The goal of every long term investor should be to try and beat the major indices. The S&P 500 is, and typically has been, the index to beat as it is most indicative of the health of the U.S. economy. So, when you are purchasing an annuity, investing in mutual funds, or any other retirement planning, this should be one of your goals: beat the average for the economy. If you are below average, your money still might be growing, but you are definitely not growing it at the rate that you could be.

Where should you start? This is a tough question, and since we are focusing on annuities here, this is what we will look at. There are two major types of annuities, and each has strengths and weaknesses. We’ll start with fixed annuities as they are often the most misunderstood of these retirement planning tools. Also, remember the state you are located in when deciding.

Fixed Annuities

A fixed annuity should never return less than 3 percent to you. This is the average that the U.S. economy grows by each year, and 3 percent is very realistic to ask for in a retirement account. Fixed rate annuities are sometimes seen as a generic thing, and that 3 percent is 3 percent, but this isn’t quite the case. For example, some accounts will offer you a bonus upfront, and then pay interest on that bonus. These should be your primary goal here as not only are you getting free money with the bonus, but you are growing interest on that free money, too. If you deposit $10,000 into a policy, receive a 10 percent bonus ($1,000), and then get 3 percent interest on it each year, you’re not just getting a 10 percent bonus, but actually a 13 percent bonus as you will have $300 extra in your account that you wouldn’t have had otherwise. This adds up a lot over the course of 20 or 30 years, and suddenly that 10 percent is worth twice as much or more. Avoid policies that do not pay interest on bonuses if possible. Also, remember that if you surrender your policy early, you might have to give up the bonus amount plus any interest gained by it.

Variable Annuities

When you start looking at variable annuities, things become much more complicated. These will shift more dramatically in value on a daily basis than a fixed account will as they move with the markets, so you will want to look at past performances in order to gauge the health of the fund that the policy is a part of. Working with a licensed agent will help you to figure out the ins and outs of what is available, but be sure to inspect any prospectus that is offered before you commit. These should outline the goals of the fund as well as give you an idea of how well the fund has performed compared to the benchmark. In most instances, the benchmark will be the S&P 500, and if the fund is consistently beating that, then you will know that your goal has been accomplished in the past. If it’s been hit in the past, there’s a higher degree of likelihood that it can be done again. Like with mutual funds and other long term investment funds, variable annuities will show the percentage comparisons to the benchmark over applicable years, usually 1, 5, and 10 years, if the fund has been around that long. The longer you are keeping your money in the market, the less you should compare the fund to the shorter timeframes, and the more you should focus on the longer ones.