How To Buy An Annuity For Retirement

Shawn Plummer

CEO, The Annuity Expert

Annuities have gained significant traction among individuals eyeing a stable and predictable income stream in their retirement years. But with an array of complex terms and varied options, the process can seem overwhelming. You might ask, “How do you buy an annuity?” or “What factors should I consider when buying an annuity?” You may also wonder, “Do I have to buy an annuity in full when purchasing?” or “What happens when you buy an annuity?” This guide answers all these questions, simplifying the process to help you make a confident, informed decision.

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Understanding What Buying an Annuity Entails

An annuity is a contract between you and an insurance company where you make one or more payments in exchange for regular disbursements, starting immediately or at some point. When you buy an annuity, you essentially purchase future income. The duration and amount of these payments depend on various factors, including the type of annuity and the contract terms.

Buy An Annuity

How To Buy An Annuity For Retirement

There are a few things to keep in mind when purchasing an annuity. First, you need to decide what type of annuity purchase you want. There are two basic types: fixed and variable annuities. With fixed annuities, you know precisely how much lifetime income you will receive each month for the rest of your life. A variable annuity, on the other hand, does not provide a guaranteed income stream. Instead, your annuity payments will fluctuate based on the performance of the underlying investment.

Next, you need to choose an insurance company. Again, it is vital to select a company that is financially sound and has a good reputation. You can check the ratings of different companies by contacting independent rating organizations such as Standard & Poors or Moody’s.

Finally, deciding how you want to receive income payments would be best. You can receive them all at once (lump sum) or spread them out over time (annuitize). If you choose to annuitize, you must decide how long you want annuity payments to last – for example, ten years, 20 years, or for life. Once you have considered all these factors, you will be ready to purchase an annuity that best meets your needs.

Helpful Tool: Buying an annuity calculator

Steps For Buying An Annuity

  1. Assess Your Needs and Set A Goal: A clear financial plan is critical to maintaining your lifestyle. Work with a financial professional to help you assess your current needs and set long-term goals. This will ensure you have the resources you need now and in the future.
  2. Research Annuities: With so many annuities on the market, deciding which is best for you can be challenging. First, consider what’s most important to you in an annuity — income or growth. From there, research illustration documents that come with each option. An illustration is a presentation that shows all the guaranteed and non-guaranteed elements of an annuity contract over time.
  3. Find A Reputable Insurance Company: You must locate an A-rated or better annuity provider for a reasonable, competitive rate. You can discover reputable providers by looking up ratings from well-known agencies such as A.M. Best, Standard & Poor’s, and Moody’s.
  4. Submit An Application: Double-check that it is “in good order before sending in your insurance application.” Good order means that the application is filled out completely and accurately. If you don’t follow this advice, processing times can lengthen, affecting whether the quoted interest rate will be honored by the insurance company. The insurer’s suitability team makes the final determination of who qualifies for their services.
  5. Fund The Annuity: Funding goes directly to the insurance company. You can fund annuity contracts with cash, roll over a 401k, transfer an IRA or other retirement assets to a qualified annuity, or 1035 exchange for an annuity or life insurance policy for a nonqualified annuity.
  6. Use the free-look period: Almost all insurance companies enable purchasers 10 to 30 days from the start date in the contract to nullify the annuity and receive their money back. If your agreement doesn’t show a free-look duration, request that the agent explain why it isn’t included.
  7. Manage The Annuity: You can manage the annuity similarly to a bank account by setting up a profile with the insurance company. Annuity owners can track progress, request withdrawals, change beneficiaries, and request any claims.
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Buying an Annuity: What to Look Out For

To ensure that you’re making a sound investment, it’s essential to know “how to tell if an annuity is good for the buyer.”

1. Fees

All annuities come with costs, but these vary from one annuity to another. Understanding these costs can help you decide, “What annuity can I buy?” and “How do I purchase an annuity?”

2. Surrender Period and Charges

The surrender period is when you must pay a penalty for withdrawing funds from your annuity. Knowing this period and its associated costs can guide your decisions about “how to purchase annuity contracts” and “how long does it take to buy an annuity?”

3. Annuity Payout Terms

Annuity contracts include various payout options, including life-long payouts for a guaranteed period or payouts until a certain amount is disbursed. Understanding these terms can help when wondering “how to buy a pension annuity” or “how to buy a qualified annuity?

