A Simple Guide To Annuity Matchmaking

By Due
Published on

Like I’m sure that you do as well, I have a friend who has no trouble dating. He’s by no means some creep who abides by questionable tactics championed by infamous pick-up artists. He just likes going out and meeting new people. And, when he finds someone he connects with, he’s all about being in a committed relationship.

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Others don’t have it as easy. That’s why some of us may turn to matchmakers. That could be a friend introducing us to an acquaintance or exploring the world of online dating. And, in some cases, hiring a professional matchmaker to assist us in making a romantic relationship.

While this might sound like a stretch, this could apply to most things in life. For example, some people work with a career or life coach to guide us in achieving specific professional and personal goals. And this concept could even be applied to annuities.

I know that sounds a bit out there. But, for some, retirement just comes easy. This is especially true if you have a 401(k) through work that matches your contributions. Or if you’ve hit the jackpot and have a pension plan.

At the same time, most people are underprepared for retirement. As such, they could definitely use a matchmaker to help them prepare for their golden years. And one option they may present is annuities.

Do I Really Need Annuity Matchmaking?

Not everyone needs an annuity. But, if you want a guaranteed source of income in retirement, and you’ve already maxed-out other retirement contributions, an annuity might be right for you. And this steady income stream will ensure that you don’t outlive your money.

If you’re at or near retirement age, you may want to consider an annuity — depending on your financial situation. After all, for many retirees, Social Security, pensions, or savings are their primary sources of income. As such, this can create income gaps. For instance, you may find that your Social Security payments won’t stretch as far as you expected, especially if you’d like to start taking it earlier.

Retirement annuities offer you the chance to live comfortably in retirement without sacrificing your standard of living. Also, an annuity has no annual contribution limit, unlike a 401(k) or an IRA. This may also be useful for those approaching retirement age and catching up on their savings.

Your investment grows year after year, tax-free. Being able to keep every dollar invested working for you can be a tremendous advantage over taxable investments like stocks, bonds, exchange-traded funds (ETFs), and index funds.

What Are You Looking For? Choosing the Right Annuity

There are plenty of fish in the sea when it comes to dating. And this is also true of annuities. As such, if you want a successful match, you first need to know what you’re looking for.

Annuities come in many varieties. Some require that you already have a substantial sum in savings, while others let you build it up gradually. And others offer both risk and reward, while others are more reliable and straightforward.

Overall, the type best suited to your needs will be influenced by your financial situation and retirement plan.

Immediate vs. Deferred Annuities

If you’re new to the world of annuities, you have options on how you want to receive payments; immediate or deferred.

Immediate Annuities

Are you approaching retirement and want a way to supplement your Social Security money? An immediate annuity might be an attractive option.

To buy an immediate annuity, you’ll have to deposit a considerable amount of money upfront. Usually, this money will come from savings or inheritance. After the insurance company receives the lump sum payment, you’ll receive payments over a set number of years. If you wanted to, you could set up a guaranteed income stream for the rest of your life.

The payments you receive are based on several factors. These include the age you bought the annuity and the specified length of time you wish to receive payments. With an immediate annuity, though, you can receive payments, well, immediately after it’s been purchased.

Remember that immediate annuities may not be as liquid as other investments, such as cash, CDs, or what you have stashed in a savings account. As such, you may be penalized if you withdraw any of your initial investments early.

Deferred Annuities

You may consider a deferred annuity if you haven’t yet saved a significant amount for retirement. And, you aren’t sure that you’ll have enough income for retirement.

The payments for a deferred annuity won’t begin right away like they would for an immediate annuity. Rather than handing over a lump sum of cash or savings, you can steadily build up the value of your annuity over time through payment installments.

As you invest more money in your annuity and the insurance company grows your investment, the value of your annuity will increase. Also, your money won’t be taxed until you withdraw it. And, there are no contribution limits like there are with a 401(k)).

In addition, there is usually a death benefit as well. So if you die before the money is annuitized, your family will still receive it.

