Most of you who have been following my
writing and reading my books over the years know exactly how I feel about annuities. I believe that they are an insurance product not an investment, and unless you have absolutely no other choice, should be avoided.
But those calls for restraint sometimes fall on deaf ears. There is, as some point out, too many attractive features despite the downside costs.
Some retirees are faced with a payout in one lump sum as they exit the work place. And because you no longer have a steady and reliable stream of income, immediate annuities provide some measure of how much you have to spend each month.
The downside risks in annuities are something to consider and if you don’t, the attraction these instruments have can be problematic. If you decide to sell the annuity, the escape fees can be sizable although they diminish over time. The costs of managing the underlying investment, which is usually a relatively conservative mutual fund, often comes with higher than industry average fees for similar funds. And should you die early, the money is gone.
There are additional downside risks, even as the annuity industry attempts to convince you that, over time and providing you live a longer-than-average length of time, you could conceivably receive up to 40% more than you would have had you invested in mutual funds without the insurance factor.
One of those downside risks is inflation. Once your income is fixed, it will never increase as time drifts past. Each year it will buy less as the dollars you receive are worth less. To offset these problems, you can of course, add riders to your policy extending the payments to a spouse in the event of your death or even protecting against that inflation factor but these cost money – which is subtracted from – you guessed it – your monthly payout.
Now the mutual fund industry has stepped up its efforts at attracting these soon-to-be retirees with a payout fund, offering regular income checks and the ability to leave the remaining balance to whomever you wish as part of your estate.
But these products come with warning from the very industry that is promoting them. They worry, that the markets could not provide the guaranteed income that the investor might expect and because of that, many fund families are suggesting that you buy an annuity any way. Another major concern that fund offering these payout investments warn about is a change in investment strategies.
Normally, a payout fund will offer a stream of income over a set period of time – 20-30 years. And while your assets may appreciate, they will drop due to regular withdrawals. The money is inheritable should you meet an early demise.
Probably the best suggestion would be to keep your money where you want it in a
Roth IRA. You may face the same market-decline possibilities, but the fees (if you choose an index fund) will be considerably lower and that makes all the difference over the long-term.
Sometimes these are deferred until a later date whereby the investor can withdraw money all at once or in scheduled payments. Investments grow in a tax-deferred environment. Fixed annuities offer the investor the lowest risk (in part because the insurance company invests in bond funds) which insures your principal is never lost. Immediate annuities are also lump sum investments that begin distributions immediately.
