Top 5 Pros and Cons of Annuities
As with any investment you consider, there are pros and cons of annuities too. When you purchase an annuity, you will want to time your purchase according to your needs, or how far away from retirement you are.
What follows is a discussion of the pros and cons of annuities in general. This is a very basic starting point, but you can learn a whole lot more in the AST Flex Strategy videos.
Pros and Cons of Annuities – Pro Annuity Points:
The advantages of getting an annuity are absolutely easy to understand. Here are some brief introductions of each.
- Liquidity: Your money is accessible. Most contracts have an annual withdrawal clause that will allow you to take 10-15% of the account value each year without incurring any penalty.
- Tax Deferral: Like an IRA, annuity earnings are tax deferred. This makes them more appealing than CDs, money market funds, or other safe investments.
- Safety of Capital: Your money is safe in annuities. Insurance companies are required to keep cash reserves to ensure this. Most states also have a guarantee fund up to $100,000 per annuity for additional security.
- Rate of Return: Annuities offer higher rates of return than other safe investments. Currently, annuities are yielding an average of 4% tax deferred in comparison to only 2% taxable with CDs. As our economic markets stabilize, annuity yields should increase accordingly. Annuity rates of return offer more stability in fluctuating markets.
- Income stream: Annuities that provide an income stream has been found to be one of the best retirement income vehicles according to a study done by New York Life and the Wharton Business School. After the first annuity contract year, most annuities can provide monthly income payments for your lifetime. Likewise, immediate annuities provide monthly income payments for your lifetime, but they start immediately.
Pros and Cons of Annuities – Negative Points:
The wrong annuity product can have negative effects on your retirement. It is important to know these cons so you do not purchase the wrong product for you.
- Surrender Schedule: Because annuity contracts have surrender charges for withdrawing money before the contract matures in lieu of up front sales charges, you will be obligated to the terms of the contract. Some surrender schedules can be as long as ten years.
- Short Term Money: If there is a chance you need all of your money returned to you in the short-term, say one to two years, an annuity is not right for you. It is best to only invest funds you will not need for at least the next five years.
- Sales Commissions: As with any purchase, the sales agent will earn a sales commission. An unethical sales agent may not have your best interests at heart and will not show you the right product for your needs.
- Liquidity: You may be referring back to the pros section and find liquidity featured there as well. While liquidity can be a pro, it can also be a negative in so much as you realistically knowing how much money you may need to access and when you will need it. Without knowing these answers, liquidity can easily turn into a negative.
Annuities have pros and cons, and this brief summary should help you analyze your annuity needs. Use these guidelines to determine what factors are important to you and you will have an easier time selecting the right annuity for you.