If you are like me and you are nearing your target date for retirement you are trying to answer a lot of questions. You most definitely are trying to figure out how to make your 401K money last the rest of your days. You have undoubtedly explored the subject of annuities and this article will attempt to answer the question "Why not to buy an annuity"?
I will give you a quick 9 reason rundown that show why annuities are a poor investment choice. Reason #1 - In the case of immediate annuities you get a flat fixed payment every month for the rest of your life but there are no adjustments for inflation. In a 401K or 403B you can adjust your distributions but this is not the case with an annuity.
Reason #2 - You have no access to the principal in the event that you have an emergency and need a lump sum of cash. This represents one of the biggest advantages of traditional retirement accounts.
Reason #3 - You can set up an immediate annuity so that you get a lifetime monthly amount as long as you or your spouse are alive. However, once both of you are gone there is no leaving the rest to your kids. If leaving your nest egg to your kids is a real priority to you then don't invest in an annuity.
Reason #4 - Most annuities come with commissions and fees. Sometimes the annual fees can be in the 3% to 4% range. There is a reason why insurance agents are so gung ho to sell you an annuity, they make a hefty commission. You need to remember that annuities are insurance products and agents make their living on commissions!
Reason #5 - Typically there is a period of time where the balance of your annuity can be withdrawn, this is usually a period of several years. However, there is most often a surrender fee of about 10%. So, if you have a $50,000 balance that you want to withdrawn you will owe $5000 in a surrender charge. That is a definite disadvantage to owning an annuity.
Reason #6 - Speaking of fees most variable annuities have annual fees to cover miscellaneous costs and these can run in the 3% to 5% range. Again, that is a lot of money. People fall in love with the income guarantee but fail to scrutinize the fees.
Reason #7 - Annuity returns are based on interest rates. With interest rates at historically low levels right now it would be unwise to purchase an annuity. If you are just determined to get one then at least wait if you can to see if rates improve and thus your monthly payout will increase too.
Reason #8 - Annuities are only as reliable as the insurance company from which you buy them. Make sure that the company has a long history and a long history of A or A+ ratings. The good news is that many states have "guaranty funds" set aside to protect consumers who buy annuities from companies that fail. Check your state for such a fund and check to see if there are limits of coverage.
Reason #9 - The fine print can be very complicated. Once again, these annuities are insurance instruments and insurance companies are known for "the fine print".
Most people will be better served investing in traditional 401K plans. But if you are going to go the annuity route do your homework!
I will give you a quick 9 reason rundown that show why annuities are a poor investment choice. Reason #1 - In the case of immediate annuities you get a flat fixed payment every month for the rest of your life but there are no adjustments for inflation. In a 401K or 403B you can adjust your distributions but this is not the case with an annuity.
Reason #2 - You have no access to the principal in the event that you have an emergency and need a lump sum of cash. This represents one of the biggest advantages of traditional retirement accounts.
Reason #3 - You can set up an immediate annuity so that you get a lifetime monthly amount as long as you or your spouse are alive. However, once both of you are gone there is no leaving the rest to your kids. If leaving your nest egg to your kids is a real priority to you then don't invest in an annuity.
Reason #4 - Most annuities come with commissions and fees. Sometimes the annual fees can be in the 3% to 4% range. There is a reason why insurance agents are so gung ho to sell you an annuity, they make a hefty commission. You need to remember that annuities are insurance products and agents make their living on commissions!
Reason #5 - Typically there is a period of time where the balance of your annuity can be withdrawn, this is usually a period of several years. However, there is most often a surrender fee of about 10%. So, if you have a $50,000 balance that you want to withdrawn you will owe $5000 in a surrender charge. That is a definite disadvantage to owning an annuity.
Reason #6 - Speaking of fees most variable annuities have annual fees to cover miscellaneous costs and these can run in the 3% to 5% range. Again, that is a lot of money. People fall in love with the income guarantee but fail to scrutinize the fees.
Reason #8 - Annuities are only as reliable as the insurance company from which you buy them. Make sure that the company has a long history and a long history of A or A+ ratings. The good news is that many states have "guaranty funds" set aside to protect consumers who buy annuities from companies that fail. Check your state for such a fund and check to see if there are limits of coverage.
Reason #9 - The fine print can be very complicated. Once again, these annuities are insurance instruments and insurance companies are known for "the fine print".
Most people will be better served investing in traditional 401K plans. But if you are going to go the annuity route do your homework!
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