The Pros and Cons of Annuities
Do you have, or are you considering an annuity? Is it right for you and your financial goals? Annuities are popular for a variety of reasons, and it seems like they’re everywhere. But are they always a good investment?
First, it’s important to note that every strategy has its place. There are many solutions that may only work for a specific set of people – including annuities. Many people appreciate the relative financial safety they may offer.
But, there are also many drawbacks to annuities. For example, the lack of liquidity - once clients place money in an annuity, they’re often limited as to how and when they can get it out. At the very least, they’ll likely have a surrender charge. Some have even more limitations – like how much they can withdraw each year! Often times, these products aren’t explained well, and by the time an issue arises and you need cash, the person who sold them to you is long gone.
So, there can be many challenges annuities offer, but how would investors know? The answer is that annuity companies have to report all the ins and outs of their various annuities to a 3rd party reporting service. We have access to those tools and can offer you a no obligation annuity intelligence report. It will reveal things like how much the surrender charge is, hidden fees and expenses, all the terms of the contract that you have to abide by, the amount of your free withdrawals each year, and much more. There are many different types of annuities, including fixed, variable, indexed, deferred and immediate – and they can be very confusing.
Fees and costs should be disclosed up front, but they’re not always as transparent as they should be. On top of that, you may have extra riders for income or other guarantees that add additional costs – often in ways that aren’t entirely clear. They also can be unforgiving in terms of long-term planning – for example, if you have a 6-7% income rider, for 10 years, it may take you 20 years just to get your money back. If you defer for 10 years and take income over 20 years, that’s tying up your money for 30 years.
The tax structure of annuities is also an important consideration. While some people appreciate the tax-deferred nature of annuities, keep in mind that rather than to be taxed at the lower capital gains rate, annuities are taxed at the same rate as your income when you take money out.
Abraham Maslow famously said that “If all you have is a hammer, everything looks like a nail.” This is the same approach insurance companies and insurance licensed only salespeople take to your financial planning – it’s all they have, so it’s always right for everyone they talk to!
If you have an annuity or are considering one, see an independent, experienced, Certified Financial Planner that is both securities and insurance licensed. An independent professional won’t have as much of a reason to sell you something you don’t need and will help you review many ways to reach your financial goals.
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