There is a lot of debate surrounding annuities. Some people believe they are a great investment, while others think they are a waste of money. So, are annuities good or bad? Unfortunately, the answer to this question is not so simple. In this somewhat-biased guide, we will explore the pros and cons of annuities and help you decide if this investment is suitable for you.
- Are Annuities Good or bad?
- Can you lose your money in an annuity?
- What are the fears of risks about an annuity?
- Why would anyone buy an annuity?
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Are Annuities Good or bad?
The answer to this question is not so simple. Annuities can have good and bad qualities depending on the person’s circumstances. So let’s explore the pros and cons of annuities so you can decide if this investment suits you.
Pro: If You’re Looking for a Guaranteed Income Stream in Retirement, an Annuity Can Help
An annuity can be a good option if you’re looking for a guaranteed income stream in retirement. With an annuity, you make a lump sum payment upfront and then receive payments from the annuity provider for a set period of time, typically for the rest of your life. This can provide peace of mind knowing that you have a guaranteed income stream to cover your basic living expenses in retirement.
Con: Annuities Come with High Fees
One of the most significant drawbacks of annuities is that they come with high fees (typically variable annuities). These fees can eat away your investment returns, leaving you with less money than you started with. So be sure to review the fee structure of any annuity before investing carefully.
My Thoughts: Fees in annuities are generally lower than having an advisor manage your money in the stock market.
- Variable annuity fees are usually 3% to 4% annually
- There are generally no fees for immediate annuities or fixed annuities.
- Fixed annuity fees range from no fees up to 1% annually.
- Managing money in the market could cost you up to 5% annually.
Pro: Annuities Offer the Potential for Growth
While annuities come with high fees, they also offer growth potential. If you invest in a fixed annuity, your money will grow at a set interest rate. And if you invest in a variable annuity, your money will be invested in a portfolio of stocks and bonds, which have the potential to provide higher returns. However, keep in mind that your investment return is not guaranteed with a variable annuity.
My Thoughts: Fixed index annuities offer the best features of a fixed and variable annuity. A fixed indexed annuity earns interest based on the rise of an index, such as the S&P 500, but without the risk of losing your principal if the market declines.
Con: Annuities Are Not Accessible
A common misconception is annuities are not accessible. However, this is not always the case. With some annuities, you may be able to take out a loan against your account value or make withdrawals without a penalty. However, it’s important to note that if you withdraw before age 59½, you may be subject to a federal income tax penalty.
My Thoughts: I’m not a fan of annuitizing an annuity contract because you lose control over your savings. Generally, a deferred annuity allows an owner to withdraw up to 10% annually without a penalty. After the contract term is completed, the annuity becomes 100% liquid. Just plan for this, and you’ll be fine.
Can you lose your money in an annuity?
The answer to this question is yes and no. You can not lose money in a fixed index and immediate annuity. However, you can lose money in a variable or registered-linked (buffer) annuity.
What are the fears of risks about an annuity?
The primary risks with annuities are market risk and interest rate risk.
- With a fixed or fixed index annuity, your interest rate is locked in for the contract’s life. So if rates go up, you will not benefit from the higher returns. However, if rates go down, your investment is protected from declining.
- With a variable annuity, your investment is subject to market fluctuations. If the stock market goes down, your investment value will also go down. However, your investment value will also increase if the stock market goes up.
Why would anyone buy an annuity?
People buy annuities primarily because of the guaranteed income stream they provide in retirement. In addition, an annuity can help you cover your basic living expenses and give you peace of mind knowing that your income is not subject to market fluctuations.
So, are annuities good or bad? The answer to this question is not so simple. Annuities can be an excellent investment for some people, while others may find them a waste of money. Only you can decide if an annuity is a suitable investment for your needs. Contact us today if you have any questions or want a quote. We will tell you if an annuity is a wrong decision or not. We would be happy to help!
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