The No. 1 Mistake People Make When Buying an Annuity — And How To Avoid It
Written by
Laura Bogart
Edited by
Kristen Mae
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
Preparing for retirement is no small task. There are many moving pieces in a full financial plan designed to provide sustained and comfortable income. It’s difficult to figure out everything and set it up flawlessly — especially when you might be adding new financial products, like annuities, to your retirement strategy.
You might be tempted to think purchasing an annuity is a one-size-fits-all endeavor. But that would be a mistake — and could potentially shortchange you in the long run. The biggest mistake people make when buying an annuity is failing to align the product with their specific financial goals and needs.
To avoid turning your retirement income stream into a trickle — or boxing yourself in with unexpected limitations — it’s important to get clear on what you truly need.
Learn More About the Various Annuity TypesÂ
Figuring out which annuity works best for you doesn’t have to be overwhelming. The first step is learning about the different kinds of annuities and how they serve distinct financial needs.
- Fixed annuities offer guaranteed interest and predictable income. They’re ideal for conservative investors or retirees focused on covering their essential expenses.Â
- Variable annuities offer growth potential by investing in market-based options. Since payments fluctuate based on performance, they’re better suited for people who are comfortable with risk and seeking long-term gains.Â
- Immediate annuities begin payouts within 12 months and are best for retirees who need income right away.Â
- Deferred annuities accumulate value over time and are designed for people who are still working and looking to grow savings on a tax-deferred basis.
Do an Honest Inventory of Your Financial NeedsÂ
Everyone wants to believe they’re financially secure heading into retirement. But as the countdown becomes real, it’s important to assess where you truly stand in terms of savings — and how those savings align with your desired lifestyle.
If you’re relatively young, still working, have a healthy risk tolerance, and expect multiple sources of retirement income, a variable annuity could play a strong role in your overall savings strategy. However, if your top priority is stability and guaranteed income, a fixed annuity may be a better fit. And if you want to build tax-deferred savings while you’re still in the workforce, a deferred annuity might be the right choice.
The best time to explore annuities is while you’re still earning income. But if you anticipate an early retirement due to illness, caregiving responsibilities or other factors, an immediate annuity might be the most practical choice.
Work With ExpertsÂ
Determining which type of annuity to purchase — and how much to invest — can feel like a full-time job. So why not consult the people whose full-time job is helping others make smart financial decisions?
To choose the right annuity, work with a fiduciary financial advisor who puts your best interests first, understands your current financial situation and knows where you want to go. A good advisor can provide unbiased guidance — though many do charge hourly fees.
Beyond helping you select the right annuity, a financial advisor can walk you through contract details, including fees, surrender charges, payout options and inflation protection features, ensuring you set realistic expectations and avoid costly surprises.
More From GoBankingRates
