Why an Annuity May Not Be Right for You

In the financial world, you often hear financial advisors being criticized in the media for recommending annuities. Financial gurus that are especially critical of annuities may have some valid points. These investment vehicles are not always the best option for every individual. However, there is a time and place for everything. When you’re trying to maintain low client expenses and create a comprehensive financial plan, an annuity, compared to many other options available, may not be the best choice.

So what are some of the reasons a person may not want to consider to purchasing an annuity?

Perhaps you possess the necessary expertise required to manage your investments, and you don’t need an annuity company to do that for you. There are also other investment vehicles such as mutual funds or ETFs available. Both of these may offer higher potential returns.

Annuity Fees

Another reason an annuity might not be the best choice is the fees can be high. Ask yourself these questions. What is my surrender charge? What are my mortality and expense fees? What is my cap rate? Will I participate in dividends? The list goes on and on. When you compare these charges to the many other investments out there, you often discover that your fees can be two and three times more.

If you are good at managing your finances and spend less than you earn, you will probably not benefit from an annuity. The same will be true if you like to control how your money is invested. Fixed annuity companies place your money into their general account, which they in turn invest. If you are hoping to earn the maximum return on your investments, that likely won’t happen. It’s important to understand that an annuity invested in the same investments will make far less once the annuity charges are factored in. (For related reading, see: Passing the Buck: The Hidden Costs of Annuities.)

So when exactly is an annuity a wise choice? When you need to defer taxes, annuities may benefit you. However, if you cannot take advantage of these tax deferral features, then you may not need an annuity.

Understanding Annuities Is Important

Annuities can be extremely perplexing for clients. Before you decide to invest in an annuity, make sure you understand all the complexities of that particular annuity. What you don’t know could end up costing you. If an annuity is merely being sold to you or you do not understand how it will fit in with your financial plan, be sure to ask questions. Also if you have managed to store up a hefty retirement nest egg already, an annuity may not be the right choice given that annuities primarily were created to prevent you from outliving your retirement money. With the development of products in the investment world, there are so many other options available today which may help to avert running out of money in retirement.

Here are the most important points to remember when considering an annuity:

  1. Can you manage your own money well?
  2. Will the fees outweigh any benefits?
  3. Will the tax deferral features be advantageous to you?
  4. Do you understand all components of the particular annuity you are considering?

As always, consult with your financial advisor to be sure your investment choices line up with your goals.

(For more from this author, see: Avoiding the Pitfalls of Long-Term Retirement.)

Disclaimer: Heritage Investors, LLC, 11470 Parkside Dr Suite 201, Knoxville, TN 37934, (865) 690-1155, is registered as an investment adviser with the State of Tennessee. Heritage Investors only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.