At one time annuities may have looked like an ideal retirement vehicle: You put in a lump or periodic sum, the principal is guaranteed with an insurance benefit, and the headline in the brochure claims you’ll receive $4,000 a month for life – which seems like plenty to live on in your later years. However, annuities have somewhat lost their glow. There are several reasons for this, including:
Every retirement vehicle (to be fair to annuities) has become less certain due to the generally lower-returning mutual funds underpinning most of them. Annuities are no exception. They are subject to uncertainty brought on by such things as the unknown effects of the recent Republican tax bill and the extreme stock market volatility of early 2018.
For people absolutely disinterested in managing their own finances, annuities offer a simple menu. The participant must make only three decisions: lump or periodic inputs (contributions), deferred or immediate income, and fixed or variable returns. Many investors have chosen variable over fixed annuities at times, usually when roaring mutual funds meant high returns compared to the conservative and seemingly safe fixed option.
In the fine print, “fixed” usually means the returns will be re-evaluated in one to five years due to market variances. Contracts simply can’t guarantee 6% if the fund manager is only making all-in yields of 5%.
The old joke about annuities is that you make a fortune on the headline and then the fine print takes it all back. In many cases this hasn’t been too far from the truth. Introductory rates may be like 0% interest on car loans and are indeed much like loss leaders in a supermarket promo. Those large promises suddenly evaporate after the first six months or year, when rates are adjusted and fees kick in.
Here are a few of the fees that can be buried deep within an annuities contract – or not shown at all:
After all the downsides and hidden costs, there are still a few upsides:
After all consideration of pros and cons, it’s important to remember that your entire investment in an annuity, or much of it, can be lost if the quality of the company behind the contract isn’t sound.
There are some state protections for some annuity funds, but they are limited (and worth researching for your state). For example, you can buy annuities below your state's protection limit from several companies, instead of buying just one larger annuity from a single company. Know that if you move from a state with a high limit to one with a lower limit, your new state's level will generally apply should the annuity fail after you move.
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