Annuities are not all bad. But, they may not be the right move for everyone either.
Annuities are contracts with insurance companies that can provide guaranteed income in retirement. There are several types, including fixed, indexed, and variable annuities. While they may be the right decision for some people who need help budgeting their retirement income or feel insecure about their financial future, they are not the right decision for everyone.
Financial planner Brian Walsh of SoFi said that these financial products have advantages and disadvantages. “Annuities are like anything else with personal finance, where they can have a place to be used appropriately. But unfortunately, many times, they are used inappropriately,” he said.
There are a few reasons financial planners warn their clients about annuities.
Financial planners don’t like them because of the fees involved.
Annuities are not free: you will pay someone to manage the money deposited in them. And that work has a cost.
It’s something financial planner John Bovard of Incline Wealth warns clients about. “You’re paying a financial advisor their fees for the annuities, and you’re also paying an actuary’s fee for them to basically do those time value of money calculations and life expectancy calculations. You have at least three or four tiers of fees that are related to annuities,” Bovard said.
These rates may vary depending on the
you choose, but there will be various fees attached. In general, there is also a penalty for withdrawals before age 59 1/2.
Walsh said fees can sometimes eat up any growth. “Generally speaking, annuities come with very high expenses and fees that, especially if you’re using them to save money, will really add up over a long period of time and offset any of the potential benefits,” he told Insider.
You will not get the same returns as if you invested yourself
Financial planners say you’re not going to add much to your wealth by putting money into an annuity.
“I compare them almost like a checking account at a bank,” said financial planner Jovan Johnson of Piece of Wealth Planning. “You’re not going to get this crazy rate of return.” Instead, it is more about guaranteed income and security.
The average stock market return is around 9.2% over the past 10 years, according to data from Goldman Sachs. The amount you get from an annuity will depend on several factors, although its value is guaranteed not to decrease.
“I think it’s good for people who need that structure and are afraid that money will be invested,” Johnson said. However, if you’re confident in your savings and investments, it’s better to leave them where they are than to buy an annuity.