How to Compare Annuities

Dealing with Complexity

Understanding the vast number of different annuity product types and features can be mind numbingly complex for both consumers and financial advisors.

The point of this section is to provide a basic overview and a starting point for understanding the pros and cons of the various types of annuities.

A great way to start is by remembering the simple fact that all annuities share three common features, and that variations in these three features are what create different product types.

Before You Compare Annuities

Consider whether or not you really need or want an annuity: With plenty of time to ride-out even the most radical market fluctuations, a young professional just beginning a retirement portfolio should invest the maximum allowable amounts in 401(k)’s or Roth IRA’s. They allow both the greatest control over your investments and the greatest flexibility; they also afford the most room for growth, and all your contributions to these retirement funds reduce your tax liability, because they are deducted from your income before you are taxed. Young investors shouldn’t consider annuities unless they’ve maxed out their 401(k)’s, are considering early retirement, are seeking protection for their money against litigation, or have come into possession of a large sum of money, like an inheritance.

If, on the other hand, you recently have retired and your employer has paid-out your 401(k); or if you otherwise have separated from, long-term employment and have substantial severance and retirement settlements, an annuity will help you preserve your principal and secure steady income. This is most often satisfied with an immediate fixed annuity. Deferred annuities are well-suited to investors who are 10-15 years out from retirement and want to bolster their retirement nestegg. Additionally, if you have received substantial bonuses, scored major gambling purses, or sold a home for profit, an annuity can help maximize your wealth by letting it work for you and earn interest.

Annuity Comparison: Determining Your Type

Once you’ve determined that you’re a good candidate for annuity investment, start comparing and contrasting the details. The most important question is to determine which annuity type is best for you: fixed, variable, or indexed? In other words, how well do you tolerate risk and what sort of returns are you looking for?