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Tips for Deciding on an Annuity

Part of the Annuities For Dummies Cheat Sheet

If you're considering an annuity, take a serious look at your personal situation. Examine the following points when shopping for an annuity to see what type best fits your needs or if you should even get an annuity:

  • Assess your needs. After you estimate your living expenses in retirement and identify all sources of income, you'll know whether you'll need an income annuity.

  • Consider your options if you don't have a traditional pension. Like most people, you may not retire with a traditional pension. But you can use an income annuity to build a do-it-yourself pension.

  • Get familiar with your "risk tolerance." Determine what risks you can tolerate and which ones you can't. For example, if a 500-point drop in the Dow doesn't deprive you of sleep, then you probably don't need a life annuity.

  • Expect trade-offs in risk and reward. Annuities are insured investments, which means they protect you from some of the risks that accompany investing. But greater safety often means smaller gains, so some risks may be worth taking.

  • Count on living longer. Don't assume you'll die young — most people underestimate their lifespan by several years, and half of all 65-year-old Americans will live past age 83. Look at annuities that can help with extended retirement funding.*Guard the womenfolk! Women tend to outlive their husbands, and therefore have a much greater risk of running out of money during their lifetimes. That's why prudent couples buy "joint-and-survivor" life annuities.

  • Protect yourself from inflation. The rising cost of living can erode your purchasing power in retirement. An income annuity with an inflation rider or a variable income annuity can help.

  • Look at how much you need to spend. An advanced life deferred annuity (ALDAs) is an inexpensive way to guarantee yourself an income in late retirement while pumping up your spending power in early retirement.

  • Get a discount for less-than-ideal health. If you think you'll have a shorter-than-average lifespan, check out "impaired risk" annuities. They'll give you bigger-than-average monthly payments.

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