Why Annuities Are A Poor Investment Choice

Shawn Plummer

CEO, The Annuity Expert

Why are annuities bad? Are annuities a good investment? Many consider annuities one of the best ways to invest for retirement. They offer a guaranteed income stream backed by the insurance company issuing them, and they have historically had higher returns than other conservative investments. But why do annuities make such poor investment choices? We will look at why annuities are not worth it in this guide.

How Are Annuities Investments?

An annuity is an investment that can provide tax-deferred growth and income during retirement. There are two basic types of annuities: fixed annuities and variable annuities.

A fixed annuity pays a guaranteed rate of return, while a variable annuity’s rate of return is based on the performance of a market index, such as the S&P 500

Many people use annuities as a way to supplement their retirement income. Annuities can be especially beneficial for those who have invested heavily in stocks or bonds, as they provide a source of income that is not dependent on the stock market. 

There are different annuities, but one of the most popular is the fixed index annuity. This type of annuity offers tax-deferred growth and protection from downside risk while providing the potential for upside growth. As a result, fixed index annuities can be a great way to help you reach your retirement goals.

Are Annuities A Scam?

Investing can be a tricky business. There are many options, and knowing which is right can be hard. For example, annuities are one type of investment that has been getting much attention lately. But are they a good option?

An annuity investment can be a great way to build up your retirement savings. They offer a guaranteed income stream that can help you cover your expenses in retirement. And, unlike other investments, you don’t have to worry about losing money if the stock market worsens.

Of course, annuities come with some downsides as well. The fees can be high (variable annuities), and it can be challenging to get your money out if you need it before retirement. Also, if you die before you reach retirement age, your beneficiaries may not receive the total value of your investment (immediate annuities).

So what’s the verdict? Are annuities a scam? No, they’re not. But like any other investment, they’re not suitable for everyone. So be sure to do your research before deciding where to invest your hard-earned money.

Reasons Why Annuities Make Poor Investment Choices

  • Annuities are long-term contracts with penalties if cashed in too early.
  • Income annuities require you to lose control over your investment.
  • Some annuities earn little to no interest.
  • Guaranteed income can not keep up with inflation in certain types of annuities.
  • The annuity might not provide a death benefit to your beneficiaries.
  • Annuities offer regular but limited liquidity, sometimes none at all.
  • Fees can be high in investment-based annuities.
  • You have to wait until age 59.5 to withdraw from the annuity.

Long-term contracts

Annuities are long-term contracts (3 to 20 years in length), and like most contracts, penalties are attached if you break the contract. Typically, annuities allow for withdrawals without a penalty. However, penalties will be applied if an annuitant withdraws more than the allowed amount.

You won’t be able to control your investment.

Some annuities require you to give up control over the money in exchange for an income stream. Who wants to give up control?

You might not have enough money for when you retire.

Different annuities provide various monthly payments. Therefore, you want to ensure that you buy an annuity with the highest monthly payment.

Your annuity might not earn any interest.

Some annuities do not provide enough growth potential. Limited growth means the retirement plan does not grow fast enough and has less money when you retire.

Annuity income may not keep up with inflation.

Annuities offer a lifetime income. However, not all annuities offer inflation-adjusted income. If you start your lifetime income too early, you might not be able to keep up with the cost of living, and you will not have enough money in later years.

Free Tool: Annuity Payout Calculator

Your beneficiaries will not get a benefit if you die.

Some annuitants select the highest monthly income possible in certain annuities in exchange for zero death benefits for their beneficiaries. This negative can be corrected by purchasing a deferred annuity with a guaranteed lifetime withdrawal benefit. The death benefit will be the annuity’s remaining account balance in a lump sum.

Helpful tip: Life insurance might be a good option if you want to leave money to your beneficiaries. You don’t have to take a medical examination in some cases. Compare quotes online to see if you can purchase cheap life insurance. Coverage starts at $9.37 per month.

Limited to no liquidity

An annuity may provide only a limited amount of liquidity each year without a penalty or fee. Some annuities offer no liquidity whatsoever.

High fees

Some annuities (not all) charge a lot of money. You might have the same or better result for a lot less money.

You have To wait

Annuity owners can receive an early withdrawal penalty from the IRS if they collect income from the annuity too early.

Annuities At A Glance

Fixed Index
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

Next Steps

Annuities can be a poor investment for many people. The main drawbacks are the long-term contract, loss of control over your investment, low or no interest earned, and high fees. There are also fewer liquidity options with annuities, and you must wait until age 59.5 to withdraw any money from the annuity without penalty. So before investing in an annuity, weighing all of these factors and deciding if it suits you is essential. If unsure, our team can help you determine if an annuity fits your unique financial situation.

Why Annuities Are Poor Investments?

Find Out If Investing In An Annuity Is A Poor Choice For You

Contact Us

Frequently Asked Questions

Who should not buy an annuity?

Investors seeking short-term investments to invest around frequently, individuals with little or no liquid assets, and persons wanting to spend their earnings before they reach full retirement age are people who shouldn’t purchase an annuity.

Is an annuity a good investment for an elderly person?

An older adult can purchase different annuities if they are of sound mind and body. Fixed and fixed indexed annuities are protected, and you usually get a minimum guaranteed interest rate. If something happens to you, the people who inherit your annuity will not have to go through probate. Long-term care annuities can help you pay for a nursing home, assisted living facilities, and home healthcare expenses. Medicaid annuities can help married couples with a spouse who needs long-term care. The annuity allows the healthy spouse to keep their assets and still participate in Medicaid.

What is wrong with annuities?

Annuities can be a good option for most people, but some drawbacks. The main ones are the long-term contract, loss of control over your investment, low or no interest earned, and high fees. There are also fewer liquidity options with annuities, and you must wait until age 59.5 to withdraw any money from the annuity without penalty.

Should a 70-year-old buy an annuity?

Suppose they are of sound mind and body. In that case, a 70-year-old can invest in different types of annuities to help them protect their savings, earn a guaranteed interest rate, save money on long-term care expenses, and pass an inheritance to beneficiaries without having to go through probate. In addition, Medicaid annuities may assist married couples with a disabled spouse by allowing them to participate in their state’s Medicaid program without becoming impoverished.

Related Reading

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

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

Scroll to Top