Planning to ensure that a senior has enough income to last through retirement can be tricky. There are times when an experienced estate planning lawyer may recommend the senior look to annuities to meet their financial needs. However, these financial instruments can have significant drawbacks that seniors should be aware of before signing on the dotted line.
In general, seniors appreciate that an annuity can provide a steady income during the retirement years. Annuities can be especially helpful for those who are approaching retirement age and don’t already have a good 401(k) or IRA in place, for example. On the other hand, there are some significant expenses that come along with annuity income streams, and it’s important to factor them in when making your decisions regarding this type of investment. They include:
The amount you pay in annual fees will depend on several factors, including the company you use and the type of annuity you purchase. A variable annuity, for example, will be subject to higher annual fees than a fixed annuity. It is not unusual for annual fees to add up to 3% a year or even more. This definitely needs to be taken into consideration when planning for what your eventual payout will be. Losing a chunk of your money every year will affect the overall value of your annuity. Be sure to have your estate planning lawyer compare annual rates for different annuities that you might be considering.
Having your annuity money sitting there can provide quite a temptation when you find yourself in need of cash. You may still have access to the cash, but not for free. If you want to pull money out early, you will likely face a pretty steep surrender charge, which is usually higher earlier on in your account’s history. For example, you could be charged as much as 20% for taking money out in the first year, with the percentage dropping each year after that. Surrender periods can range from 5 to 15 years.
Do not forget that annuities are insurance products. Even when working with a reputable estate planning lawyer, you will need to purchase your annuity through some kind of insurance salesperson. This salesperson or broker will be entitled to a commission for selling you the product. This commission will vary based on many different factors, but it is not unreasonable to expect to pay 10%.
Annuities can be used for Veterans benefits or Medicaid planning purposes. However, having the wrong kind of annuity can be an expensive nightmare in these same circumstances. If you need to “un-do” the annuities to get into the right kind of annuity, you need to consider not only the surrender charges but also the income tax consequences. If you are planning to access long-term care benefits, be sure to have an estate planning lawyer review your current annuities and any annuities you are looking to purchase.
Again, an annuity might be a great option for your situation. These are just some considerations to make. For a fuller understanding, meet an experienced estate planning lawyer to review your needs and options. If you are ready to get started, we invite you to contact me at 916.247.6868 to schedule an appointment.