Understanding annuities and knowing when annuities are a good option is potentially a complicated process for seniors that are not familiar with annuities. While some sources describing annuities make them seem like a sound investment, other sources warn seniors about annuities.
This annuities guide, provided by The Senior List, helps seniors understand what annuities are, how they work, when buying annuities is possibly the right choice and when it is possibly a bad choice. This guide also helps seniors learn how to choose the right annuities for them, and how to notice warning signs, indicating risky behaviors or actions, including potential annuities scams.
What Are Annuities?
An annuity is basically a contract between you and an insurance company that serves as a retirement investment tool. Lindsay VanSomeren, a Credit Karma contributor, explains that there are different types of annuities, including fixed annuities, variable annuities, and indexed annuities. Annuities pay out at different times, something seniors want to consider when deciding which type of annuity is potentially their best option.
Some seniors plan ahead and purchase an annuity to help provide more income during their retirement years. Other seniors do not consider an annuity until later in life, which requires careful consideration when choosing the ideal type of annuity.
Although insurance companies are the primary issuer of annuities, the website annuity.org points out that annuity distributors, independent brokers, and sources such as mutual fund companies, issue annuities. Do you have an existing investment portfolio? Ask your advisor that currently manages your portfolio about annuities and if it is possibly a good choice for you.
When you purchase annuities, you make the purchase through a lump sum payment, or through a series of payments, typically paying into it monthly, or at another designated regular payment time.
Seniors are often the target of insurers that sell annuities. This is because seniors or other individuals planning to leave the workplace in the near future likely realize that social security benefits do not provide enough of a steady stream of retirement throughout a senior’s retirement years.
Many seniors leave the workplace with little to no pension, likely causing concern about living comfortably after retirement. Investing in an annuity provides seniors with one option that potentially helps provide increased income for seniors willing to make the investment.
Seniors need to understand annuities, including the risks, along with how they work before purchasing an annuity.
How Do Annuities Work?
Annuities have some basic features, along with some features that are possibly complicated and difficult for some seniors to understand without careful explanation from someone knowledge of annuities. One important point that seniors need to consider is that annuities requires a commitment.
Purchasing a fixed annuity provides a guaranteed payout, and guarantees that you earn a certain interest amount. Purchasing a variable annuity allows seniors the opportunity to choose their risk level, performed through different investment options. Seniors that purchase this type of annuity need to understand that while you possibly receive a large payout, you also face losing all your money, based on your chosen investment option.
Seniors have the option of adding features called riders that protect the principal, or as AARP explains, allows seniors the ability to lock in a minimum income, typically with a guaranteed lifetime withdrawal benefit.
Are you considering an indexed annuity? This type of annuity earns a return based on the market index. Choose a fixed index annuity, which is currently the fastest-growing option, and have the satisfaction of knowing that the money you invest is protected even if the market index declines.
Make sure that you understand how annuities pay out. Do not make your decision on the best annuity for you based solely on the type of annuity.
Some annuities pay out at different times than other annuities. Invest in an immediate annuity and start receiving payouts within one year of your purchase.
Some seniors choose a deferred annuity. This annuity does not provide an immediate payout, instead paying out at a point specified in your contract when you make the annuity purchase. Seniors that consider this option possibly take into consideration the fact that deferred annuities are tax deferred for a longer time.
Why are Seniors Often the Target for Annuities?
Seniors are often the primary target for annuities for a few reasons. One primary reason is that seniors or other older individuals leaving the workplace soon, want and need steady income that allows them to live a comfortable lifestyle during their retirement years. Social security benefit payments likely do not provide for the comfortable lifestyle that most seniors want after leaving the workforce.
Insurers, brokers, independent agents and others that sell annuities likely know this, and therefore, target seniors as the ideal age group to purchase annuities. Seniors have expenses to pay, and depending on how a senior decides to take the payout on an annuity, there are potential benefits. If you have annual expenses, considering an annuity in an amount that covers that expense, along with a payout in line with the due date of the annual expense, provides the necessary income stream.
There is the unfortunate side of why seniors are a primary target for annuities. Some con artists specifically target seniors in annuity scams to profit from the senior that likely does not know how annuities work. Promises of big returns likely appeals to seniors, who then invest in an annuity, only to discover later that they are the victim of a fraudster.
The Retirement Industry Trust Association reveals that seniors are a ‘favorite target' of scammers that focus on investment fraud. One reason that scammers often target seniors, including through annuities scams, is that seniors own more than 50 percent of all financial assets in the U.S. This makes them a potential target for financial investment scammers.
Unlicensed agents or brokers sometimes fit the profile of investment scammers, performing scams such as persuading seniors to invest in a non-existent annuity. Seniors that realize the importance of trusting licensed agents or brokers are potentially less likely to become the next annuities fraud victim.
How Do I Know If Annuities are the Right Option for Me?
Seniors that consider investing in annuities need to take important steps to determine if purchasing an annuity is the right choice for their needs. Remember that while annuities sound simple, they are also complicated, so make sure you understand every detail before investing in annuities. If you do not understand something, ask questions before making the investment.
Investing in annuities requires an understanding of the fees, which are possibly higher than a senior initially realizes prior to the annuity purchase. If you need money for an emergency down the road, getting your money back is likely a difficult task. If you do succeed, it likely comes at considerable additional expense.
Some seniors turn to annuities as a means of providing income that helps provide the lifestyle that the senior enjoyed while in the workforce. This predictable income is potentially important to some seniors, while others possibly consider other types of investment options instead of annuities. Seniors make individualized decisions regarding whether investing in annuities is the right option during their retirement years.