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Annuity Do’s and Don’ts for Retirement Planning

Annuity Do’s and Don’ts for Retirement Planning

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Annuities are a great way to grow your nest egg in retirement without fear of stock market volatility.  

If you’re considering a 401(k) rollover or transitioning from a bank CD, here are some important annuity do's and don’ts for baby boomers.

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Don’t: Consider a variable annuity.

Variable annuities are tied to the stock market performance, and they may have several fees involved. These fees can end up being higher than any interest you earn, which means you could actually lose money.

While variable annuities may be suitable for a younger investor, they aren’t ideal for growing and preserving your nest egg in retirement.  

Our agents are not going to recommend any annuity products in retirement where there is risk of losing your principal.

Thankfully, variable annuities are just one type of annuity. There are other kinds of annuities that can be absolutely wonderful for those aged 65+.

Related: Are Annuities a Good Investment?

Do: Eliminate volatility.

Financial experts will tell you no more than 25% of your retirement assets should be in volatile funds, such as the stock market. Ensure your money is secure in a place that will earn you interest and avoid fees.

There are many annuities available that offer extremely competitive returns with no fees and zero risk. Which brings us to our next do

Do: Educate yourself on the difference between variable, fixed, and fixed indexed annuities.

Not all annuities are created equal! While we don’t recommend variable annuities for those in retirement, there are other types of annuities that really shine.

Fixed annuities – and more specifically, Multi-Year Guaranteed Annuities (MYGAs) – are very simple – you earn a guaranteed interest rate over a certain period of time. For example, you might earn 3% interest over a period of 5 years.

And for those who want the potential of higher interest rates, a fixed indexed annuity (FIA) may the perfect choice. Its performance is tied to an index – say the S&P 500 – but you’re protected from any losses.

When the index goes up, your annuity value also goes up (though not as high as the actual index). And when the index goes down, your floor is 0. You can never lose your principal with a fixed indexed annuity, which offers so much peace of mind.

An agent can help answer more questions and provide a deeper education on your best annuity choices in retirement.

For more information on these two types of annuities, check out this simple graphic from SILAC Insurance Company:

Don’t: Assume CDs or Money Markets are the only safe place for retirement funds.

Many times, retirees will roll their money into a bank CD or money market because of the safety component. But the national average 5-year CD rate is 0.28%. Money Market rates are typically even lower.

Read this Case Study: Mike Is Getting Double the Interest Thanks to Luke Hockaday

Fixed and fixed annuities offer the same amount of safety as the bank with no fees and no risk of losing your principal. The upside? The interest rates are much, much higher.

Do: Make a game plan.

Before you start moving your money around, make a game plan.

You’ll need to determine when you’ll need your funds and how much you’ll plan to use.

When you’re considering an annuity, look for one with free withdrawal privileges, so you can access some of your funds without a penalty. (An agent can help with this.)

Most annuity plans allow you to withdraw a portion of your funds after the first year with no early withdrawal penalties. If you have any financial commitments coming up in the next 12 months, hold that money back for now. Put the rest of your funds in the plan so it can begin earning interest.

As an example, if you plan to buy a new vehicle, update your kitchen, or travel in the next year, consider keeping those funds with you rather than putting them into an annuity contract.

Don’t: Let your money sit when you retire.

When you and your employer are no longer contributing to your retirement account, it’s the ideal time to roll over the retirement account as a non-taxable event. This will secure your hard-earned retirement funds.

Many individuals are intimated by money, and they don’t want to mess anything up. They see their account growing over the years, and they want to leave it alone.

We love helping these individuals by providing education, security, and safety. You can earn interest on your nest egg without fear of volatility, fees, and risk!

Read this Case Study: Michael Sams Helps Client with Millikin Retirement Account Rollover

Do: Ensure you use a transfer form during the rollover.

When you get ready to do the transfer, be sure that your retirement account funds are transferred directly to the annuity company – not you!

Examples of transfer forms

If the check is made out to you, the client, it becomes a taxable event and there is no way to reverse it.

As an example, the check may read from Wells Fargo to SILAC Insurance Company. The check should NEVER say from Wells Fargo to you.

Your agent will take care of this, but it doesn’t hurt that you also know this and keep an eye out for it.

Conclusion

Annuities are a fantastic tool for baby boomers looking to preserve their retirement account funds.

If you’re interested in learning more about how annuities can help you in retirement, schedule an appointment with us today! You can do so online or by calling our office at 217-423-8000.

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