How to Buy an Annuity in 6 steps
#2. Identify Your Primary Reason for Buying an Annuity
#3. Match Your Objective with Appropriate Annuity Types
#4. When Should You Buy an Annuity?
#5. How to Buy an Annuity
#6. Where Can You Buy an Annuity?
As uncertainty persists and volatility creeps back up into the market, you may find yourself buying an annuity. That is – if you haven’t already.
When contemplating whether or not an annuity may be right for you; the first step is to consider your time horizon. How long do you wish to invest this portion of your retirement nest egg and what is it you are looking to accomplish?
An annuity is probably not for you if you don’t have money to invest for at least 3 years.
#1. Before Buying an Annuity Learn the Basics
We are not suggesting you learn about all of the various types of annuities in this first step, just the basic fundamentals. Below are key considerations when deciding if you should buy an annuity:
- Annuities are retirement savings vehicles and grow on a tax-deferred basis. While this is great for accumulating retirement savings, it also brings a 10% IRS Penalty for early withdraws prior to age 59 1/2.
- Annuities require a commitment of at least 3 years in almost all cases.
- Annuities provide principal protection and upside potential that varies by type; however, they do not deliver equity-like returns.
- Annuities offer limited liquidity during the accumulation phase and most have penalties for early withdrawals.
#2. Establish Primary Reason for Buying an Annuity?
There are 3 primary reasons to buy an annuity:
- Accumulation – A safe and steady way to grow your retirement savings.
- Distribution – Converting a lump sum into a monthly lifetime income; beginning now or at some point in the future.
- Wealth Transfer – You don’t intend to spend these funds and would like to utilize them to maximize the legacy you leave behind to your loved ones.
#3 Match Your Objective to Appropriate Annuity Types
If your goal is to turn a lump-sum into an income stream an income annuity or index annuity with an income rider would be the best two choices for you.
- Income Annuity – A single lump sum is converted into a lifetime income stream beginning in 30 days or up to 12 months from the purchase date.
- Fixed Index Annuity with an Income Rider – Pay a fee for a guaranteed lifetime withdrawal benefit from your annuity; however, you maintain control of your asset.
If your primary reason for purchasing an annuity is a safe and steady way to grow your retirement savings a fixed or fixed index annuity is the best option.
Fixed Annuity – Pays a specified interest rate for a set number of years.
Fixed Index Annuity – offers principal protection and upside potential based on the performance of a market index.
Death Benefit Rider – Guarantees your death benefit grows by a specified interest rate each year.
Long Term Care Annuity – Leverages your annuity account value two to three times for LTC expenses. If LTC does not need the account value passes directly to your beneficiary.
#4. When Should You Buy an Annuity?
The ideal time to purchase an annuity will always depend on your personal situation; however, it is normally recommended you buy an annuity 5-10 years before your retirement.
Prudential Annuities calls the five years before and 5 years after retirement the ” Retirement Red Zone.” Market downturns in the Retirement Red Zone could mean a dramatic loss of retirement savings and run out of money sooner than expected.
This is to call the sequence of returns risk. That is, the risk that the sequence of your investment returns will not be favorable – ending with down years towards the end of your accumulation phase
#5. How to Buy an Annuity?
- Speak to multiple financial advisors and work with the one who seems to be most knowledgeable and capable of answering your questions.
- Go with someone who is knowledgeable and can help advise and guide you during the annuity shopping process.
- Be sure that you understand exactly what you are buying and don’t feel rushed during the process.
- Technology and Selection Matters so go with a firm that provides real-time, accurate, annuity rate and quoting capabilities so you are sure to get the best annuity available.
- Make sure you are seeing quotes from many different insurance companies and compare their financial ratings. Typically, higher-rated insurers may offer slightly less rate – you can weigh the trade-offs.
- Be sure you are working with someone who specializes in annuities. Many wealth managers focus the bulk of their energy and efforts helping clients accumulate assets but are not true experts when helping you transition to the distribution phase.
- Ask for references and do a little online research of your own on prospective advisors or firms.
#6. Where Can You Buy An Annuity?
You can purchase an annuity from a licensed insurance agent, registered investment advisors (RIA), Banks, Broker-Dealers, and captive insurance agents.
Below are 3 articles we’ve published listing the 20 best-fixed annuity, fixed index annuity companies, and variable annuity companies; based on overall U.S. Individual Annuity Sales according to the Secure Retirement Institute.
Who Buys Annuities?
Do you know which segment of the population buys the most annuities? In September 2018 the Alliance for Lifetime Income conducted the protected lifetime income study of 3,120 U.S. adults between the ages of 25 and 74.
More than half of the Millennials surveyed (age23-38) said they were either “somewhat” or “very interested” in the idea of the annuity.
The study looked at annuity ownership by age, income, education, gender, and more.
What they found could be useful in helping you explain to your clients that they fit the profile of annuity owners. Among those who do own annuities:
46% are Middle-Class earning between $75,000 and $150,000.
50% Are College Graduates
52% are between the age of 55 and 74
62% of all the annuity owners had less than $500,000 in investible assets.
While the study determined that many people who own annuities are older, it was Millennials who showed the greatest interest when asked if the concept of an annuity was attractive.
More than half of these individuals (ages 23—38) * who were surveyed said they were “somewhat” or “very interested” in the idea of an annuity.
Clearly, protected lifetime income is something that many Americans consider to be an important part of their retirement planning.
Being able to identify which type of people own annuities is the first step in educating other prospective individuals on the importance of protected lifetime income in their retirement portfolios.
The National Association of Insurance Commissioners (NAIC) published a “Buyer’s Guide to Deferred Annuities” which may also be a helpful resource if you are shopping for an annuity.
Frequently Asked Questions
Most annuities have no minimum issue age, while the maximum issue age is typically 85. The selection of available products will be less, you can purchase an annuity up to the age of 95.
As part of the “Know Your Customer” Legislation you must complete a Customer Identification and Suitability Worksheet including a copy of your Valid Photo I.D.
As long as you have proof of citizenship and are not suspected of Anti Money Laundering (AML) you are able to purchase an annuity in the United States.
If you have separated from service and are no longer with an employer, you would be able to purchase an annuity with your 401k via a Direct Rollover. This method transfers the funds directly from custodian to custodian and would avoid any negative tax consequences.
If you are still employed, you must check with your Plan Administrator as to whether or not you are permitted to make “in-service” withdrawals. It is common for 401k plans to permit employees aged 55 and over to make take an in-service distribution equal to the amount of their contributions (but not those of the employer).
Fixed Annuity, Fixed Index Annuity and Income Annuities do not have any upfront fees or sales charges. However, should you purchase an annuity and add an optional rider a fee may apply.