Assess your personal situation and follow some basic guidelines for determining if an annuity is right for you. Once you decide to invest in annuities, figure out how to shop for an annuities contract and how to stay smart about annuities.
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Tips for Deciding on an Annuity
If you're considering an annuity, take a serious look at your personal situation. Examine the following points when shopping for an annuity to see what type best fits your needs or if you should even get an annuity:
Assess your needs. After you estimate your living expenses in retirement and identify all sources of income, you'll know whether you'll need an income annuity.
Consider your options if you don't have a traditional pension. Like most people, you may not retire with a traditional pension. But you can use an income annuity to build a do-it-yourself pension.
Get familiar with your "risk tolerance." Determine what risks you can tolerate and which ones you can't. For example, if a 500-point drop in the Dow doesn't deprive you of sleep, then you probably don't need a life annuity.
Expect trade-offs in risk and reward. Annuities are insured investments, which means they protect you from some of the risks that accompany investing. But greater safety often means smaller gains, so some risks may be worth taking.
Count on living longer. Don't assume you'll die young — most people underestimate their lifespan by several years, and half of all 65-year-old Americans will live past age 83. Look at annuities that can help with extended retirement funding.*Guard the womenfolk! Women tend to outlive their husbands, and therefore have a much greater risk of running out of money during their lifetimes. That's why prudent couples buy "joint-and-survivor" life annuities.
Protect yourself from inflation. The rising cost of living can erode your purchasing power in retirement. An income annuity with an inflation rider or a variable income annuity can help.
Look at how much you need to spend. An advanced life deferred annuity (ALDAs) is an inexpensive way to guarantee yourself an income in late retirement while pumping up your spending power in early retirement.
Get a discount for less-than-ideal health. If you think you'll have a shorter-than-average lifespan, check out "impaired risk" annuities. They'll give you bigger-than-average monthly payments.
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How to Be Annuities-Savvy
Annuities are complex but useful financial tools. Be aware of the latest annuity trends when you are buying and make sure you stay aware so your annuity continues to benefit you in the best way possible. The following checklist shows important reminders for you to track annuities:
Recognize that the annuity world changes. For example, deferred annuities used to be purchased mainly as a tax dodge by people in the upper tax brackets. In the future, income annuities will likely be purchased by Baby Boomers who want a guaranteed lifelong paycheck. Keep on top of the trends, and you'll be able to make adjustments to ensure that your annuity stays on top of them, too.
Understand how "survivorship credits" (mortality credits) work. When the owner of a life annuity dies, his or her assets are distributed as so-called survivorship credits to the owners who go on living. That's the biggest benefit (and for some, the biggest drawback) of life annuities.
Get creative with your annuities. You may be able to maximize your income in retirement with a combination of two or three annuities. This path takes research and planning, but it can pay off!
Decide how much money to keep outside an annuity. When you buy an annuity, leave some money in more liquid investments so you can meet emergency expenses. If a salesman urges you to put all your money into an annuity, get a second opinion.
Plan for trade-offs in risk and reward. Annuities are insured investments, which means they protect you from some of the risks that always accompany investing. But insurance costs money, and the fees can eat up a good chunk of your returns.
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How to Shop for an Annuity Contract
If you've made the decision to look for an annuity contract, keep this list on hand and cover every option it gives, so you can be confident you're staying on top of the annuities game.
Find an annuity-savvy adviser. Income annuities aren't yet widely used, so not many advisers or brokers understand them. Try to locate a professional who does.
Look for a strong insurer. Always buy your annuity from a financially strong insurance company with "Superior," "Excellent" or "Strong" ratings from the major rating agencies.
Read the prospectus before you buy an annuity. Annuity contracts offer guarantees, and guarantees are always accompanied by complex exclusions and restrictions that may appear only in fine print.
Buy direct and saving money. If you're the self-reliant type, you can save big by purchasing your annuity direct from an insurance carrier or from a no-load mutual fund company like Vanguard or Fidelity.
Buy only what you understand. Some annuities are more complex than others. Don't buy one (or any other financial product) that confuses you. What you don't know may come back to haunt you.
Be wary of excessive fees. Variable annuities offer attractive options, but the options aren't free. Try to get the benefits you need at a reasonable price.
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Source:http://www.dummies.com/how-to/content/annuities-for-dummies-cheat-sheet.html
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