Finding the Best Annuity for Your Retirement

Planning for retirement can be intimidating, especially with the wide range of financial products available. Today, we’re going to discuss a financial tool that provides guaranteed, predictable income for your future – annuities. Annuities are investment products designed to provide a guaranteed income stream for individuals or their spouses throughout their retirement years. But, there are many types of annuities also, and knowing where to start can be daunting. This article outlines the key considerations you should have when deciding whether an annuity is right for you. We’ll also guide you through the steps you should take to find your best option.

Understanding Annuities

Before we dive into the best way to choose an annuity, you should have a solid understanding of what annuities are and how they work. Annuities typically come in three forms: fixed, fixed indexed, and variable. Each of these comes with its own features and benefits.

Fixed annuities function similarly to certificates of deposit (CDs) but are backed by an insurance company, rather than a bank.
Fixed annuities give you a reliable income over a specified period of time. They provide greater stability and predictable returns for those who are risk-averse.

Fixed indexed annuities (FIAs) allow you to experience the benefits of market gains, but still provides some protection against declines in the market. FIA’s offer a guaranteed fixed account, which allow you to benefit from the positive returns of the selected index, like the S&P 500.

Variable annuities allow you to select the underlying investment on which your returns are based, such as mutual funds or index funds. This allows for the potential of higher returns, but also more risk. Variable annuities have the ability to contain value-adding riders, such as guaranteed growth or lifetime income options.

Step 1: Know Your Financial Goals

The first step to any type of retirement planning is to identify your financial goals for retirement.
What do you want your annuity to accomplish for you? Common objectives include:

Principal Protection: If your primary concern is protecting your retirement savings from market volatility, a fixed annuity or fixed indexed annuity may be the best fit.

Lifetime Income: If your goal is to generate reliable, consistent income in retirement, you can either go with a fixed annuity or fixed indexed annuity with a living rider benefit.

Legacy Creation: If your goal is to leave a financial legacy that your loved ones can rely on, an annuity with a death benefit guarantee is a solid choice.

Long-Term Care Costs: The income from an annuity can be directly applied to help cover long-term care expenses. Look for annuities with long-term care riders or options that provide additional benefits for this purpose.

Your annuity search becomes much easier once you’ve clarified your retirement goals.

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Step 2: Consider Your Risk Tolerance

Another crucial factor to consider when choosing an annuity is your risk tolerance. Each type of annuity comes with its own level of risk and potential for returns. Assessing your risk tolerance will help you determine which annuity type is the best fit for you.

Conservative Investors
For those that have a low tolerance for risk and prioritize the stability of guaranteed returns, fixed annuities or fixed indexed annuities with principal protection features are likely your best options.

Moderate-Risk Investors
If you want the associated risk that comes with market exposure, but you still want growth while still enjoying protection from a down market, a fixed indexed annuity with a living rider benefit could be a good choice.

High-Risk Investors
If you are willing to take on more risk in exchange for the potential for higher returns, variable annuities with investment options tied to mutual funds or index funds may be a good fit. Consider adding a living rider benefit to provide guaranteed growth and lifetime income.

Understanding your risk tolerance will help you make an informed decision and select an annuity that aligns with your comfort level.

Step 3: Select Your Payout Options

Annuities offer various payout options to suit different retirement income needs. Here are some common payout options to consider:

Lifetime Income
This option provides a guaranteed income stream for the rest of your life. It ensures that you will not outlive your retirement savings and offers peace of mind.

Joint Lifetime Income
for those that are married or have a partner, you can choose a joint lifetime income option. This ensures that both parties receive income for life, even if one of you passes away.

Period Certain
With this option, annuity payments continue for a specified number of years (e.g., 5, 10, 15, or 20) or for your lifetime, whichever is longer. This provides flexibility in your options and allows you to choose the payout duration that works for you.

Lump Sum Withdrawal
If you prefer to access your annuity funds all at once, you can choose a lump sum withdrawal option. Keep in mind that fees may apply for this type of withdrawal.

Consider your income needs, longevity expectations, and desired flexibility when deciding on the payout option that best suits your retirement plan.

Step 4: Compare Annuity Offerings

Once you’ve refined your retirement goals and identified your tolerance for risk, you’ll be in a good position to compare annuity options.

While annuities may have similar features, there can be significant differences in terms of fees, rates, and additional benefits. These are the factors to consider when comparing annuities:

Administrative Fees
Review the fees associated with each annuity, including administrative fees, surrender charges, and withdrawal fees. Look for annuities with reasonable fees and transparent cost structures.

Joint Lifetime Income
for those that are married or have a partner, you can choose a joint lifetime income option. This ensures that both parties receive income for life, even if one of you passes away.

Age Requirements
Some annuities have age restrictions for eligibility. Ensure that you meet the age requirements for the annuity you are considering

Bailout Provisions
Explore the bailout provisions of each annuity, which determine the conditions under which you can exit the contract without incurring excessive penalties.

Expense Charges
Variable annuities often come with expense charges related to the underlying investment options. Understand these charges and compare them among different annuities.

Withdrawal Rules
Familiarize yourself with the withdrawal rules of each annuity. Some annuities allow penalty-free withdrawals up to a certain percentage each year, while others have stricter withdrawal policies.

Minimum Premium
Consider the minimum premium required to purchase each annuity. Ensure that the minimum fits within your budget and investment capabilities.

Carefully comparing the offerings of different annuities, you can find the one that best aligns with your needs and offers the most favorable terms.


Key Takeaways

Choosing the retirement vehicles that are right for your future requires deliberate research and understanding. Before making a decision on an annuity, you should identify your financial needs and risk tolerance. Consulting with annuity experts, like the ones at Leverage, will make the process much easier and faster. That way you can retire with confidence.

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Last updated December 12, 2023

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