How to Compare Annuity Plans: Choosing the Right Annuity for You

Annuities can be a tricky purchase. You need to compare annuity plans to find the right option for you.  But, there are many different products – fixed annuities, variable annuities, tax-deferred annuities, guaranteed annuities, inherited annuities, equity indexed annuities and more. How do you even begin to go about comparing annuities?
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Estimate how much income your savings can generate using an Annuity Calculator.

Comparing Annuities: Get to Know What the Names Mean

The names of different kinds of annuities actually refer to the different features that can be applied to a basic annuity product.

Some of these features are great for retirees and are options recommended by the most respected financial planners. Other annuity features are almost universally condemned by these same planners. As such, it is important for you to understand how to choose the right annuity for you and your family.

Below you will find the issues that are important to consider when doing an annuity comparison and evaluating annuity providers. Learn about your options below or jump right into an annuity calculator to try out different options for yourself.

Fixed Annuities and Variable Annuities

Perhaps the most important consideration to make when evaluating annuities is whether to choose a fixed or variable annuity.

Fixed Annuities: Fixed annuities are typically based on fixed income products like bonds and pay a guaranteed stream of income. With a fixed annuity, your income stream is “fixed” or guaranteed. You know how much income you will receive every month when you finalize your contract.

A fixed annuity guarantees you a certain income – no matter what – which makes them a good bet for retirement financial planning. Guaranteeing your income to cover your basic expenses in retirement is a good retirement financial planning goal.

With a fixed annuity you can also elect to pay extra for an annual Cost of Living increase or inflation protection as an option on the annuity contract.

Variable Annuities: Variable annuities are typically based on mutual funds and pay a stream of income that moves up and down with changes in the value of the underlying fund. A variable annuity is a riskier investment for retirement.

Which is the Best Product for Retirement? Fixed or Variable? Many financial retirement planners will recommend that their clients purchase a fixed annuity.

Fixed annuities are less risky and provide a more reliable income stream.

Lifetime Annuity or Term Annuity

Lifetime Annuities: Lifetime annuities are annuities that pay an income stream for the remainder of your life – no matter how long you live. In fact, depending on how long you live, a lifetime annuity could pay you a higher sum over your lifetime than you originally invested in the annuity. Of course, the opposite might also be true – you could die before you have recouped your investment. (However, many annuity products offer premium protection – insuring that you or your heirs will receive back at least as much as you invested.)

Lifetime annuities can be a good bet for you if you need to guarantee additional income beyond your pension(s) and/or Social Security payments to cover your basic expenses for the rest of your life.

Term Annuities: Term annuities are annuity products that pay you an income stream for a specified period of time – 5 or 10 years for example.

Which is the Best Product for Retirement? Lifetime or Term? Unless you know how long you will live or know that your income needs will decrease as you age, a lifetime annuity is the best bet for most retirees. A lifetime annuity guarantees your retirement income indefinitely.

Deferred Annuity or Immediate Annuity

Defferred Annuities: A deferred annuity is an annuity that you purchase now with payments schedule to start at an agreed upon date in the future.  Your annuity income is deferred.

Immediate Annuities: When you purchase an immediate annuity, your income starts immediately.

Which is the Best Product for Retirement? Deferred or Immediate? This answer really depends on your age, why you are purchasing the annuity and when you need the income.

  • Deferred annuities are often purchased by people who are worried about funding a long term care need in the future or who don’t want to run out of money later in life.  They want to guarantee a certain level of income in the future.
  • Immediate annuities are usually purchased by retirees who want to guarantee adequate retirement income.  Perhaps there is a gap between their guaranteed income from Social Security and what they would like to be spending.  And, they don’t want to worry about investments.  An immediate annuity can fund the gap and release them from fears about loosing money to stock market fluctuations.

Other Points to Consider When Evaluating and Comparing Annuities

Company Rating: Your annuity should come from a reputable and highly rated annuity company/insurance company.

Annuities are a long-term investment and the federal government does not guarantee these products. You need to be confident that your insurer will be around 20 years from now. You need income for the rest of YOUR life – not the lifetime of the insurer.

Premium Protection: You should consider an annuity with premium protection.

Premium protection is a feature that guarantees you to receive in premiums at least as much money as you originally invested.

With premium protection, you will continue to receive periodic annuity payments until the cumulative annuity payments equal your net investment. (If you die beforehand – your heir(s) will receive the payments.)

You can choose higher lifetime income payments each month by forgoing premium protection, but there’s no guarantee that you will recover all or part of your original investment in the annuity.

Cost of Living Protection: Most financial planners would strongly recommend that you choose an annuity with automatic cost-of-living adjustments.

When you buy an annuity, you are buying a certain amount of monthly income. However, inflation can dramatically decrease the buying power of that income over time. An annuity with “cost of living adjustments” (COLA) protects the value of your income stream by adjusting your payments along with inflation or the cost of living. Inflation protection or cost of living adjustments afford you the ability to maintain your lifestyle in retirement.

Joint and Survivor Benefits: Annuity products can be tailored to accommodate one person or a family. If you are married, you will probably want to purchase an annuity that guarantees your own income – as well as your spouse’s financial welfare after you die.

Tax Implications: The purchase of an annuity with qualified retirement savings (401k or IRA funds) can save you money on taxes over taking a lump sum payment. You can roll-over qualified funds into a qualified annuity without any tax penalties. You only pay taxes on the income the annuity provides

Compare Annuity Plans and Discover if an Annuity is Right for You and Your Retirement?

Now that you have a better understanding of the different types of annuities, you can begin to make a better assessment about whether an annuity is right for you and your retirement.

The real trick is in understanding the cost of the various types of annuities.  An immediate lifetime annuity with premium and cost of living protection is going to be much more expensive than a deferred annuity without those qualities.

Use the NewRetirement lifetime annuity calculator to immediately compare annuity plans.  You can also model different annuity options as part of your overall retirement plan in the NewRetirement Planner.

You may also want to talk with a financial advisor about your decision to get an annuity.

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