Council Post: Five Reasons Not To Buy An Annuity (2024)

FAQs

Council Post: Five Reasons Not To Buy An Annuity? ›

Another reason annuities are viewed as a bad financial product is because of commissions. Annuities can have large upfront commissions paid to the agent who sold it. There is little transparency to the purchaser on how much and when the agent is getting paid. The commission is baked into the fees you have to pay.

Another reason annuities are viewed as a bad financial product is because of commissions. Annuities can have large upfront commissions paid to the agent who sold it. There is little transparency to the purchaser on how much and when the agent is getting paid. The commission is baked into the fees you have to pay.

Why are annuities a poor investment choice? Annuities can be a bad choice for some people—they have higher fees and less flexibility than some savings options. And depending on the type you choose, your heirs may get nothing after you die even if far less was paid out than you had contributed.

Beware of High Surrender Charges

The most significant fee associated with annuities is often the surrender charge. This is the percentage that a consumer is charged if he or she withdraws funds early.

Most financial advisors will tell you that the best age for starting an income annuity is between 70 and 75, which allows for the maximum payout. However, only you can decide when it's time for a guaranteed stream of income.

Annuities often have high fees compared to mutual funds and other investments. You can customize an annuity to fit your needs, but you might need to pay more or accept a lower monthly income.

Examples of Popular Annuity Alternatives

Treasury bonds. Certificates of deposit. Dividend-paying stock funds. Retirement income funds.

Dying early. If you die too soon after buying an income annuity, you will not receive the benefit of the future payments you had expected. This risk is common to all sorts of insurance, and it's the tradeoff for the security of knowing that no matter how long you live, your income stream is guaranteed.

Why do financial advisors not like annuities? ›

‌They don't want their army of advisors pushing Immediate Annuities, Deferred Income Annuities, QLACs, and Qualified Longevity Annuity Contracts. Why? You can't charge a fee on those, and those are irrevocable lifetime income products, which means that money in the firm's eyes is gone.

If the sector of the market that an annuity is linked to suffers in a recession, the annuity can perform poorly and even lose money. Stocks typically have more market risk, and so they are more likely to decline during a recession. Bonds are usually safer because they experience less market volatility.

Poor Performance of Variable Annuities: Poor performance on the underlying investments of your variable annuity can expose you to a loss. This happens if the annuity is not protected with a guaranteed minimum return option (more on that later).

So, if you have experience and success managing your funds on your own and can convert your assets into an income, there is no reason to buy an annuity. 2. Don't buy an annuity if you're sure you have enough money to meet your income needs during retirement (no matter how long you may live).

Annuities also charge higher maintenance and operational fees than products like mutual funds and exchange-traded funds (ETFs), and they often include additional fees if you opt for income guarantees called “riders.”

For most annuity types, the fear of actually losing your principal is minuscule. The main risk to this would be the rare situation where the company that issued your annuity goes bankrupt or shuts down. But, even in this situation, state guaranty associations would likely offer coverage and help you recoup that money.

Because most Americans count on Social Security to cover the bulk of their retirement expenses. And that annuity, alone, doesn't provide enough monthly income to fund a comfortable retirement, at least not for many of us.

According to the duo, the results suggest that financial professionals are concerned that many clients could deplete their savings too quickly, but the majority of them do not recommend annuities and, when they do, many clients do not take the advice.

An annuity is not a savings account or savings certificate, and it should not be bought for short-term purposes. The most appropriate use for income payments from an annuity contract is to fund your retirement.