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Three Annuity Mistakes To Avoid

  Sanjiv Gupta CPA  Published 
Three Annuity Mistakes To Avoid

The recently concluded Market Watch Retirement Adviser Event held in New York gave some basic insight into dealing with annuities and what are the mistakes to avoid while doing so. The immediate annuities and the deferred annuities contribute excellently to the whole retirement income strategy; however, the benefits of these are usually not utilized fully, because both consumers and financial experts make some gross errors while dealing with these.

John Olsen, president of Olsen Financial Group and an expert on annuities (he is also the author of lots of annuities books including, Index Annuities: A suitable approach), addressed the gathering and explained about the various mistakes that one should avoid while dealing with annuities. The three mistakes are explained below:

Unfair Comparisons

The common mistake that people make with annuities is about the costs. Most of them view these costs as overheads and hence there is a perception among the general public that these annuities are quite expensive. However, Olsen gave a different view of the whole concept. He advised that one should start looking at these costs as the charges for the risk that is being borne by the insurance company on behalf of the buyer. One of the major reasons for misunderstanding these annuities is that the consumers are not trained to manage risk properly and to transform their assets into income. It was also emphasized, annuities, being a product of insurance, would definitely come with the additional baggage of insurance costs. This cannot and should not be ignored by customers, at any cost. The insurance products never pay profits on average, and it imperative for the consumers to realize the fact that the insurance companies can never survive if it starts to pay off profits on average. This being a product of insurance can never be compared with other mutual funds, because that would be equivalent to comparing apples with oranges.

Focusing on Returns

Olsen advised the focusing on the rate of return when buying annuities is not the right way to deal with annuities. Though low-interest rates directly collaborate with lower pay payouts, annuities must be viewed for the absolute insurance of having a particular amount, in one’s account every month. One should consider the benefits of mortality credits while evaluating annuities. These are nothing but the process where the premiums paid by persons who die earlier than expected, yield more benefits for persons who live longer.

Failing to Annuitize

Annuitizing a particular portfolio strengthens it and reduces the risk of failure to a great extent. In addition to that, an annuitized portfolio also guarantees a steady flow of retirement income. However, most people fail to realize the benefits of annuitizing. Olsen advised that this process must be focused on more, to evaluate the benefits of annuities in a proper methodical way. The experts at the Market Watch Retirement meet, suggested the consumers that past data should not be taken as the base, as it can create a negative impact in their minds.