Are Annuities A Good Investment?

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Why Invest In Annuities?

  • Guaranteed Income for Life: This is the hallmark of annuities. Knowing you’ll receive a steady paycheck, regardless of how long you live, can provide peace of mind.
  • Protection from Market Volatility: Annuities can offer a buffer against the ebb and flow of the market, ensuring your principal remains intact.
  • Tax-Deferred Growth: Your investment grows tax-free until you start making withdrawals, potentially allowing for more substantial growth.
  • Longevity Protection: As a hedge against inflation, certain annuities can increase payouts over time.
  • Higher Rates than CDs and Savings Accounts: Annuities often offer more competitive rates, leading to better returns.
  • Creditor Protection: In many states, annuities are protected from creditors, ensuring your investment remains untouched.
  • Investing Without Risk: Fixed indexed annuities provide the potential for growth based on market performance without the risk of losing your principal.
Are Annuities Good Investments

Annuity Comparison

Type of AnnuityBenefitsDrawbacks
Immediate AnnuityProvides income immediately after a lump sum payment. Predictable and guaranteed income. Can provide income for life.No access to the principal after purchase. May not keep up with inflation. No potential for capital appreciation.
Deferred AnnuityAllows for tax-deferred growth. Flexibility in when to start receiving payments. Potential for capital appreciation.Withdrawals before a certain age can result in penalties. Fees can be high. May have surrender charges.
Fixed AnnuityGuaranteed rate of return. Predictable and stable income. Low investment risk.Returns may be lower than other investments. May not keep up with inflation. Limited growth potential.
Variable AnnuityPotential for higher returns based on market performance. Can invest in a variety of sub-accounts. Tax-deferred growth.Investment risk is higher. Fees can be high. Value can decrease based on market conditions.
Indexed AnnuityPotential for higher returns based on a specific market index. Provides a minimum guaranteed interest rate. Limited downside risk.Limited maximum returns. Can be complex and hard to understand. Fees can be high

Helpful Tool: Check out the best annuity rates

Annuity Good Investment

Why Annuities Are Good?

Beyond the benefits above, annuities can help you avoid probate, offer long-term care insurance options, and even assist with Medicaid eligibility. Their versatility makes them a valuable tool in many financial portfolios.

Helpful Tip: Annuity investment calculator

Are Annuities A Good Investment

What Are The Problems With Annuities?

However, like all investments, annuities come with their set of challenges:

  • Long-Term Contracts: Committing to an annuity means you’re in it for the long haul, often with penalties if cashed in too early.
  • Lose Control Over Your Investment: Once your money is in an annuity, it’s not as accessible as a regular savings account. (Immediate annuities)
  • Might Not Provide a Death Benefit: Some annuities don’t offer benefits to your beneficiaries upon your demise.
  • Limited Liquidity: While some offer regular but limited withdrawals, others might not offer any liquidity at all.
  • High Fees: Variable and RILA annuities can come with hefty fees, eating into your returns.
  • Age Restrictions: You typically must wait until age 59.5 to withdraw without incurring IRS penalties.
Is An Annuity A Good Investment

Why Are Annuities Considered Bad Investments By Some?

The primary criticisms revolve around their long-term contracts, the potential for earning little to no interest, and the high fees associated with some types. The limited liquidity and age restrictions can deter those seeking more flexibility.

While annuities can be suitable for certain investors, they do come with potential drawbacks. Here are reasons why some consider annuities to be bad investments:

  • High Fees: Variable annuities, in particular, can come with high annual fees, including mortality and expense charges, administrative fees, and sub-account management fees.
  • Surrender Charges: Many annuities have surrender charges, which are fees for withdrawing money from the annuity before a specified period.
  • Limited Returns: Some annuities, especially indexed annuities, might limit the potential returns, meaning you might not fully benefit from a strong market performance.
  • Complexity: Annuities can be complex products with various riders, options, and features that can be difficult for the average investor to understand.
  • Illiquidity: Annuities can tie up your money for a significant period, making it challenging to access funds when needed.
  • Tax Implications: While annuities offer tax-deferred growth, withdrawals can be taxed as ordinary income, which might be higher than capital gains tax rates.
  • Potential for Loss: With variable annuities, principals are likely to be lost if the investments in the sub-accounts perform poorly.
  • Sales Pressure: Some annuities are aggressively marketed, and investors might be pushed into products that aren’t suitable for their needs.
  • Lack of Dividend Benefits: Unlike some other investments, annuities don’t provide the benefits of qualifying dividends, which are taxed at a lower rate.
  • Inflation Risk: The fixed payments from certain annuities might not keep up with inflation over time, eroding purchasing power.
  • Credit Risk: If the insurance company issuing the annuity goes bankrupt, your investment might be at risk, although there are some state guaranty associations that provide limited protection.
  • Limited Death Benefit: Unless you purchase an additional rider, the death benefit for variable annuities might be limited to the account value or the original investment, which can be less than the potential death benefit from other investment vehicles.
  • Opportunity Cost: By locking money in an annuity, you might miss out on other investment opportunities that could offer better returns.

What Is Better Than An Annuity For Retirement?

