While a fixed annuity can reduce market risk, there are other factors to consider when evaluating whether or not a fixed annuity is right for you.
- The “guarantee” of an annuity is only as good as the insurance company that issues it. In the event that an insurance company fails, state guarantees may exist, but annuities are not guaranteed by the FDIC, SIPC, or any other federal agency if the insurance firm that issued the contract fails.
- Because fixed annuity payments do not normally include cost-of-living adjustments to keep up with inflation, the value of the money you receive in payments may decrease over time. Inflation-protected annuities are available, but they are much more expensive in general.
- Once you’ve paid the insurance company your premium, it may be difficult to get your money back. The insurance company may not be compelled to continue payments to your spouse or reimburse your premiums to your estate if you only receive a few payments under a fixed annuity contract.
- If your fixed annuity is changed and you want to withdraw your money early, you may be subject to surrender charges, which reduce your returns.
Can you lose your money in an annuity?
Variable annuities and index-linked annuities both have the potential to lose money to their owners. An instant annuity, fixed annuity, fixed index annuity, deferred income annuity, long-term care annuity, or Medicaid annuity, on the other hand, cannot lose money.
Is my money safe in an annuity?
Are Annuities a High or Low-Risk Investment? Annuities have a low risk profile when compared to other investments such as equities and bonds. In the correct circumstances, their fixed rates and guaranteed income make them safe.
Is an annuity guaranteed for life?
An income annuity is not the same as a CD, which offers a fixed rate of return for a set period of time.1 Rather, it’s an income product that guarantees a fixed monthly income for the rest of your life, regardless of how the markets perform. Your final payout will be determined by how long you live. The longer you live, the higher your overall lifetime income will be.
Why you should never buy an annuity?
You don’t have enough liquid assets. Annuities work best when a portion of your money is used to buy the guaranteed income that an annuity may provide. If, on the other hand, purchasing an annuity would leave you with insufficient funds to cover unforeseen needs, an income annuity may not be the best option for you.
Long-term contracts
Annuities are long-term contracts that last anywhere from three to twenty years, and they come with penalties if you violate them. Annuities typically allow for penalty-free withdrawals. Penalties will be imposed if an annuitant withdraws more than the permissible amount.
Has anyone ever lost money in a fixed annuity?
“Did you know that the #1 concern of individuals over 50 is running out of money in retirement?”
“Did you know that a Fixed Annuity is the ONLY financial strategy that GUARANTEES you will never outlive your income?”
If you ask someone if they’d be interested in a retirement plan that pays a reasonable rate of return, allows them to participate in market gains without being exposed to market losses, guarantees they’ll never lose a penny if they stick to the plan, has a better-than-average chance of making a better-than-average return with no risk of loss, has few or no fees, allows some limited access to funds, and pays them a lifetime income when they decide to retire, they’ll probably say yes
Then ask someone if they’re interested in an annuity, and they’ll tell you they’re not.
If this seems familiar to you, then you, too, have most likely been subjected to systematic disinformation and “misinformation” about Fixed Annuities. The media is sloppy and irresponsible when it comes to Fixed Annuity information. Because they have a clear interest in keeping your retirement assets “under management,” Investment Advisers have done an excellent job of spreading the negative word about Fixed Annuities. That’s “bottom line” heading out the door of that beautiful office when you convert your assets to an annuity! (I’ll go into more detail about this later). In an effort to be helpful, well-meaning friends regurgitate the same myths about annuities that they’ve heard from the media and “financial planners.”
To be sure, a Fixed Annuity isn’t always the best option for everyone, all of the time, and in all circumstances. An annuity purchase should be made only after careful deliberation with an expert agent and a thorough analysis of all of your retirement assets and aspirations. But do yourself a favor and expose yourself to the truth rather than lies, distortions, and myths.
#1.) Agent commissions. This is a fiction spread by the securities business, ironically. Agent commissions from the insurance firm that issues the annuity might range from 3% to 7%. (In most cases, roughly 6%). The agent is only paid ONCE, and not with your money. Unlike a mutual fund or stock purchase, when 5% to 6% is taken off the top and goes to your broker’s pocket, 100% of your money gets into your account. When you make your first transfer, your account is frequently credited with a bonus. Consider what the financial adviser earns out of your account each year if you think 3 percent -7 percent is too much. (See also #2)
#2.) Exorbitant Annuity Fees This is yet another fabrication! With a Fixed Annuity, there are no “excessive costs.” The only costs connected with Fixed Annuities are optional, fully disclosed, and usually less than 1% per year. Variable Annuities, on the other hand, contain very high costs and are offered by securities dealers such as brokers, investment advisers, and many financial planners who make a lot of money off you every year regardless of whether your account has gone up or down. However, in the interest of full transparency (which is more than you’ll get from your registered securities dealer), Variable Annuities can make a lot of money—but they can also lose a lot of money. Is there a pattern emerging here? Purchase securities—pay hefty annual fees, “enjoy” stock market volatility, lose money, and there is no complete transparency!!! You can’t lose money in a Fixed as long as you follow the insurance company’s rules. There are no fees on most fixed annuities. ZERO. ZERO. ZERO. ZERO. ZERO Are we on the same page here?