Upon reaching a specific value, the annuity can be annuitized, and you will begin receiving payments.

Fixed, Variable, or Indexed?

After you’ve decided on an immediate or deferred annuity, you next have to have to specify if it’s going to be fixed, variable, or indexed.

Fixed Annuities

People who wish to draw protected income from their annuity upon retirement should consider a fixed annuity. Offering a fixed interest rate that’s highly predictable, and has flexible payment options, is ideal if you want to preserve your principal.

Key features:

  • A guaranteed interest rate is offered for a specified period — usually 3% to 6%.
  • In case of market downturns, protection is provided.
  • You can choose from different payment options, including protected lifetime income.
  • Contributions can either be a lump sum or periodic.
  • Depending on your unique situation, payments may begin immediately or be deferred.
  • Any interest earned may not be subject to tax until you withdraw the money.
  • There are no annual fees.

The main drawbacks? Early withdrawals are subject to a tax penalty. For example, a 10% IRS penalty if you withdraw money before the age of 59 ½. And, compared to other investments, returns are limited.

Variable Annuities

Variable annuities are designed for those willing to take on more risk in exchange for a higher return in their retirement savings. However, you can still enjoy income protection and growth.

This rate of return is linked to professionally managed funds that are comprised of a mix of stocks, bonds, and other investments. This value can increase or decrease depending on how the underlying funds perform. When investments go up, you can make money, but if they go down, you can lose money.

Key features:

  • Depending on the market, -5% to +10% returns are possible.
  • You have a wide range of investment options that can be managed by a professional.
  • Any interest or earnings may not be subject to taxation until the money is withdrawn.
  • A lifetime income that is protected from market volatility and provided for the entirety of your life.
  • Payments can be deferred to a later date or begin immediately.
  • Contributions can either be a lump sum or periodic.
  • For an additional fee, you can choose standard or enhanced death benefits.
  • Annual fees can range from 2% to 5%.

The main drawbacks? If the underlying funds perform poorly, you could lose all or some of your principal. For early withdrawals, there may be fees and penalties.

Index Annuities

People who want to gain from potential gains in the stock market while being protected against losses can take advantage of an index annuity. Its interest rate depends partially on the performance of a market index like the S&P 500.

Just note that your annuity contract specifies how much interest you’ll receive when the index increases. So, in the event of a decline in the index, you will not receive interest. But, the principal of your annuity will be unaffected.

Key features:

  • A market index has the potential to grow as a result of its performance.
  • Positive index returns do not affect the value of the annuity during market downturns. This is because you do not directly own any security or index.
  • Any interest you earn may not be subject to taxes until withdrawn.
  • You can choose from different payment options, including protected lifetime income.
  • It’s possible to receive income immediately or on a later date.
  • Contributions can be either a lump sum or periodic.
  • For an additional fee, you can choose standard or enhanced death benefits.

The main drawbacks? You may be charged a penalty if you withdraw early and are subject to taxes. And, if there’s a market downturn, don’t expect your annuity to earn interest.

Finding a Matchmaker: Where Can I Buy an Annuity?

Know that you know what type of annuity you want in your life; it’s time to make that happen by finding a matchmaker. And in this case, that means knowing where to buy an annuity.

“Annuity providers can be insurance companies, independent brokers, banks, and other financial entities,” notes Kim Borwick for Annuity.org. “While many organizations sell annuities, only an insurance company can formally issue the annuity contract.”

In addition to insurance companies, you can purchase annuities from:

  • Due Annuity
  • Annuity distributors, think large brokerage firms, like Merrill Lynch and Morgan Stanley.
  • Independent broker-dealers, such as Raymond James.
  • Well-known national banks like Bank of America.
  • Mutual fund companies including Vanguard and T. Rowe Price.
  • Independent agents, brokers, and financial advisors.

