Are annuities good investments? Weigh the pros and cons
Some people may like annuities.
Some people may hate them.
Of course, in many cases, a person’s views on annuities Often it’s not just about personal preferences, but also about whether they make money on it. A financial professional who sells annuities but has nothing else to offer potential clients will likely point you in the direction of annuities. Likewise, someone who is not authorized to sell annuities will steer you away from it, quickly jumping on any real or perceived faults with that investment option.
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Both sides are incorrect.
Annuities can be a smart investment – for the right person under the right circumstances. It is not a financial cure-all nor is it an investment that should be considered taboo.
If you think of all the potential investments out there as tools crammed into one big toolbox, annuities are just one of those tools. With an actual toolbox, if you need to hammer a nail into a board, you reach for a hammer, not a screwdriver, because you need the right tool for the job at hand.
pensions in the same way. It’s a tool to consider reaching for when the situation calls for it. One of the benefits of annuities, for example, is that they can be set up to provide you with a lifetime source of income. Some even have options to include your spouse. This is an important thing to consider for anyone worried about running out of money in retirement.
For all the good they can do, annuities draw a lot of criticism—some maybe worth it, some not so much. Let’s explore some of the things that have been said about annuities and put the record straight.
One criticism of annuities is that they come with high fees. (A particularly sharp critic describes them as “nose-level fees.”) This is disingenuous, however, because there are different types of annuities, and how different the fees are.
Fixed annuities, for example, can have no fees at all. It works similar to a Certificate of Deposit (CD): You invest your money at a fixed interest rate for a specified period of time, and your return is guaranteed. CDs are Guaranteed by the Federal Deposit Insurance Corporation (FDIC) (Opens in a new tab), and annuities are backed by the financial strength and ability of claims payable to the issuing insurance company. Fixed-index annuities can have fees and sometimes have little or no fees.
To be fair to the critics, the annuity that the higher fees share is the variable annuity. But even when there are fees on annuities, it can be shown that people get value for the fees they pay, especially when there is an income rider that provides a lifetime income. What’s more, if your lifetime income stream includes a cost-of-living adjustment and some additional benefits you can start to help offset the costs of long-term care.
Another concern some investors have about annuities is that they create tax issues. Yes, the monthly income stream that an annuity provides can be taxable, but people usually buy an annuity from their retirement savings. This savings is usually in Traditional IRAs or 401(k)swhich is taxed anyway when withdrawals occur.
There is no difference between the tax rate on an annuity and the tax rate on an IRA account or a 401(k) withdrawal. So yes, there can be taxable income when the money is distributed, but it’s basically the same issues many taxpayers would have anyway.
Lack of liquidity
If you own a stock and want to get rid of it, you can easily sell it and get your money back in a few days. The speed at which you can convert an investment into cash is called liquidity, and one criticism of annuities is that they are not highly liquid. This is because they are designed to be long-term investments for retirement income.
Once you invest in one, critics say, you’re stuck. It’s kind of possible to withdraw a certain amount of your money from the annuity each year without penalty, but there are waiver fees designed to discourage you from withdrawing the entire amount. Paying this surrender fee can be financially painful.
But here are my thoughts on the liquidity issue: If you have an annuity with interest for life, why would you want to cash it out? I can’t think of a reason.
Long and complex contracts
Yes, it’s true — as some critics gleefully point out — annual contracts are decent-sized documents. But while this can be frustrating when you have to read page after page of legal language before signing, it’s not a bad thing. After all, you want the contract to be detailed to make sure that those lifetime guarantees I gave you are in writing. A few paragraphs won’t make it happen.
Also, contracts aren’t as complicated as some people make them out (I mean, come on, did you see the size of some flyers?), so don’t let yourself be overwhelmed or misled. You can always seek advice if you encounter anything that confuses you.
Finally, those who find fault with annuities sometimes also claim that annuities are only good for the advisor who sells them because that person receives a commission.
As I mentioned before, this could be a legitimate issue to grumble about if a financial professional is licensed to sell annuities and nothing else. But you can too Find a financial professional Which has a more diversified set of financial instruments. This person can ask questions, understand your needs, and create a financial plan that meets those needs.
Ronnie Blair contributed to this article.
Appearances at Kiplinger were obtained through PR software. The columnist received assistance from a public relations firm in preparing this article for submission to Kiplinger.com. Kiplinger was not compensated in any way.
Investment advisory products and services are provided by AE Wealth Management, LLC (AEWM), a registered investment advisor.
Insurance products are offered by the Miller Retirement Group. The Miller Retirement Group is also an investment advisory practice that provides products and services through AE Wealth Management, LLC (AEWM), a registered investment advisor. AEWM does not offer insurance products. Insurance products offered by Miller Retirement Group are not subject to investment advisor requirements. AEWM and Miller Retirement Group are not affiliated companies. 1597118 – 12/22