5 Common Annuity Mistakes You Should Avoid
Annuities are a must-have or a must-avoid for many people when planning their retirement. However, one of the biggest issues for most is that they’re uninformed about using annuities to strengthen their retirement planning. This leads to mistakes and, eventually, regret.
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Keep reading as we explore a few common annuity mistakes that should be avoided at all costs.
Choosing The Wrong Annuity
There are four main types of annuities, each with its own special purpose. Purchasing the wrong type doesn’t make a lot of sense. It’s like a right-handed golfer purchasing left-handed clubs.
Understanding the goal of each annuity and its individual pros and cons can help you make a more informed decision. For example, a fixed-rate annuity pays a fixed rate of return. That seems like a pretty good deal until you consider how much inflation has increased the cost of everything over the past couple of years.
Before purchasing an annuity, understand each type to determine which is the best fit. You’ll be much happier in the long run.
Investing Too Much
Annuities should be a small part of a well-diversified retirement portfolio, not a majority. You lose all control of the money once you invest cash into an annuity. For this reason, most financial advisors advise their clients to hold no more than 25% to 30% of their portfolio in annuities.
Picking The Wrong Type of Payout
Single-life immediate annuities are going to offer the highest annual payout. However, if you’re married, those benefits will stop upon your death. That doesn’t do much good if the annuity payout is also part of the income plan for your spouse.
In this situation, it would make more sense to have a joint and survivor annuity that will continue paying your spouse after your death. You could also choose a refund annuity to continue paying until your initial principal is distributed.
Not Naming Your Spouse as a Beneficiary
This might seem like a no-brainer, but not naming a spouse as a beneficiary is a common mistake for couples with joint and survivor annuities. Instead, the annuity names an IRA as the beneficiary. When this happens, your spouse is only guaranteed income until the remaining investment has been depleted. However, when the spouse is named as the beneficiary, the payments will continue like before until your spouse’s death.
Withdrawing More Than The Guarantee
Variable annuities with a guaranteed distribution amount usually allow you to withdraw around 5% of the guaranteed total annuity value each year. If you accidentally withdraw more than that, some annuities will recalculate your maximum amount, which can reduce your yearly benefit in the future.
The Bottom Line
Annuities can be a great addition to a person’s retirement plan, but they won’t be for everyone. It’s essential to understand how they work to ensure you’re fully taking advantage of their purpose and benefits.
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