1. Investing too much money
Annuities are a great source of lifetime income, but sometimes they can be rigid.
Immediate annuities generally pay out a lot more than interest on CDs and other fixed investments-for example, a 65-year-old man who invests $100,000 in an immediate annuity can currently get about $6,700 per year for life.
But part of those payouts is a return of your principal, and to get the extra income, you have to give up control of the money: After you give the insurer the lump sum for an immediate annuity, you can’t take it back. That’s why advisors generally recommend investing no more than 25% to 30% of your assets in an immediate annuity.
2. Withdrawing too much money
Variable annuities with guaranteed minimum withdrawal benefits usually let you take out 5% to 6% of the guaranteed total value each year. If you take more money than that, you can jeopardize the guarantee.
The consequence varies by annuity. Some recalculate the guaranteed amount based on the extra money you withdraw and others will reset the guarantee based on a much lower payout amount or even nullify the guarantee.
Before withdrawing more than the permitted amount, find out exactly how the extra withdrawal will affect your guarantee.
3. Ignoring the Insurer’s Financial Strength Rating
No matter what type of the annuity you get, you’re counting on the annuity to pay out for the rest of your life., which could be 20 or 30 years or more.
Picking a company with a solid financial strength rating is essential. Many advisors recommend choosing annuities from insurers that are rated A or better.