1) If it seems too good to be true, it probably is. Buying an annuity is not like buying a new flat panel television. You’re converting a portion of your life savings into income, so avoid the latest, hottest offer and focus on the highest quality products, companies and financial advisors.
2) Don’t be overly influenced by what you read about annuities in the popular press. Mainstream media coverage of annuities is often negative—annuities, insurance companies and “high-priced salespeople” present easy targets. Search for alternative viewpoints in industry trade publications or from multiple financial advisors.
3) Receiving a formal product recommendation without a financial plan. You really need to have a financial plan in place in order to understand how an annuity might fit into the picture. A formal product pitch in the absence of a financial plan should be a red flag.
4) The hard sell. You should have the feeling that you are being educated rather than sold to. Walk away if the sales pressures seem to be front-and-center or all-consuming.
5) Misrepresentation. Product misrepresentation can be deliberate or stem from a lack of knowledge on the part of the financial advisor. In either case, the antidote is a trusted, objective and highly competent financial advisor. Also, don’t be afraid to seek second opinions on product recommendations.
6) Lack of suitability. There are loads of different types of annuities that address very specific needs and purposes. The right annuity can work very well but the wrong annuity can be disastrous. In addition, an annuity at the wrong time in your life can be very harmful.
7) Credit risk. We have all seen how quickly large, established companies can disappear. Your insurance company must be there for you well into the future, so as a somewhat absurd rule of thumb, think about buying from those companies that advertise on the weekends during major sporting events.
8) Be wary of lead generation and protect your personal information. You should be highly selective—to say the least—with whom you share your personal information unless you want to receive hundreds of dinner time phone calls from complete strangers.
9) Avoid over-reliance on calculators and software. Certain software is absolutely better than others, but there is no magic number or silver bullet that will solve all of your retirement income planning needs. Be very afraid if someone tells you they have a model that will provide definitive answers and solutions.
10) Avoid the lone-wolf strategy. Buying an annuity without the help of a professional advisor or “creating your own annuity” without an insurance company are pretty poor ideas. You need as much input and information as possible and the notion of creating your own annuity to minimize expenses is based on myth rather than sound analysis.
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