Choosing the Best Annuity Rate

Choosing the right retirement plan is perhaps the most important decision you can make to ensure a secure retirement. However, it is evident that many people fail to adequately plan for their life after retirement. The old saying, “if you fail to plan, you plan to fail” definately applies in this situation. One method of providing for retirement is annuities.

What are Annuities?

For those who may not know about annuities, an annuity is a contract between an individual and an annuity provider so that the individual will be receiving a regular income after his/her retirement in exchange for either a lump sum amount or periodic payments. There are two phases to an annuity, the accumulation phase and the distribution phase. The amount you receive monthly during the distribution phase is based on the value at the time of conversion from accumulation to distribution. Obviously, the higher the value at conversion the more your monthly income will be. The accumulation phase can be as long as you desire, it can be immediately after a lump sum investment or after a lump sum plus a growth period or after (regular or irregular) periodic payments.

The sooner you set up an annuity the better off you are. This for two reasons.

The longer you contribute to the annuity the more you will have to fund the contract when it begins to payout.
The sooner you start periodic payments the more payments you will accrue before distribution.

Annuity vs. Pension

An annuity is similar to a defined benefit pension in that you will receive a set amount every month for the rest of your life no matter how long you live.Therefore, you need to consult your company on this before you choose an annuity. If your employer provides a pension based on your final salary, then you may not need an annuity.

How do you choose the best annuity for you?

Once you have signed an annuity quote, you cannot reverse it without paying a hefty penalty so be sure you know what you are doing first. But if you think an annuity might be right for you, it is advisable to compare annuity quotes from several different annuity providers, including your pension provider. Normally, your pension provider will send you an annuity rate quote based on the final value of your retirement savings prior to your retirement date. Obviously, they want you to consider choosing their annuity plan. However, you need to choose the best annuity based on your situation. Although their quote may offer the best annuity rate, it is worth comparing it to other annuities to be sure. Also note that rate isn’t everything, there are other factors involved in how much your monthly payment will be.

Type of Annuities

Choosing the best annuity may be a bit tricky as there are different types of annuities. Therefore, it is advisable to understand all the annuities before you to choose the best annuity. Here are some of the types of annuities;

An annuity could be single, joint or guaranteed

A single annuity

is a contract where only the annuitant receives a regular income after his retirement. The annuitant’s spouse gets nothing after the death of the annuitant.

A joint annuity

on the other hand, includes the spouse in the contract. The annuitant’s spouse continues receiving the agreed amount of income even after the death of the annuitant. The down-side is that the monthly payout will be lower since it has to last for the lives of two people. A better (more economical) option might be a single annuity combined with a life insurance policy to provide for the surviving spouse. The other alternative is a guaranteed annuity.

A guaranteed annuity

runs for a specific period of time. In case the annuitant dies before the end of the agreed period of time, the spouse or the estate continues to receive regular income until the specified time elapses. Of course in this case you can outlive the payments as well.

What determines the best annuity plan?

Looking at the above types of annuities, it is clear that choosing an annuity plan may not be that easy. First, you need to determine when your annuity income should start. The annuity provider will calculate your annuity income based on your age and life expectancy of when you want to start receiving your annuity income. The younger you are when you start the distribution phase of the annuity, the less amount you will receive each month, since you will be receiving annuity income for a longer period of time.

The other important factor you need to consider when choosing an annuity is finding the best annuity rate. For starters, calculating your annuity rates may be quite challenging. However, it is now easy to calculate the best annuity rates by using an annuity calculator. There are hundreds of online companies offering these calculators for free. The annuity rate is a big factor determining your monthly income. The distribution phase of an annuity is sort of like a mortgage in reverse. You pay the company the distribution amount as a lump they pay you principle and interest for the rest of your life, based on their best estimate of how long you will live (only the interest portion is taxable). Logically, if you find a company that is willing to pay a higher interest rate and/or estimates your life expectancy to be shorter, you will receive more each month than from a company that expects you to live long and/or is paying a lower interest rate.

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