5 Questions To Ask Yourself Before Investing in an Annuity
Written by
Laura Bogart
Edited by
Kristen Mae
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Planning your retirement can mean balancing a lot of needs and wants, but one goal generally reigns supreme: stability. Your quest for a reliable source of income in your golden years may prompt you to consider purchasing an annuity. It’s a smart impulse, since annuities can be powerful financial tools. But you must be careful — getting the wrong kind of annuity, or making your purchase at the wrong time, could prove to be an expensive mistake.
Before you commit a potentially significant portion of your savings to an annuity, you should ask yourself whether this investment makes sense for you. While the right annuity can help provide financial stability in retirement, the wrong one can essentially lock up your money and underperform other alternatives.
To avoid regret, you should ask yourself some key questions before signing on the dotted line. GOBankingRates connected with Patrick Yono, founder of Sure Life Financial, and Cynthia Campos Delgado, founder and financial advisor at Campos Wealth Management, to determine the most important questions to consider.
1. How Do I Want To Live in Retirement?
According to Yono, during the years spent working and planning for retirement, most people choose target-date funds and don’t focus much on short-term performance. But once you’re within 10 years of clocking out for the last time, you need to take a closer look at your retirement funds and investments to ensure they’re working for you.
Yono encourages you to sit down with a financial advisor to talk about how you’d define a successful retirement. Do you want a simpler, quieter life that requires less income? Or are you eager to travel the world, requiring more money? In that conversation, you should determine whether the structure of an annuity could serve those goals. He’d rather you think of an annuity as a tool in your investment toolbox — not the end-all, be-all of your financial planning.
“You should ask yourself if your investment portfolio aligns with your life and retirement goals,” he said. “The great function of an annuity is it allows you to limit or eliminate your risk of loss with the money you invest into it. In exchange for this protection, the amounts that you can withdraw are limited, and in most cases, you need to commit to the investment for multiple years, and in some cases your gains may be limited.”
2. What Keeps Me Up at Night?
Ideally, retirement would be a time to relax and savor the fruits of your labor. But Yono knows it can also be a time when some of your biggest anxieties come to the forefront — concerns about health, family or other factors. Those worries can influence the kind of annuity that’s right for you.
“Another wonderful thing about annuities is that there are many types, all designed for specific functions based on the needs of the client,” he said. “Some annuities are geared toward lifetime income, some toward maximizing funds to pass on to loved ones, and others offer insurance components if you fall ill.”
There is a wide range of annuities available, all created to serve a specific purpose. To see how these products could address your needs, it’s important to discuss your options with a trusted financial professional.
3. What Are the Consequences of Withdrawing Early?
When considering an annuity, Delgado suggests asking about the conditions that govern how you can access the funds inside the annuity — as well as any penalties for early withdrawals. Ultimately, you’ll want to know about any factor that could cause you to lose money.
“Your goal is to have your account grow, so equally you need to be aware of what would cause you to lose funds. It is important to know what fees will be incurred and under what conditions,” she said. “MVA, bonus recapture, surrender charges — these would be fees incurred if taking a withdrawal above the penalty-free allowed amount. If you have an annuity with a rider, understand what withdrawals would reduce or affect your rider.”
4. Does the Annuity Align With My Long-Term Financial Needs?
As you decide whether an annuity is right for you — or which type will best serve your needs — Delgado encourages you to consider what your long-term financial needs will be. With an annuity, you can access some funds for daily living expenses, but you’ll also need to hold on to additional funds to support yourself in the future.
She wants you to ask yourself what would make you feel financially secure — and that means determining whether you’re at risk of outliving your other income sources. As you explore that, she advises drilling into the following questions:
- Are you a single-income household, or do you have other lines of income to sustain yourself?
- What is the likelihood that your existing accounts and funds will support your future lifestyle?
- Which accounts or funds are most likely to dwindle over time?
“If you don’t need the funds right now to supplement your everyday living, then you might consider a longer-term annuity for higher potential growth,” she said. “Once you recognize your reality, selecting an annuity should be aimed at fulfilling the need you have now identified.”
5. Do I Trust Myself With Money?
Delgado acknowledges that this can be an uncomfortable question. Still, knowing whether you trust yourself to make sound financial choices can be a key factor in deciding whether to purchase an annuity.
“If you have a budgeting issue and don’t trust yourself to make financially solid choices, then having an income stream provided for you spread out over time might be something you should consider,” she said.
The Bottom Line
Annuities come with considerable perks, notably the promise of a steady income stream. But they also come with trade-offs, including complex terms and fees — and they might not always align with your goals. Though you’ll want to consult with a trusted advisor, asking yourself these key questions is a great start to help you decide whether an annuity makes sense for you.
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