#3.) “The insurance company keeps my money if I die.” This is yet another deception perpetrated by the financial services industry. Any money in your account at the time of your death is distributed to your specified beneficiary. Period.
“Annuities don’t keep up with inflation,” says #4. If you have a Fixed Rate Annuity, you will receive that rate for the crediting period. If you have an annuity with an old-style fixed rate, it may not keep up with inflation (historically about 3 percent average over the last 100 years). Most Fixed Annuities now provide a fixed rate option, but only as part of a wide range of crediting alternatives. In a moderately excellent market, typical returns are in the range of 5% to 9%, with an average of around 7%. An Income Rider account can easily generate returns of 12 percent to 13 percent or higher. In recent years, new plans with inflation protection riders have been introduced.
#5.) “With a Fixed Annuity, you’ll never obtain 100% of the market gain.” Because it is only partially explained, this is a half-truth. True, you don’t get 100% of the market gain, but when the market falls, you get ZERO PERCENT OF THE MARKET LOSSES. Is it a good deal? In comparison to the Wall Street Casino, most individuals prefer safety and 7% for their retirement assets.
#6. “With Fixed Annuities, there are substantial surrender charges.” Annuity surrender charges are referred to as “fees” by my security dealer friends. The securities industry is the best place to learn about fees. The fees charged by mutual funds and variable annuities are astonishing, and they can put your retirement plans on hold. A fixed annuity is a tool for arranging long-term retirement income. You should not purchase an annuity if you do not intend to use the benefits for a long time (such as your entire life). To issue an annuity, an insurance firm must pay commissions, bond fees, and other expenses. These charges are not passed on to the customer in question. Over the course of the contract, these charges are recouped on a decreasing scale. There are no surrender charges at the conclusion of the contract’s original period. In addition to any Lifetime Income Rider payments, most Fixed Annuities allow you to take a 10% free withdrawal each year. If you remove more than 10% of your account value, you will be charged a penalty for the amount that exceeds the “free” 10%. For example, if John has $100,000 in his account and requires $15,000 in year five, he will receive a penalty-free $10,000 and will pay a 5% charge on the remaining $5,000, or $250.00. Surrender charges are a serious matter that should not be neglected, minimized, or lied about by anyone!
“Fixed Annuities are difficult,” says #7. Everything in a Fixed Annuity is disclosed, unlike a mutual fund prospectus or a stock offering. It’s critical to speak with an expert agent who can thoroughly explain annuities to you. It’s true that a Fixed Annuity has a lot of “moving parts,” but a good advisor should be able to explain them to you. After all, annuities have been around for nearly 2000 years, so they can’t be that difficult to grasp!
If you have an unfavorable attitude regarding Fixed Annuities, consider where and how you came to that conclusion. What source did you hear the ominous noise? What method did they use to hear it? Did they have a financial stake in your money? Were they just a decent buddy who was trying to help but unwittingly spreading lies and half-truths?
1.) Annuities are purchased because of their inherent safety, security, and stability.
2.) No one has ever lost money in a Fixed Annuity if they stick to the terms of the contract.
3.) If chosen, one can earn a lifetime income guarantee.
4.) The growth of your annuity is tax-deferred. This becomes a significant factor over time.
5.) You benefit from market growth in a good year while avoiding losses in a poor year.
6.) You can get your money in a number of ways. Your funds aren’t “locked up.”
7.) There are no fees and they are voluntary.
Isn’t it best to learn the facts and truth about all your possibilities before making retirement income decisions? Recognize all of your options. And, rather than hearsay and half-truths, make sensible conclusions based on objective facts? It’s a lot less taxing on my head!
Does Suze Orman like annuities?
Suze: Index annuities aren’t my cup of tea. These insurance-backed financial instruments are typically kept for a specified period of time and pay out based on the performance of an index such as the S&P 500.
What is a better alternative to an annuity?
Bonds, certificates of deposit, retirement income funds, and dividend-paying equities are some of the most popular alternatives to fixed annuities. Each of these products, like fixed annuities, is considered low-risk and provides consistent income.
What are pros and cons of annuities?
Annuities are no exception to the rule that nothing in the financial world is without flaws. The fees associated with some annuities, for example, might be rather burdensome. Furthermore, while an annuity’s safety is appealing, its returns are sometimes lower than those obtained through regular investing.
Variable Annuities Can Be Pricey
Variable annuities can be quite costly. If you’re thinking of getting one, make sure you’re aware of all the costs involved so you can choose the best solution for your needs.
