The right way to Buy a good Annuity

The right way to Buy a good Annuity

You can buy an annuity a little at a time, or in a single payment.  That’s one of the reasons annuities can be appealing:  You can choose a flexible premium annuity that lets you invest on a schedule that works for you, or you can buy a single premium annuity with a lump sum purchase.

Having lots of choices can make investing seem somewhat like a jigsaw puzzle.  But all that variety can work in your favor, too, especially if it gives you flexibility in how you buy. That’s because finding the money to invest or deciding how to invest it are big issues for most people.

For example, you might be able to commit a small amount each month to build your personal retirement savings, but not thousands of dollars at a time.  Or you might get a $5,000 bonus or an inheritance and want to put it to work right away.

Single Premium Annuity
Generally a single premium annuity requires a minimum investment, often $5,000, but impose no ceiling, or upper limit, on the amount of the purchase. That’s one reason people who inherit a sum of money or receive a lump sum payment see these annuities as a logical choice.

A single premium annuity can be used to buy either immediate annuities or deferred annuities, based on whether you want to start taking the income right away or at some point in the future.

A Little at a Time
The other way to buy an annuity is by making contributions either on a regular schedule or one that suits your changing financial situation. After an initial investment, typically of $500 to $1,000, you might invest $100 a month, year in and year out. Or you might add whatever money you earn from an occasional part-time job.

Most contracts are flexible, so you can skip months or vary the amount you contribute each year. The danger you face with sporadic contributions, however, is not committing enough to your long-term needs, and therefore potentially facing a shortfall after you retire.

To avoid this situation, you may want a fixed amount transferred automatically from your checking or money market account each month—sometimes in sums as modest as $25 a month. This approach usually commits you to regular contributions—and in most cases consistency is the most reliable approach to retirement savings.

Investing Early and Often
Making regular contributions to your annuity can help to invigorate your retirement planning. The earlier you start, the easier it is to build the resources you need to supplement your income. And you can work with your financial adviser to figure out how much you need to save and what you should be earning on those savings to generate the level of income you’d like to be able to count on. In the following example, you can get a sense of what you would have to invest to receive $500 a month from a fixed annuity earning 6% annually, assuming you chose lifetime annuity payments beginning at age 65.

The Variable Annuity Difference
With a variable annuity, you can’t predict the contract value you will accumulate or the amount of income your savings will generate in the future. The principal and return of a variable annuity will fluctuate so that upon withdrawal your investment may be worth more or less than your original investment.

Combination Plans
After you make your initial lump sum annuity payment, some contracts, called a modified single premium annuity, allow you to put additional money into the existing annuity. You may have the choice of building the account with other lump sum amounts or with periodic deposits as you would with a flexible premium annuity. Other companies will require you to purchase a new contract to add more money.

Unless you’re buying a contract you intend to annuitize right away, you should probably ask about add-on provisions before you commit yourself to a contract. That eliminates surprises if your plans or your circumstances change. Our planners and financial specialists at QOOQe can help you make the right decision.

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