What are the Pros and Cons of Annuities?
It may send your mind into an infinite loop to imagine using money to buy money products, but that’s just how the financial world works. And Americans did just that! In just the third quarter of 2016, USA investors analyzed the pros and cons of annuities and spent $51.3 billion on them.
Sound like a lot? Maybe not. Turns out that we bought $58.5 billion in annuities in the same quarter of 2015, which represents a 12.3 percent decline in one year.
What’s going on here? Have the tides turned or are more investments clogging the market and our wallets? Read on for a major return on investment.
Pros and Cons of Annuities 101
Mastering annuities can take an entire semester or more in a hard-core economics school, but we’ll try to break it down for you.
- Annuities are retirement-focused investments that pay you money.
- You can pay a lump sum (one-time) for the annuity or schedule payments, depending on the annuity and your Advisor.
- Excellent option for tax-deferred retirement income
- No annual contribution limit
- Not all annuities are the same. They include:
- Fixed (Guaranteed income no matter what happens to the market or the insurance company, but these annuities do not adjust with interest or the cost of living)
- Indexed (Flexible, but also returns a guaranteed minimum)
- Variable (Totally dependent on how the funds you select to do in the market, this is your riskiest option)
Pro: Fee-Free Fix!
If the idea of paying fees for an annuity just doesn’t add up, an indexed or fixed annuity may be an ideal match for your investment portfolio. You can buy these types of annuities from an insurance company and will not be assessed an administrative fee on top of what you put into the fund unless you add a rider or a link to the rider.
Buyer beware! These types of annuities don’t have administrative fees, but that doesn’t always stop less than respectable agents from trying to tack them on.
And you probably know we can’t get something for nothing.
As you enjoy the benefit of the no-fee annuity, keep in mind that you will (more than likely) experience fees if you withdraw from that annuity before the agreed-upon period ends. When you do need to make withdrawals, you may face surrender charges.
Financial companies have to make their money somewhere. But if you purchase this type of investment, choose one that has a term you can be happy with long-term and you’ll be feeling free.
Con: Early Demise Can Bring Surprise
And we aren’t talking about to the decedent.
When you purchase an investment, you’re looking into that crystal ball of the future for a long, long way off.
Unfortunately, life tends to get in the way of our plans.
Let’s say Person A purchases a 10-year annuity at age 55, expecting the annuity to come due at age 65. Person A then passes away at age 57, 8 years before the annuity date.
As the University of Wyoming explains, if the annuity holder dies “early,” the annuity could lose value as it passes on to the next property holder (the designated recipient from – in this case – Person A’s will).
Of course, it’s good to plan for the future and no one knows what the future will hold, so not purchasing annuities out of fear can really hold you back.
Pro: Income Stream, Flood, or Trickle
For many, annuities are a choice because of their income-providing potential.
You may be thinking, if I have the money, why am I going to give it to an Advisor who will then slowly trickle it back to me?
It almost makes this consideration of pros and cons of annuities more like no and cons!
But let’s take a step back.
Yes, you’re handing over a (sometimes large) lump sum of money.
But these “immediate annuities” really do provide you that stream of income because you get back guaranteed payout for as long as you live. Whether that amount surpasses your lump sum or not, you continue to receive the payments.
Whether you’re about to be swimming in a small creek or a huge basin of water-slash-income for the rest of your life depends on how you set things up with your Advisor.
Con: You Need Money to Make Money
Unlike stocks which you can literally purchase for a couple of bucks a share or bonds with just a small out of pocket cost, annuities don’t come cheap.
Some annuity advisors suggest you start with a minimum of $10,000 to $25,000 investment. Remember, when considering the pros and cons of annuities, you need to keep in mind that the annuity is supposed to be an income stream for life. That $20 for the hot stock on the market won’t get you very far in annuity land.
Also, the more money you can invest in an annuity, the better rates you can get. It may not seem fair that those who have the money to assure themselves a better income stream later in life may not need it.
But that’s how the annuity world works and once you understand it, you can play it to your benefit.
Ask your Advisor if he or she offers flexible premium annuities. Not all of them do, but you may be able to enter into this type of annuity with a minimum purchase of just $100, which definitely does seem more “flexible” than $10,000.
Cash In on Your Experiences Here
Still feeling like less than a hundred bucks at all the pros and cons of annuities?
Don’t worry. Help is available.
Free help. With no administrative fees or early withdrawal penalties!
Click here to sign up for a free consultation and annuity review. (Guess you CAN get something for nothing!)
By the way, be sure to ask your prospective agents about their experiences and length of time in the business. We don’t want to scare you, but if your Advisor goes out of business, you may lose your annuity investment, too.
This depends on the investment and other legalese, but it’s all the more reason to be informed, to make good choices, and to not get ripped off.
We’d love to hear from you, too, about your annuity experiences. Have you ever had to make an early withdrawal? Did your annuity consultant assist you?
Please share in the comments below and let’s help each other start saving!