Administrative, mortality, and expense risk fees all apply to variable annuities. These fees, which typically range from 1 to 1.25 percent of your account’s value, are charged by insurance firms to cover the expenses and risks of insuring your money. Expense ratios and investment fees differ based on how you invest with a variable annuity. These costs are comparable to what you would pay if you invested in a mutual fund on your own.
On the other hand, fixed and indexed annuities are rather inexpensive. Many of these contracts do not have any annual fees and only have a few additional costs. Companies may typically offer additional benefit riders for these in order to allow you to tailor your contract. Riders are available for an extra charge, although they are absolutely optional. Rider costs can range from 1% to 1% of your contract value every year, and variable annuities may also charge them.
Both variable and fixed annuities have surrender charges. When you make more withdrawals than you’re authorized, you’ll be charged a surrender fee. Withdrawal fees are normally limited throughout the first few years of your insurance term. Surrender fees are frequently substantial, and they can also apply for a long time, so be wary of them.
Returns of an Annuity Might Not Match Investment Returns
In a good year, the stock market will rise. It’s possible that this will result in extra money for your investments. Your investments, on the other hand, will not rise at the same rate as the stock market. Annuity fees are one explanation for the disparity in increase.
Assume you purchase an indexed annuity. The insurance company will invest your money in an indexed annuity to match a certain index fund. However, your earnings will almost certainly be limited by a “participation rate” set by your insurer. If you have an 80 percent participation rate, your assets will only grow by 80 percent of what the index fund has grown. If the index fund performs well, you could still make a lot of money, but you could also miss out on some profits.
If your goal is to invest in the stock market, you should consider starting your own index fund. If you don’t have any investing knowledge, you should consider employing a robo-advisor. A robo-advisor will handle your investments for you for a fraction of the cost of an annuity.
Another thing to consider is that if you invest on your own, you would most certainly pay lesser taxes. Contributions to a variable annuity are tax-deferred, but withdrawals are taxed at your regular income tax rate rather than the long-term capital gains rate. In many places, capital gains tax rates are lower than income tax rates. As a result, investing your after-tax income rather than purchasing an annuity is more likely to save you money on taxes.
Getting Out of an Annuity May Be Difficult or Impossible
Immediate annuities are a big source of anxiety. You can’t get your money back or even pass it on to a beneficiary after you put it into an instant annuity. It may be possible for you to transfer your funds to another annuity plan, but you may incur expenses as a result.
You won’t be able to get your money back, and your benefits will be lost when you die. Even if you have a lot of money when you die, you can’t leave that money to a beneficiary.
Why do financial advisors push annuities?
The goal of the bank and its securities division is to make money. This would be acceptable if all of the bank’s product offers were compensated equally, allowing for unbiased advise. This is not the case, as annuities offer the bank and its sales force with the most money (6-7 percent average commission for the salesperson).
Annuities are expensive because they are insurance-based products that must cover the cost of the benefits they provide. Many annuities, for example, guarantee that your principal will never be lost while still allowing you to gain money through separate accounts comparable to mutual funds. The reality is that your beneficiaries, not you, are guaranteed your principle at your death, which is a better explanation of this offer. If you were nearing retirement during the financial crisis, this assurance was of little use.
A variable annuity’s average expense, according to Morningstar, is 2.2 percent. If you put $10,000 into an annuity and the market yields 8%, you should have $30,882 after costs in 20 years. Instead, you might have $44,498 if you invested in a 0.20 percent index portfolio; that’s an extra $13,616!
The annuity is marketed to younger investors as a tax-deferred investment vehicle. A variable annuity will provide you all that, but at a price. I’ve discovered that the best vehicle for investors who have maxed out their 401ks and IRAs and are looking for tax-sheltered retirement savings is a taxable, tax-efficient portfolio. With the growing popularity of Exchange Traded Funds (ETFs), an investor can establish a tax-efficient portfolio for less than 0.30 percent of their portfolio value.
Why do people fall for annuity bait and switch schemes? It all boils down to the salesperson’s persuasion and the bank’s play on the customer’s anxieties of investing. Many bank customers would never invest in the stock market because they believe it is too hazardous. The annuity looks to provide the consumer with the protections he or she seeks. Always keep in mind that there are no free lunches. If something sounds too good to be true, it probably is. There are several options for managing investment risk that cost a tenth of what an annuity does. These solutions can be explored with the assistance of a fiduciary fee-only advisor.
Why annuities are bad for almost everyone?
Annuities have highly hefty commissions, which can be as high as 7% or more of the whole sum. For example, if a client is sold a $200,000 annuity, the salesperson may get $14,000 up front. Needless to say, he has little motivation to invest your money in a low-cost index fund.
Are annuities FDIC insured?
Annuities are not insured by the Federal Deposit Insurance Corporation (FDIC) and are not bank deposits. Although each state has its own guarantee fund, it should not be considered a replacement for FDIC coverage.
