Why Annuities Are A Poor Investment Choice

Shawn Plummer

CEO, The Annuity Expert

Why are annuities bad? Should I invest in an annuity? 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.

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.

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 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.

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 annuities in exchange for zero death benefit for their beneficiaries.

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.

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

Variable
Annuity
Fixed Index
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

conclusion

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, it’s essential to weigh all of these factors and decide if an annuity is suitable for you. If you’re unsure, our team can help you determine if an annuity is a good fit for your unique financial situation.

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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.

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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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