Why Annuities Are A Poor Investment Choice

Shawn Plummer

CEO, The Annuity Expert

Why are annuities bad? Should I invest in an annuity? Annuities are considered by many to be 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.

Related Reading: Annuities At a Glance

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, if an annuitant withdraws more than the allowed amount, penalties will be applied.

Short Term Annuities

Find annuity plans that range from 2-5 years in length.

You won’t be able to control your investment.

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

You might not have enough money for when you retire.

Different annuities provide different monthly payments. Therefore, you want to make sure that you buy an annuity that pays the highest monthly payment.

Your annuity might not earn any interest.

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

Annuities with Flexible Income

Find annuities that provide the same income for life with the flexibility to turn on and off, even cancel altogether.

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.

Annuities That Offer Increasing Income

Keep up with inflation throughout retirement to maintain your lifestyle.

Your beneficiaries will not get a benefit if you die.

Some annuitants select the highest monthly income possible in certain income annuities in exchange for zero death benefit for their beneficiaries.

Annuities with Death Benefits

Leave a lump sum death benefit for your beneficiaries.

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.

Annuities with Extra Liquidity

Find annuities that offer more access to your savings without penalties including getting your money back at any time.

High fees

Some annuities charge a lot of money. You might have the same or better result for a lot less money.

Annuities with No Fees

Find annuities that offer benefits without charging you an additional fee.

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

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Frequently Asked Questions

Is an annuity a good investment for and elderly person?

Fixed and fixed indexed annuities are a good investment for an elderly person because their principal is protected along with a minimum guaranteed interest rate. Additionally, a death benefit will typically avoid probate for beneficiaries. Long-term care annuities are a good investment for the elderly because it helps pay for a nursing home, assisted living facility, and home healthcare expenses at a fraction of the cost. Medicaid annuities are a good investment for healthy elderly spouses who have a spouse that needs long-term care help because it allows the married couple to participate in Medicaid without giving up their assets. Variable annuities are not a good investment for the elderly because money can be lost due to poor stock market performance. Immediate annuities are not a good investment for the elderly because it requires the contract owner to give up control over their money.

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. 

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