Making the Purchase: Buying an Annuity Upon Retirement

Once you understand how annuities work as a buyer and have determined the right annuity for your needs, you can proceed with the purchase. The process involves applying to the insurance company, choosing your annuity terms, and making the necessary payments.

Funding An Annuity

Most annuities require some minimum premium payment to get started. This initial investment provides the annuity funds used to make future payments (deferred income annuities).

There are a few different ways that people can go about funding their annuity premiums.

  • One option is to use cash. This could be money you have saved, the money you receive as a gift, or even money from selling a property.
  • Another option is to use a portion of your investment portfolio, such as stocks, bonds, or mutual funds.
  • The next option is transferring funds from a retirement plan like an individual retirement account (IRA) or 401k.
  • Finally, some people take out a loan to fund their annuity purchases. While this may seem like a risky move, it can be quite beneficial if the interest rate on a loan is lower than the rate of return on the annuity.

No matter your chosen method, you must ensure you have enough money to make all future payments (if applicable).

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How Do I Choose the Best Annuity for Me?

CD-Like Annuity

For annuity buyers seeking a fixed interest rate, better than CD’s interest rates, a fixed annuity would fit you.

Stock-Market Growth With Principal Protection

A fixed-indexed annuity will be a good idea if you want to buy an annuity with better upside potential than a fixed annuity’s interest rate. Fixed index annuities are a type of fixed annuity that earns interest based on the performance of an external index such as the S&P 500. In addition, the principal is protected from stock market crashes because the annuity is not directly invested in the stock market.

All The Upside Potential

Everyone knows that investing involves risk. Therefore, a variable annuity would be an excellent fit for annuity buyers who are comfortable with the risk of losing money in the account value but have all the upside potential from the market.

A Retirement Income For Life

Consumers wanting a predictable, guaranteed retirement income for the rest of their life should look at a deferred annuity with an income rider.

Long-Term Care Insurance

A long-term care annuity would be a good idea for individuals seeking to plan long-term care who want to pay a fraction of the cost.

Related Reading: Where To Buy An Annuity

What Annuity Can I Buy?

There are many factors to consider when choosing an annuity, such as age, retirement goals, and risk tolerance. However, one of the most important factors is the type of annuity. There are two main types of annuities: fixed and variable.

  • Fixed Annuities: Fixed annuities offer a guaranteed rate of return, which means you will know precisely how much-fixed income you will receive each month.
  • Variable Annuities: Variable annuities offer the potential for higher returns but come with more risk.
  • Fixed Index Annuities: Fixed Indexed Annuities offer a guaranteed rate of return and the potential for higher returns while protecting your investment from stock market volatility.
  • Immediate Annuities: Immediate annuities provide a guaranteed income stream within 30 days of issuing the contract.

Before making any decisions, it is crucial to contact us to see what type of annuity products would be best for you.

What Happens When You Buy An Annuity?

When you buy an annuity, you enter into a contract with an insurance company. You make a single lump sum payment or a series of payments. In return, the insurer agrees to make periodic payments to you immediately or at a predetermined future date. These payments can be for a specific period or for the rest of your life, depending on the contract.

For instance, if a person buys a deferred annuity at age 50, they may make regular payments until retirement at 65. From that point, they start receiving regular income from the insurer, per the annuity contract.

Next Steps

Investing in an annuity is a significant financial decision to ensure a stable income during retirement. The key to a successful annuity purchase lies in understanding your financial needs, comprehending the various types of annuities, and scrutinizing the terms of the annuity contract.

Whether you’re wondering “how to buy an annuity for retirement,” “how to buy into an annuity,” or even “what you can purchase annuities with,” the process is essentially the same. However, the specifics can vary based on your unique circumstances and the type of annuity you choose.

Finally, always remember that an annuity is not a one-size-fits-all solution. Consider the question “What portion of savings to buy an annuity?” carefully, considering that diversification is crucial to a robust retirement strategy. It’s equally important to consult with a financial advisor who can guide you on “how to buy and use an annuity” in a manner that aligns with your retirement goals.