“You should get quotes from at least three insurers before choosing an annuity since payout amounts and options vary,” advises NerdWallet’s Liz Weston. “You also may want to buy annuities from more than one company, depending on your state guaranty association’s insurance limits. If your state protects only $100,000, for instance, you could buy $100,000 annuities from three different companies to stay within those limits.”

“Even though this insurance exists, it’s no substitute for making sure you buy annuities only from financially strong companies,” adds Weston. “Insolvencies take time to resolve, and your payments could be held up for years.”

Also, when narrowing down your search, you’ll want to consider the following:

  • Verify the company’s financial strength from rating companies like A.M. Best, Fith, Moody’s, and Standard & Poor’s
  • Online reviews
  • Yearly and other administrative fees
  • Surrender fees
  • Minimum guaranteed return
  • Minimum investment amount
  • Death benefits

Is it a Match Made in Heaven? How to Buy an Annuity

Have you chosen your annuity provider and agreed to the terms of the contract? To make sure that you’re ready to settle down, here’s the process for buying an annuity.

  • Appraise both your current and future financial needs, like how much you’ll need in retirement to live comfortably and travel.
  • Select your annuity based on clear objectives, such as income or growth.
  • Choose your annuity provider wisely since annuities aren’t government-funded or supported.
  • Complete the application by accurately filling in every detail and locking in a favorable rate.
  • Fund your annuity through cash or retirement funds.
  • Use the fee-look period, usually between 10 to 30 days, to ensure the annuity is right for you.

Questions to Ask Before Committing to an Annuity

What am I going to use this annuity for?

If you’re nearing retirement or already retired, a fixed annuity provides a predictable income. If you’re younger, you have more time to absorb market losses. As such, a variable or index annuity is worth exploring. If you want to leave money to your heirs, consider a variable with a death benefit.

When do I need the money?

If you’re positive that you don’t need to receive your annuity payments until several years from now, your best bet is a deferred annuity. However, if you’re older and believe that you’ll need the income sooner than later, invest in an immediate annuity to avoid surrender fees.

What fees can I expect to pay?

Annuities can be expensive. Depending on the type of annuity you purchase, these could include annual maintenance fees, commission fees, and mortality expenses. There are also surrender fees if you make a withdrawal. And, if you had optional riders can range from 0.25 to 1 percent a year.

What is the minimum guaranteed return?

This is the return that you will make — no exception. The minimum guaranteed return is obvious with fixed annuities. But, annuity companies frequently offer a minimum return on both variable and indexed annuities. Having this known upfront can help you plan accordingly.

How will the annuity work with my other revenue streams?

“In practice, your choice won’t just be between an annuity and some other investment vehicle,” we’ve previously stated here at Due. “It will be what an annuity adds to your other investment vehicles,” such as a 401(k), mutual fund, or property investments.

“An annuity won’t secure your future alone. It will work with your other investments to ensure that you have financial security once you’ve finished working.” As such, “you should know what it brings,” by asking;

  • What does it add to your pension payments, not just financially but in terms of security and tax benefits?
  • Will it cover gaps between tenants if you’re renting out an investment property?
  • How will it ensure that you always have an income?
  • Can it deliver a level of security that your other investments don’t bring?

“You won’t be buying an annuity in isolation. Instead, you’ll be adding it to a portfolio of other investments. Each of those investments will bring different benefits in terms of income stability, cost, tax benefits, and returns.”

Ultimately, always ask your financial advisor how an annuity fits into your big picture.

Article by John Rampton, Due

About the Author

John Rampton is an entrepreneur and connector. When he was 23 years old while attending the University of Utah he was hurt in a construction accident. His leg was snapped in half. He was told by 13 doctors he would never walk again. Over the next 12 months he had several surgeries, stem cell injections and learned how to walk again. During this time he studied and mastered how to make money work for you, not against you. He has since taught thousands through books, courses and written over 5000 articles online about finance, entrepreneurship and productivity. He has been recognized as the Top Online Influencers in the World by Entrepreneur Magazine, Finance Expert by Time and Annuity Expert by Nasdaq. He is the Founder and CEO of Due.