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3 common annuity mistakes and how to avoid them

3 common annuity mistakes and how to avoid them

Annuities are a popular investment option that helps one get a steady stream of income during retirement. It is essentially a contract with an insurer in which one pays premiums and, in return, gets a guaranteed stream of payments in retirement. There are several annuity options, and choosing the right one can help one meet their long-term financial goals with ease. Also, one should avoid the following common mistakes associated with annuities:

1. Overlooking future tax implications
Annuities are not taxed during the accumulation period. However, these benefits are only available until one withdraws money from their annuity plans. So later, the retirement income earned in the form of annuities will be taxed. This can be an additional monetary burden at the time. To avoid this issue, one must not let all their retirement income be taxable. They must set aside certain percentages of their income and direct them to non-tax deferred retirement investment options.

2. Investing too much
While an annuity is a good investment option for retirement, it also tends to be rigid and difficult to get out of after a certain point. One can even end up paying penalties for several years after purchase if they miss a payment or two in the interim. Also, it becomes difficult for one to access their own money as it is locked away in an annuity plan and cannot be withdrawn due to the insurer’s rigid terms. So, the only way to avoid it is by not putting all of the money into an annuity plan. One should diversify their retirement portfolio, with annuity plans just being one among many other investments that will keep yielding returns.

3. Choosing the wrong type of payout
One should carefully review the payout terms of different types of annuities. For instance, with an immediate annuity, one can get a high annual payout. However, such policies do not come with the option of payments being made to the policyholder’s spouse after the policyholder passes away. In this case, one may want to opt for a payout type that involves regular, albeit smaller, payments for the spouse of the policyholder even after the policyholder dies. Taking such factors into account can help one make an informed decision.

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