With this knowledge, you can confidently answer, “How do you purchase an annuity?” Knowing how to evaluate and purchase annuities allows you to take control of your financial future, ensuring that your retirement years are secure and comfortable. The choice is ultimately yours, so make it count. Happy investing!

How To Buy An Annuity For Retirement

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Frequently Asked Questions

How do I purchase an annuity?

You can purchase an annuity through a financial institution, such as a bank, insurance company, or brokerage firm (like The Annuity Expert).

Is it a good idea to buy an annuity at age 40?

Buying an annuity at age 40 can be a strategic move for retirement planning. The forecasting allows you to invest money now in return for a guaranteed income stream in the future, providing clarity on your retirement income. With the power of compounding, your money has more time to grow, which can translate into higher income during retirement.

Do you have to buy an annuity in full when purchasing?

No, you don’t necessarily have to buy an annuity in full when purchasing. There are two common ways to fund an annuity: a lump sum payment or periodic payments over time. A lump sum payment means paying the entire amount upfront, while periodic payments involve making contributions at regular intervals until the annuity begins to pay out.

How do I buy a pension annuity?

To purchase a pension annuity, start by identifying your financial needs and goals for your retirement. Understanding the different types of annuities and their unique benefits is integral to this process. It is advisable to consult a financial advisor who can guide you in choosing the right annuity based on your individual circumstances. Once you’ve decided, select a reliable annuity provider, considering their financial strength and reputation. Finally, you must submit an application with your chosen provider, specify the annuity terms, and make the required payments.

How does an annuity work as a buyer?

As a buyer, when you purchase an annuity, you make an upfront payment or series of payments to the insurance company. In return, the company agrees to make future payments to you, either immediately or starting at a certain point. These payments may last a specific number of years or for the rest of your life, depending on the annuity contract. Essentially, an annuity provides a means for you to secure a steady income stream in the future, making it a popular choice for retirement planning.

How long does it take to buy an annuity?

Buying an annuity can take anywhere from a few days to several weeks. This timeline depends on factors such as the complexity of the annuity product, the responsiveness of the insurance company, and the time it takes for you to complete any required paperwork or medical exams. The insurance company will issue the annuity contract after the application is submitted and approved and the payment is made.

How to buy an annuity for a lump sum payout?

To acquire an annuity allowing a lump sum payout, you’ll need to invest in a deferred annuity, such as a fixed, fixed indexed, or variable one. Once the contract period concludes, you can withdraw or transfer the entire account balance as a lump sum.

How to buy an annuity with cash?

Purchasing an annuity with cash involves paying a lump sum to an insurance company. Firstly, assess your retirement needs and understand the different types of annuities. Then, select a trustworthy annuity provider. Submit your application, indicating that you’ll be making a lump sum payment, and transfer the cash to the insurer via a wire transfer or mail in a check.

How to buy a qualified annuity?

To buy a qualified annuity, you use pre-tax dollars often through a retirement plan like a 401k or IRA. Start by identifying your retirement needs and goals. Then, explore the different types of annuities and choose the one that best suits you. Select a reliable annuity provider, complete the application, and fund the annuity using money from your retirement account via a transfer form.

How do you tell if an annuity is good for the buyer?

Assess your financial goals and retirement needs to determine if an annuity is good for you. Consider factors like the annuity’s fees, surrender charges, the insurer’s financial strength, and the annuity’s potential for income growth. Compare these factors with other investment options. Additionally, consider your risk tolerance and the annuity’s payout options.

What portion of your savings to buy an annuity?

The portion of your savings to put into an annuity depends on your financial goals, risk tolerance, and other retirement income sources. A common guideline is to invest enough to cover your necessary expenses in retirement not covered by Social Security and pensions.

Is buying an annuity at 30 a good idea?

Purchasing a fixed indexed annuity at age 30 can be a smart strategy for the safer portion of an investment portfolio. This type of annuity offers a unique blend of potential for growth linked to a market index and protection from market downturns, serving as an alternative to bonds. The earlier purchase allows for a longer accumulation phase, which can lead to a higher income during retirement.

Can I buy an annuity with my 401k?

Yes, you can buy an annuity with your 401k funds. This is typically done by rolling over the funds from your 401k into an individual retirement account (IRA) annuity without incurring taxes. This strategy can provide a steady stream of income in retirement.

Related Reading

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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