20 Facts About Annuities That Every American Over 40 Needs to Know

One of the most important things we all want in retirement is to know we will be well taken care of. Whether through a 401(k) or an IRA, there is a definite hope that between personal savings and Social Security, we’ll live a lifestyle that allows us to travel and enjoy life. 

An annuity is a popular retirement option for those seeking a little joy while retired. It provides lifelong guaranteed income, and there is every reason to believe that it is the best option for ensuring that bills and expenses are paid on time. 

20. Ask For Help

Arguably, the most important thing anyone can do with an annuity is ask for help with any paperwork. The last thing you want is to get into something only to learn years down the road that it wasn’t exactly what you had expected. Whether it’s a lawyer or a financial advisor, asking for help might be the best when considering an annuity. 

19. Three Types

There are different types of annuities, including fixed, variable, and indexed formats. A fixed annuity provides a guaranteed rate of return. A variable annuity is tied to the performance of a specific investment portfolio. Lastly, an indexed annuity is linked to the return percentages on a market index like the S&P 500. 

18. Cancel Period

In the event you get sucked into an annuity by a smooth-talking insurance salesperson, there is what is called a “free-look” period that generally lasts between 10-30 days. During this period, you can cancel an annuity completely without any penalties. 

17. Annuity Protection

Unlike a bank account where you have FDIC protection, there is limited coverage if an insurance company holding your annuity fails. This is pretty much going to be dependent on each state and what any state guaranty association will provide you as a benefit. 

16. 401(k) Rollover

An understated benefit of having an annuity is that you can roll over a 401(k) directly into an annuity plan and continue to keep this money as tax-deferred. You could do something like this when you turn 60, with payments starting at 65 to avoid tax penalties. 

15. Insurance Companies Only

A common misconception is that both insurance companies sell annuities. Still, if you’re over 40 and want to explore whether an annuity is right for you, you have to contact someone at an insurance company. 

14. 10 Percent Rule

If you have a deferred annuity and attempt to withdraw after you turn 40 and before you turn 59.5, you‘ll have to pay a 10% IRS penalty plus taxes. If you look to pull the money out after you turn 59.5, there are no additional IRS taxes outside of declaring the annuity payments as income. 

13. Commission Costs

A dark side of purchasing an annuity, once you turn 40 or any age, is that you must pay the insurance agent between 1 and 10% in commission costs. If the annuity is lower, the fees will be less, but a $200,000 annuity could cost as much as $20,000 extra. 

12. Adding Riders

An attractive option with an annuity is adding a “rider,” which offers existing benefits. For example, a long-term care rider would increase your payout to help offset any increased medical expenses you might experience during your lifetime. 

11. Long-Term Commitment

One of the most important things about an annuity is its long-term commitment to tie up existing funds. If you are between 40 and 50, you will be paying a lump sum into an annuity now, which removes your existing cash pool but guarantees income in 15 to 25 years. 

10. Must Have A Beneficiary

If you are married, planning to get married, have children, or want to have children, know that you must name a beneficiary with any annuity you choose. Upon your death, any death benefit your annuity allows for would then be paid to your beneficiary. 

9. No Limits

Unlike a 401(k) account or an IRA with government-placed limits on how much you can deposit, there is no such consideration with an annuity, as you can place as much money into one as you can reasonably afford. 

8. Fixed Rate Interest

Going with a fixed-rate annuity means knowing exactly how much money you will receive as a payment so you can plan accordingly. However, most insurance companies only guarantee the rate for up to 10 years. Afterward, they can change the rate, and you can’t get out of the annuity without a surrender charge. 

7. Not A Liquid Investment

If you ever think you might need money fast in the case of a medical emergency, going with an annuity can be challenging. Unlike stocks you can cash out of quickly, pulling money out of an annuity requires surrender fees.

6. Life Expectancy

There is every reason to believe that your payments will be lifelong, but how much these payments are can vary based on your life expectancy. Two people who invest $200,000 into a fixed annuity might receive different payments based on what the life insurance company believes their life expectancy is. 

5. Customize Your Annuity

The good news with an annuity is that you can customize the level of long-term coverage you want. You can also add a rider that ensures your spouse or child continues to receive payments in the event of your death. 

4. Inflation Concerns

While the hope is that when you sign up for an indexed or variable annuity, it will grow with the market. However, the challenge with this annuity type is that the percentage these accounts grow might not keep up with inflation, leaving you with less buying power than a 401(k) or IRA. 

3. Surrender Charges

It’s important to know that you’ll have to deal with surrender charges when you sign up for an annuity if you need to withdraw money in the first 7 or 10 years. This surrender charge could amount to as much as 10% of the original lump sum investment. 

2. Guaranteed Income

The biggest reason anyone should consider an annuity is that it can provide lifelong income. For example, if you invest $200,000 in a fixed annuity at 65, you will receive approximately $1,000 monthly for the rest of your life. 

1. Lower Fees

Some annuities can charge fees, especially during the initial sign-up period or if you want to add a rider later. However, some annuities out there do not charge any fees whatsoever, so it will require some research. 

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