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While most Americans are feeling the pinch caused by ongoing economic uncertainties, perhaps no group feels its impact as strongly as seniors, especially those on a fixed budget. Despite easing slightly, inflation is still hovering around 2.4%, according to the Bureau of Labor Statistics. And, prices for food and shelter, in particular, are putting pressure on seniors’ budgets and are largely responsible for rates remaining above the Fed’s 2% target rate.
On top of that, stock market performance has been tenuous at best recently, as evidenced by the S&P 500 dropping nearly 18% earlier this spring. While the index has since bounced back, further turbulence from trade policy uncertainty, global conflicts and other economic factors could potentially impact many seniors’ retirement savings.
Concerns about retirement security are leading more seniors to take a closer look at annuities. These insurance products offer steady income in retirement, protection against outliving your savings and guaranteed payouts. They can be complex, though, so it’s important to understand how they work to avoid some of the common annuity mistakes seniors often make.
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4 annuity mistakes seniors should avoid making, retirement pros say
If you’re a senior who’s planning to open an annuity, make sure you avoid these major mistakes during the process:
Not understanding the fees
One of the biggest annuity mistakes experts mentioned was not understanding the fine print of an annuity contract, which could lead to unexpected fees and penalties.
“Watch out for surrender charges, recurring fees for riders and withdrawal penalties,” says Patrick Huey, owner of Victory Independent Planning and creator of the VIP Retirement Glidepath. “If you don’t understand how long your money is tied up or what it costs to get it back out, keep asking questions.”
Given the potential fees you could incur, it’s important to avoid signing up for any annuity until you’ve verified that it helps you achieve your long-term goals.
“Make sure you know exactly how this contract fits into your larger financial plan. If it feels like alphabet soup, get a second set of eyes before you commit,” Huey says.
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Choosing the wrong type of annuity
An annuity can offer peace of mind in retirement, but you need to make sure it truly fits your situation, experts say. The last thing you want is to end up stuck in a long-term contract that doesn’t meet your monthly income needs or match your risk tolerance level.
So how can you make sure you’re getting the right type of annuity?
“The decision will be different depending on your goals,” said Melissa Caro, CFP and founder of My Retirement Network in New York. “If you need guaranteed income now, an immediate annuity works best. For growth with some downside protection, consider indexed annuities. Fixed annuities suit those wanting predictable, conservative growth.”
To avoid this mistake, make sure you’re very clear on your goals for income, death benefit and liquidity before buying the annuity, says David Haas, president of Cereus Financial Advisors.
“I also think a CFP who views annuities as tools instead of products can help the senior find the best solution to the problems they are trying to solve,” says Haas.
Not designating a beneficiary
Failing to name a beneficiary can prevent your annuity benefits from passing on to a loved one. For example, if you die 10 years into a 20-year annuity, your spouse or beneficiary might receive payments for the remaining 10 years if the contract allows for it. But that only works if you’ve properly named them as a beneficiary in the contract. It’s important to note, there are various death benefit options you could choose from but they rely on a clear beneficiary designation to avoid serious consequences.
“Without proper beneficiary designations, annuity proceeds go through probate,” says Caro. “For married couples, not naming a spouse as beneficiary can result in loss of valuable spousal continuation rights, where the surviving spouse can take over the contract and maintain its tax-deferred status.”
Withdrawing excessive funds
Another annuity mistake seniors often make is taking out too much money early on. Remember, annuities are designed for long-term retirement income, so taking out too much money early can trigger fees and penalties. It could also reduce your future income, lower your death benefit and make your retirement less secure.
“Annuities are not piggy banks, they are more like hourglasses. They work properly when you take the amount out they are designed for. If you take larger withdrawals, the annuity will fail to do what it was designed for. Withdrawals above the guaranteed amount will reduce the guarantee,” Haas says.
The bottom line
If you’re thinking about an annuity, take your time and compare multiple providers. Look at the different features, fees and how the payouts work. Just as important, make sure the company is financially strong. Before investing in an annuity, you should also be sure to understand what you’re agreeing to. The contract should make sense to you and match your goals for retirement income.
“After two decades working with retirees and navigating the annuity maze, I’ve learned one thing: no two plans, or people, are alike,” says Huey. “The products themselves aren’t inherently good or bad, it’s how and why you use them that counts. If I could pass on one thing to seniors considering annuities, it would be this: slow down, ask more questions, and make sure every piece of the puzzle makes sense in your broader plan.”