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Tips You Should Know When Comparing Annuities | How to Grow & Protect Retirement Savings

What to Look for When Comparing Annuities

The reason you’re reading this “how-to” compare annuities article is because you’re probably unsure how, if at all, to compare the multitude of different companies who compete for your money in this ever growing investment space. You may have heard people say they recommend XYZ company and how, according to them, it has great rates and services – so how do you know which company you should choose? Well let’s see how we can use data and statistics to find the best deals. To start with we’ll need a set of products that we want to compare: let’s go ahead and limit ourselves by only considering variable annuity products (unlike fixed annuities , these investments fluctuate in value based on market conditions).

But First, What is an annuity?

An annuity is a financial means of becoming entitled to receive fixed amounts at regular intervals in the future. This definition contains three key terms: entitlement, fixed amount and future.  Let’s take a closer look at these terms so you understand what they mean when talking about common annuity questions .

  • What does “entitlement” mean?

When you purchase an annuity, you begin your road to receiving fixed sums at regular intervals in the future. The thing is that people who buy annuities don’t always know how long they’re going to live or how much money they will end up with by the time they die. However, it doesn’t seem like common sense that everyone would be entitled to the same amount of money. For example, let’s say there are two people who buy annuities at around the same time. They both put in $10,000 into account that will provide them with fixed amounts every month for the rest of their lives after they turn 65 years old. Each person is entitled to different amounts of money based on how long they live. One person ends up living until he’s 70 and has about $90,000 left when he dies, while the other person dies after only 3 years because of an illness and has reached $100,000 when he passes away. One common annuity question we see a lot is how to get all of your money back before you die, this example would show why it’s different depending on when someone dies because each person is entitled to different amounts of money based on how long they live. The common annuity question “how much can you earn off an annuity” is another common question that will be answered in this article.

  • What Does “fixed amount” Mean?

This term refers to the fixed sum of money that someone will receive every month after purchasing an annuity. This means it’s different from common investments, like stocks and bonds, where people are taking a risk with their money by hoping their investment goes up in value over time. With common annuity questions about how long do you have before your annuity payments stop , you’ll understand why it would be important for future reference once we discuss different kinds of annuities below.

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  • What Does “Future” Mean?

Future refers to the point in time when someone will be receiving fixed sums of money. It’s common for common annuity questions regarding how much is an annuity payment to pertain to this topic. For example, common annuity questions about how long do you have before your annuity payments stop would answer this common question because people receive their future monthly payments at different times depending on what kind of annuity they buy.

Do I Need to Know My Life Expectancy?

No, you don’t need to be worried about common questions like “how much can i earn off an annuity” if you don’t want to. These common annuity questions are answered in another section below where we discuss different types of annuities and how they work. Different kinds of common annuity questions and how many there are: common annuity questions that involve life expectancy and “how much can i earn off an annuity” will be answered in this article. We’ll learn more about common annuities, like the immediate fixed deferred common annuity question of “can you get back your initial investment before you die”.

Can I Get all My Money Back Before I Die?

Now we’re going to answer some common annuity questions with a very specific kind of common annuity called common immediate fixed deferred annuities. These common immediate fixed deferred annuities tell us how long we have until we can start withdrawing our money for different reasons (commonly known as cashing out). It’s common to ask how long it will be until you can start withdrawing your money. Many common immediate fixed deferred annuities tell us that we cannot cash out our money before the common age of 59 ½ . The common age could also be 70 or somewhere in between. You should read carefully to understand what ages are common for when you can take out your own money.

What are the Best Annuity Rates?

We’ll also need to know how much we want to invest in each contract (how much on average you can expect to pay) and how long we want to invest for. Finally, since these products offer different levels of guarantees, how much annual interest on our investment is acceptable? For this example, I’ve arbitrarily used 80% as the limit so that the product would still be called “variable annuity” by insurance companies. You can adjust this amount depending on your personal circumstances.

Comparing all the Best Annuity Rates

Now, let’s start comparing a set of 7 variable annuities from a range of different providers:

  • Comparing Variable Annuities – Company A
  • Annuity: $80,000 initial investment
  • Guaranteed return of 3.5% for 10 years, after that the product returns to the prevailing market rate of 4.5%.

Insurance company A’s website states that they have a call center open from 8AM – 9PM every day, as well as a “financial comparison” tool to help you choose products. You also only pay a single up-front commission of 5%. This information is taken from their website and you’ll see how we use it below.

