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Some Say the Annuity Cons Outweigh the Pros

I just read another article saying that annuities have more cons than pros.  If you put all Americans in a generic group together, that may be the case.  But when looking at annuities on an individual level, many of the so-called cons aren’t even valid arguments against using annuities.  “Annuities: More cons than pros?” is an article published on CNBC by certified financial planner Tim Maurer.  He disagrees with the mantra telling people that there are not actually bad investment products, only bad uses for certain products.  I agree with him on that.  There are definitely unethical investment salespeople who are just trying to make money and don’t have your best interest in mind.  Those are not common though and it’s bothersome that annuity products get generalized as bad investments when there are a few bad products to the plethora of good ones.  Let’s take a look at his annuity pros and cons.

Opponents of annuities claim that “annuities are not bought, they are sold.”  Even the author of the article says that this quotation was likely generated by someone selling an annuity product competitor.  Bad annuities may be “sold,” but with the understanding of the benefits offered by annuities they are “bought” by wise investors.  Annuities come in four basic forms: immediate, fixed, variable and indexed.  It’s not surprising that this CFP likes the immediate annuity the best.  It is the simplest form and is the best way to create a lifetime income stream equivalent to a pension.  He even says that “annuities come with benefits that often cannot be duplicated in any other investments.”  This is true.  Immediate annuities offer higher pension-like distributions because the principal and interest are combined.  If you were just drawing down your portfolio, you wouldn’t be able to take out nearly as much in distributions without a high risk of running out of money.

Fixed annuities are similar to CDs, but your annuity rates are locked in for a longer time period.  Although rates are low now, the 3, 5, and 7 year terms offer you the chance to get a higher fixed annuity rate if interest rates increase in the future.  Let’s all hope that they do!  Annuities guarantee at least a portion of your principal will be paid back to you.  They also defer your taxes until you start receiving distributions, something that CDs do not.  This author does not see any pros to equity indexed annuities since they can be complicated and costly.  If you are interested in the benefits of indexed annuities, like market upside potential with protection against downside risk, ask an annuity expert to explain the costs and the detailed contract so you know what you are getting.

Now the author gets into the cons of annuities.  Most of these cons are valid and apply to at least one type of annuity product.  But they are the reason that it is best to use only some of your retirement savings to purchase an annuity.  The benefits you receive from annuities and their guaranteed lifetime income cannot be found anywhere else.  It’s true that interest rates are low, most annuities don’t have the step-up cost basis that lowers taxes for heirs, most annuities are not liquid investments in the short term, and some annuities have high costs.  Shopping for the right annuity product is crucial to making a good annuity investment.  The guarantees offered with annuity products are worth the cost when you have the peace of mind that you won’t outlive your savings.  Use some of your money for more liquid investments and maybe even to keep for your heirs.  But guarantee yourself a monthly income to cover your living expenses in retirement so that you know you won’t run out of money.

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