each. Before deciding you should get professional advice. There are many other aspects of annuity investments and how they should be used on your retirement that require careful consideration.
Readers do you have annuity investments? What do you like or dislike in them? Personally I do not have an annuity yet.
We’ve talked about annuities some on the podcast. There are great provisions in some annuities (guaranteed minimum withdrawal benefits, especially), but you have to realize you’re going to pay through the nose for them. It’s important to clarify point #1 of your guest poster: if you’re rolling your 401k into an annuity, make sure the annuity is inside an IRA and you use the appropriate “rollover” paperwork or you’ll get clobbered with taxes while making the switch.
I will let her know she needed to reply to comment. Thanks for your input
Edward Antrobus says
Other than the general idea of what they are, the sum total of my knowledge of annuities is that a friend of mine sells them.
And how it sells?
Van Beek says
Thanks for this sensible list of do’s and don’t’s. It is not easy to keep the overview when something sometimes looks to good to be true. Since there are no free lunches, check very carefully the costs of the annuity scheme that you put your savings in.
I know you trafde stocks, do you have some exposure to annuities?
Harvey Timmons says
People are scared to just jump into this kind of investment there is always a risk. If you determine that an annuity might make sense for you feel free to visit our site! http://www.annuitystraighttalk.com/annuities/