Annuities have been the poster child of bad investments for years. Critics point to high fees, insurance companies running off with your money, and your nest egg for retirement becoming something you never get access to. While some of these criticisms may have some truth to them, they’re not all true. Missing out on using annuities to guarantee your retirement’s safety is a mistake you don’t want to make.
There is good reason to have reservations about annuities. Here are the most common criticisms and why you may want to consider an annuity anyway:
The Fees Built Into Annuity Products Are Ridiculous
For some annuities, that’s true. What most people don’t realize is these fees generally only apply to variable annuities. Variable annuities often force you to pay annual 3% to 4% fees, while also having similar volatility to an account in the market. And even if your account loses money, you’ll still be on the hook for paying those fees. Some variable annuities are too good to be true.
Opting for fixed, or fixed indexed annuity products, that produce a guaranteed return—albeit somewhat lower than variable ones—is a smart way for any retiree to guarantee safety of principal while allowing growth for future years. (For related reading, see: How a Fixed Annuity Works After Retirement.)
Insurance Companies Take Your Cash When You Pass Away
This is a common misconception. Some contracts are set up in a way that if you pass away, you forfeit those funds. These often have higher commission rates for your advisor and can leave your family feeling frustrated your retirement money is gone in the blink of an eye. But many annuities exist that allow you to leave funds to your spouse or other beneficiaries, so you can have a guaranteed income in a few years, assuming you’re still around, or if you pass away, it can be passed to whoever you’ve designated.
Some people who see these words worry they’re surrendering their money and won’t see any portion of it again. In this case, the words surrender charge mean if you choose to end the contract early, the insurance company does have a right to a portion of the principal. For example, if you put $100,000 into a 10-year annuity, and in one year you decide you want it back, the annuity company will not give you all of the original amount back because you didn't honor your half of the deal (which was to keep the annuity for 10 years).
An annuity is a long-term product. Anyone who tells you there isn’t any penalty for going back on a contract isn’t telling you the truth.
The best way to understand these misconceptions is to educate yourself about the products you're considering or work with a professional who has your best interests at heart. An annuity isn’t something you dump your entire portfolio into, and it’s not going to meet everyone’s financial goals. But it absolutely will meet the needs of those who need guaranteed long-term income for their later years and have other funds to meet current needs.
(For related reading, see: Overpriced Annuities: How to Avoid Them.)
Disclosure: Investment Advisory Services are offered through Mercurio Wealth Advisors, a Registered Investment Adviser.