Questions to Ask When Considering the Purchase of an Annuity

Annuities are designed to act as a long-term investment which can serve as the foundation or a significant component of a sound individual retirement savings and/or retirement income strategy. An annuity is essentially a financial contract sold by an insurance company that offers tax-deferred savings and a choice of payout options (income for life, income for a certain period or a lump sum) in exchange for a fixed sum paid upfront. Potential annuity investors may choose to purchase an annuity with funds from a retirement savings vehicle (e.g., 401(k) or IRA) or with personal savings or proceeds from the sale of a home, business, etc. It can be used in a variety of situations; however, there are certain questions you should address before you make any decisions such as:

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  1. Am I investing in an annuity to save for retirement, generate guaranteed retirement income, or both?
  2. When do I plan on using the money I’ve invested in the annuity?
  3. What percentage of my assets is appropriate for an annuity based on my retirement objectives?
  4. What kinds of guarantees are offered?
  5. What is my risk tolerance?

Envisioning how you want to live in retirement is essential to understanding the role that an annuity can play. Annuities are designed to be long-term retirement investments. They are essentially a contract between you and a top-rated insurance company to provide you with guaranteed income payments for life or for a period of time that you specify. An immediate annuity provides you with income payments that begin shortly after the purchase. Deferred annuities allow you to accumulate assets for retirement and also offer the option to provide income payments some time in the future.

It is generally not advisable to invest 100 percent of your retirement assets in an annuity or any other single investment vehicle. In order to determine the most appropriate percentage of your assets to invest in an annuity, talk with a qualified financial/retirement planner to help determine what makes sense for you. Annuities can provide a wide range of guarantees that are unavailable in other financial instruments, making them a very advantageous part of a retirement income strategy. An immediate annuity offers the following guarantees:

  • Guaranteed lifetime income payments -- an important component of a secure retirement plan given increasing life expectancies.
  • Guaranteed death benefit -- generally the greater of the purchase payment or the value of the annuity at the time of death.

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Your individual risk tolerance will depend on a number of factors, including your age, time horizon and retirement goals. Annuities offer a range of investment options from which you can choose based on your risk tolerance. Fixed annuities can minimize risk by locking in a fixed rate of return.

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