The Truth About Annuities

Recently I’ve been wondering how many people would own annuities if they fully understood what they were getting. I also wonder how many advisors would sell annuities if they received normal fees and commissions on the sales. I suspect that in both cases, the number would be a lot lower than it is today.

Sure, some people truly benefit from the income security that annuities provide after retirement. Keep in mind that annuities are long-term contracts. A typical annuity begins with the payment of a single premium to an insurance company. In return, you receive payments over your lifetime that can help supplement other retirement savings and investments.

Annuities come in all shapes and sizes; some have fixed rates, some have variable payments, and some even offer death benefits. And since there are so many types of annuities, each contract needs to be analyzed on its own particular features to be matched with your situation.

But be wary, after the insurance company collects your lump sum for your annuity, this amount is basically non-refundable and the principal is tied up for the long-term. Add in the high fees and commissions, and annuities become less attractive as an investment and make it hard to get liquidity to cover emergency expenses.

So, if you have a lot of savings, annuities must be for you, right?

Not quite. If you have enough money to cover your expenses through retirement there is no reason to pay the fees that come with annuities. The fees and commissions reduce your investment returns, and you can make more money outside of an annuity.

But then who benefits from annuities? Annuities are for those who have enough savings and liquidity to meet their immediate needs, but not enough to make it through retirement. The right annuity could produce cash flow in the early years and the rest of the savings could be invested long-term to cover expenses for the remainder of their lifetime.

I want to add that this is a special situation. In my 30 years of experience, I have never run into a client that would be better off in an annuity versus other investment options. That doesn’t mean they’re not out there, but they are not as common as insurance companies want you to think.

For more information on annuities or to discuss the right retirement plan for your situation, feel free to contact us.