While annuities offer many benefits, they’re not the only retirement tool. Depending on your financial goals, traditional investments like stocks, bonds, or real estate might provide better returns. It’s essential to weigh the pros and cons and consult a financial advisor to determine the best fit for your situation.

Annuities At A Glance

Variable
Annuity
Indexed
Annuity
Fixed
Annuity
Immediate
Annuity
Deferred
Income
Annuity
Principal ProtectionNoYesYesYesYes
Access To PrincipalYesYesYesNoNo
Control Over MoneyYesYesYesNoNo
Tax-Deferred GrowthYesYesYesNoNo
Guaranteed GrowthNoYesYesNoNo
Guaranteed IncomeYesYesYesYesYes
Inflation ProtectionYesYesNoYesYes
Death BenefitYesYesYesYes/NoYes/No
Long-Term Care HelpYesYesYesNoNo
Why Annuities Are Bad Investments

Conclusion: are annuities a good investment?

Annuities are multifaceted investment tools offering significant advantages and notable drawbacks. Their guaranteed income for life, protection from market volatility, and tax-deferred growth make them an attractive option for many. However, their long-term nature, potential fees, and age restrictions can be off-putting for some.

In my experience, the key is understanding your financial needs and goals. Annuities can be a powerful tool in the right circumstances, but they’re not a one-size-fits-all solution. As with all investments, due diligence, research, and consultation with trusted financial professionals are paramount.

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Frequently Asked Questions

What is an annuity?

An annuity is a financial product that offers a regular stream of payments in exchange for an initial investment over a specific period. It is often used as a retirement strategy to ensure a steady income later in life. Annuities come in two types, immediate or deferred, and can be fixed or variable depending on when payments commence and how returns are calculated. Insurance companies typically sell them, and the contract terms can vary significantly.

Why should you not buy annuities?

Annuities are long-term investments for retirement, not short-term investments to spend before retirement.

What are the pros and cons of annuities?

Annuities offer guaranteed income, the potential for higher returns, and tax-deferred growth but can also have high fees, limited liquidity, investment risk, surrender charges, and reduced control. Understanding the terms and weighing the pros and cons before deciding is essential.

Are annuities a good investment?

Annuities can be a good investment option for individuals seeking a steady stream of income during retirement. They provide a guaranteed income for life or a specific period, protecting against market volatility. However, annuities may not be the best choice for everyone, as they often come with fees, limited liquidity, and may not keep up with inflation. It’s important to carefully weigh the pros and cons before investing in annuities.

What are the pros and cons of annuities?

Annuities offer a predictable income stream during retirement, but they also have their drawbacks. The pros of annuities include guaranteed payments, tax-deferred growth, and protection against market volatility. On the other hand, cons include high fees, limited access to funds, and potential loss of purchasing power due to inflation.

What is an annuity deposit scheme?

An annuity deposit scheme refers to a financial arrangement in which an individual makes regular deposits over some time to secure a fixed income stream for the future. This scheme offers a reliable and predictable source of income, making it a popular choice for retirement planning. Annuity deposit schemes are commonly offered by insurance companies and financial institutions.

Is an annuity a good investment for an elderly person?

An annuity can be a good investment for an elderly person, as it offers a steady stream of income throughout retirement. This can provide financial stability and help cover living expenses. However, it’s important to consider individual circumstances, such as health and financial goals, before deciding if an annuity is the right choice. Consulting a financial advisor is recommended for personalized advice.

Are annuities worth it?

Annuities can be worth it for individuals seeking a steady stream of income in retirement. They offer tax-deferred growth and the option for guaranteed lifetime payments. However, it’s important to carefully assess the terms, fees, and potential limitations before committing to an annuity.

Is a fixed annuity a good investment?

A fixed annuity can be a good investment for individuals seeking a reliable source of income in retirement. With a predetermined interest rate and guaranteed payouts, it offers stability and security. However, it may not be the best option for those looking for higher returns or flexibility in accessing their funds. It is advisable to consult with a financial advisor to determine if a fixed annuity aligns with your investment goals and risk tolerance.

When is an annuity a good idea?

An annuity is a good idea when individuals want a guaranteed income stream during retirement. It can provide financial security by offering regular payments that last for a specific period or their entire lifetime. Annuities can be particularly beneficial for those with no other pension plans or limited knowledge of managing investments.

Are annuities high risk?

Generally, annuities are considered low risk, especially as a strategy to shield retirement funds from market volatility. Fixed annuities, for example, provide stable returns. However, variable annuities carry some risk as their performance depends on the underlying investment options, and it is possible to lose money with them. The risk level depends on the type of annuity you choose.

Are annuities index-linked?

Yes, some annuities are index-linked, particularly fixed-indexed annuities. These annuities tie your returns to a market index, such as the S&P 500. While they provide a degree of market participation, they also typically offer a level of protection against market losses. The exact terms, such as caps on returns and protection levels, depend on the specific annuity contract.

Are annuities only for retirement?

No, annuities are not exclusively used for retirement purposes. They are versatile financial tools that can be used in various situations. For instance, annuities are often utilized for structured settlements in court cases, providing consistent payments to the beneficiary over time. Additionally, lottery winners frequently opt for annuities to receive their winnings in periodic payments rather than a lump sum, helping manage large amounts of money more effectively and potentially reducing tax burdens.

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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