I have never been a fan of annuities. The plain and simple truth to this belief rest on the fact that an insurance company should not be involved in your retirement future, past or present. These businesses do have a role in protecting you from unforeseen problems and the possibility of those issue delivering a financial blow that could derail your plans. Insure your life, your house, your car. But insure your retirement?
First, an annuity is as I wrote, an insurance product with an investment aspect that offers to mask the true identity of what it is. Now annuities have been gaining traction in the retirement discussion as a way to guarantee a lifetime income for those who feel as though they may run out of cash. Just like every guarantee you are offered (on many items that at the time would be too expensive to repair on replace), the cost is built into the offer. In other words, you are paying upfront for something that you may never use.
Granted, retirement isn’t like a major appliance. You simply can’t replace it if it breaks or call a repairperson to come and fix it once you begin to use it. But the peace-of-mind component of the plan is not worth the extra costs.
Three things come to mind in addition to the fees associated with the product. First is the temptation to buy additional features. Inflation will have an effect on everyone’s retirement. With an annuity, the fixed income for life will not be adjusted for what many consider the inevitability of life. So the insurance agent cum investment advisor will suggest an annuity that protects against inflation. Second, is the issue of the inheritance. If you are worried about leaving what is left over for an heir, it will also costs more. Third is the complexity. Change your mind at some point soon after you purchase the product and you will lose a significant amount of your hard-earned cash to penalties.
Until the product is so generic it can be understood by the average worker, you should avoid the temptation. Unless of course you have done one or two things. One, you invested outside of your retirement plan and can use that as a cushion. It should be a significant enough amount that you could, if it came down to it, live on the investment. Or two, you have an old 401(k) you wish to roll over or are forced to take as annuity.
If you consider yourself an average investor with an adequate retirement account, avoid the annuity. If you are not the average investor, considering yourself savvy enough to make financial decisions on your own, you probably won’t even consider these products.
Some additional discussion can be found here.
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