Now that you've decided an annuity might be right for your portfolio, it may be tempting to approach the selection process the same way you have with other financial vehicles like credit cards, savings accounts or home loans — by comparing rates. However, some financial products, like annuities, can't be judged based on rate alone. Although the rate is one important factor, choosing an annuity based solely on the rate may not be the best way to get the right one for your needs.
Let's take a closer look at what to consider when choosing an annuity.
Start with your financial goals
There are many different types of annuities, any of which can satisfy a variety of financial objectives. Yet the primary reason people consider adding annuities to their portfolio, says Matthew Bonomo, Director of Strategic Solutions at Prudential Annuities, is to use their savings to create a guaranteed stream of lifetime income in retirement to supplement Social Security or a pension.
Balancing annuity costs and benefits
A licensed financial professional can help you evaluate the benefits of an annuity relative to its costs and risks, the specifics of your financial situation, and the type of payout and survivor benefits you’re looking for. They’ll take into account the financial risks and realities you may face in the future using some predictable information, like how many years you have until retirement, as well as unknowns, such as how many years you'll live.
They’ll also consider factors like:
the amount of money you'll invest in the annuity
the type of account you'll use to fund it
whether you’re using an annuity to address the equity or fixed income portion of your portfolio
the amount of income you’ll need in retirement
your risk tolerance
Using these variables and more, your financial professional can then consider specifics, like the payout rates for your age, to determine which annuity can be most valuable to you.
They also may provide you with a preliminary overview of projected costs and benefits using an annuity calculator, or offer you a more detailed projection with a customized annuity illustration – a tool that takes into account many factors of your specific situation.
Not all annuity providers are created equal
One of the most important things to consider when shopping for an annuity is the financial strength of the issuing company that stands behind it. Issuing companies are rated by independent organizations such as A.M. Best, Moody’s and Standard & Poor's, to provide a gauge of its financial ability to honor its contractual obligations. It is easy – and essential – to find out the rating when comparing products.
Reputation is another consideration; is the brand one you know and trust? An annuity may offer a high rate, but having confidence in the company that offers it can be even more valuable.
What to consider when choosing an annuity?
Once you have decided to add an annuity to your portfolio, consider all of the factors – including rates – that ultimately contribute to which annuity is best for you:
start by defining your goals
focus on product specifics like income growth rates, income payout rates, expenses, fees, and charges
assess the stability and financial strength of the company issuing the annuity
don't play the numbers game – the rate is not always the best way to judge an annuity
seek out an expert – talk to a financial professional who has experience with annuities
get all the facts – not all annuity providers are created equal
Investors should consider the features of the contract and the underlying portfolios’ investment objectives, policies, management, risks, charges and expenses carefully before investing. This and other important information is contained in the prospectus, which can be obtained on the prospectus page or from your financial professional. Please read the prospectus carefully before investing.
Annuity contracts contain exclusions, limitations, reductions of benefits and terms for keeping them in force. Your licensed financial professional can provide you with complete details.
A variable annuity is a long-term investment designed for retirement purposes. Investment returns and the principal value of an investment will fluctuate so that an investor’s units, when redeemed, may be worth more or less than the original investment. Withdrawals or surrenders may be subject to contingent deferred sales charges. Withdrawals and distributions of taxable amounts are subject to ordinary income tax and, if made prior to age 59½, may be subject to an additional 10% federal income tax penalty, sometimes referred to as an additional income tax. Withdrawals reduce the account value and death benefit.
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