  • Interest rate before commission: 4.50%

This is how much interest your investments will receive each year assuming there is no up-front or annual fees. Interest rate after commission: 3.96% is how much interest your investments will receive each year assuming you pay a 5% up-front fee.

Annuity vs investments – How to Compare Annuities

In this example we will assume “company A”,  is currently offering the best rates – but how do we know if they’re consistent? Their website says that “compared to the market” their product offers good value for money, so how do we compare our options with everyone else “in the market”? To figure out how competitive insurance company A’s rates are we need to look at similar products from other companies and compare them. Thankfully there’s a tool for automatically doing just that: Google’s “Insurance Annuity Calculator”. It uses Google Finance data and automatically returns how how much interest you can expect to receive on your annuity.

We use the tool as follows:

Firstly, we enter how big an initial investment is (we know that insurance company A requires $80,000) and how long they want to invest for (in this case 10 years). We also need to tell the tool how much annual interest on their investments they are willing to sacrifice. We’ll arbitrarily say 80% for this example.

So let’s compare all of our options with game-changer company A!

Insurance Company B offers a product with exactly the same features as Insurance Company A – except it only has the “market rate” of 4% instead of 4.5%. This means that if there were no up-front or annual fees, you would receive $80,000 x 4% = $3,200 in interest each year. If there were 5% up-front and/or annual fees that amount would drop to $3,350 ($80,000 x 4% – (5% x $80,000)).

  • $80,000 multiplied by the given interest rate for 10 years will give how much money your investments will make during their tenure (in this case it’s $80000 x 3.50%) = 292,000
  • $80000 multiplied by how much less you’d earn if taxes and other deductions are higher than 80%, gives how how much left over you’ll have after making your investment (in this case it’s $80000 x 0.20 = $16000)
  • $80000 multiplied by how much less you’d earn if there are up-front or annual fees, gives how how much left over you’ll have after making your investment (in this case it’s $80000 x 0.80 = $64000).
  • $292,000 + $16,000 – $64,000 = how much interest you can expect to receive each year on average during the time you invest for. In this example, that means an average of 4% interest per year ($292k + 16k – 64k divided by 2).

So how does insurance company B compare?

Well they’re offering a fixed rate of 3.96% (the difference between how much you would have received without fees, 4%, and how much you are receiving with fees, 3.96%).

  • $80,000 multiplied by how much less you’d earn if taxes and other deductions are higher than 80%, gives how how much left over you’ll have after making your investment (in this case it’s $80000 x 0.20 = $16000)
  • $80000 multiplied by how much less you’d earn if there are up-front or annual fees, gives how how much left over you’ll have after making your investment (in this case it’s $80000 x 0.80 = $64000).
  • $16,000 + $64,000 = how much interest you can expect to receive each year on average during the time you invest for. In this case, that means an average of 3.96% interest per year ($16000 + $64000 divided by 2).

So how does insurance company A compare? They’re offering a fixed rate of 4%. It doesn’t matter how short or long your investment is, how old or young you are – their rates are consistent. That’s why they’re considered one of the best annuity rates! And how does insurance company B compare? Well if your investment was shorter than 10 years but you wanted the most competitive rate they would be a good choice, however if it were longer than 10 years they’d give less bang for your buck.

We here at Senior Resource Hub do not get compensated for referring our readers to calculator.net as seen in the above link. This is simply a resource we identified as being quite helpful when searching for annuity rates and making an informed investment. All investments come with a certain level of risks so remember to only invest what you can afford to lose, no matter how solid or sound the investment might be and always seek the help of a professional investment advisor when investing larger amounts of income.

Summery of General Questions You Should be Asking

  • What kind of annuity is it?
  • How much will the annuity cost?
  • What are the tradeoffs?
  • How will this annuity work with my other income?

Our Closing Thoughts + Article Review

Annuities are a type of investment that guarantees your money will grow at a certain interest rate. As an investor, you purchase the annuity for a set number of years and pay fees upfront to lock in those rates. You’ll have access to some or all of this cash throughout the term based on your decision making process with the company issuing your annuity contract. These contracts can be used as retirement planning tools, but they also offer tax benefits if you withdraw from them before age 59 ½ by paying an additional 10% penalty fee on top of any taxes due. If you want more information about how to invest in an annuity, contact Fidelity Annuities.

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