How to Compare Annuities

Piggy Bank

An annuity is a lot like a retirement account, e.g., IRA or 401K. The main difference between an annuity and a retirement account is that you can make as many payments (contributions) as you would like to an annuity. You can also fund an annuity in one lump sum or in parts over time. Like a CD (certificate of deposit), annuities can grow at a compounded rate, tax-deferred, until you make withdrawals. Selecting the right annuity may seem like a daunting task; however, it really comes down to making a decision about three things: liquidity, the investment type and the timing of the payout.

Instructions

1. Compare the timing of the payout. Annuity payouts are either immediate or deferred. Immediate annuities pay investors as soon as they start funding the account; that is, payments begin immediately. Deferred annuities start payout at a future date, usually upon retirement; however, most allow withdrawal payments, up to 10 percent per year, after thirty days of starting your account.

2. Compare the type of investment offered. Fixed annuities offer a guaranteed rate of return and are typically invested in low risk, high grade assets such as government or agency securities. Examples of these are GRA (Guaranteed Return Annuities) and MVA (Market Value Adjustment). Variable annuities are tied to market performance. As such, they are generally higher in both risk and reward. A GRIB (Guaranteed Retirement Income Benefit) is an example of a variable annuity.

3. Compare liquidity options. These are best compared by looking at early withdrawal penalties. The most common type of annuities with withdrawal penalties are called "no-surrender." In exchange for a higher rate of return, these annuities may only allow you to withdraw up to 15 percent per year. A penalty (reduced return) will be assessed for an early withdrawal or an amount above 15 percent.

4. Compare surrender charges. These are a early withdrawal penalty fees and usually decrease over a seven year time period.

5. Compare annual fees on bonus annuities. Bonus annuities with surrender charges will offer a bonus of three to five percent for agreeing to surrender penalties; however, some companies will raise fees to pay for the bonus.

Tips & Warnings

• Avoid taxes by making a 1035 Tax-Free Exchange to another annuity (see Resources section).

References

• AnnuityFYI: Compare All Annuities
• New Retirement: Annuities -- A Valuable Tool for Retirement Planning

Resources

• Compare Annuity Rates
• MoneyRx: 1035 Exchanges for Annuities