Council Post: Five Reasons Not To Buy An Annuity (2024)

FAQs

What would not be a reason to purchase an annuity? ›

So, if you have experience and success managing your funds on your own and can convert your assets into an income, there is no reason to buy an annuity. 2. Don't buy an annuity if you're sure you have enough money to meet your income needs during retirement (no matter how long you may live).

High expenses and commissions

Cost is one of the biggest drawbacks of annuities.

Bottom Line. Annuities can offer unique advantages, providing a reliable source of income, product flexibility, tax benefits and a potential hedge against inflation. However, their drawbacks include overwhelming complexity, fees, lack of liquidity and tax penalties for early withdrawals.

Market Growth

Most of these variable annuities have high fees. If you're less than 50 years old, you have time for markets to be volatile, and then you can make up for any type of losses or volatility, etc. If you're less than 50 years old, you should never buy an annuity of any type.

A person that does not need principal protection, does not need income for life, does not need legacy, and does not need long-term care, doesn't need an annuity.

Giving up liquidity

Some annuities require a lump sum of cash to be paid up front in exchange for the promise of regular, reliable income in retirement. If unexpected costs arise, annuitants aren't able to get that money back without paying large fees and taxes.

A Fixed Annuity can provide a very secure, tax-deferred investment. It can provide a guaranteed minimum interest rate, with no taxes due on any earnings until they are withdrawn from the account. Use this calculator to help you determine how a Fixed Annuity might fit into your retirement plan.

Examples of Popular Annuity Alternatives

Treasury bonds. Certificates of deposit. Dividend-paying stock funds. Retirement income funds.

Annuities Provide the Biggest Payday to the Bank

This is okay if the compensation among all the bank's product offerings were the same, allowing for unbiased advice. This is not the case, however, as annuities provide the biggest payday to the bank and its sales force (6-7% average commission for the salesperson).

‌They don't want their army of advisors pushing Immediate Annuities, Deferred Income Annuities, QLACs, and Qualified Longevity Annuity Contracts. Why? You can't charge a fee on those, and those are irrevocable lifetime income products, which means that money in the firm's eyes is gone.

Why do people advise against annuities? ›

Poll your friends and family about annuities and you're bound to get a lot of adverse reactions. They'll likely cite at least one of these three things : They're expensive and have big fees. They don't give you access to your money.

Orman states that SPIAs can therefore take the place of CDs or treasury notes to help provide income in retirement. Many people think that Suze Orman "hates annuities," but she concedes there are circ*mstances where they do make sense.

Five-Year Rule

With the Five Year Rule, the beneficiary has several options regarding when to receive the death benefit proceeds: Take all the money out soon after the death of the owner. Take periodic payments at any time during the five-year period. Wait until the fifth year to take all the annuity proceeds at once.

Most financial advisors will tell you that the best age for starting an income annuity is between 70 and 75, which allows for the maximum payout. However, only you can decide when it's time for a guaranteed stream of income.

(Variable and fixed indexed annuities are riskier during a recession because their rates of return are tied to market performance, and during a recession, the markets tend to perform poorly.) For those reasons, fixed annuities tend to be an especially good option in the context of an economic recession.

What is the primary reason for buying an annuity? It's common today for those approaching retirement to be concerned about their savings and how long they will last. With the right annuity in place, you will never have to worry about outliving your savings. There will always be income for as long as you live.

Most people buy annuities because they offer one powerful benefit that other products can't— guaranteed income in retirement. A guarantee of lifetime income provides security and comfort. Even if your other investments lose money, your annuity payments will still be there.

Many investors buy annuities for their unique tax advantages. Annuities grow tax-deferred, meaning your dividends, interest and capital gains all remain untaxed while held in the annuity. Your funds will only be taxed when withdrawn.

The main purpose of buying an annuity is to provide a guaranteed source of income for retirement. They are especially useful for those who are concerned about outliving their savings.