Wealth Management: Why Annuities Might Not Be the Best Option

by | Oct 21, 2022 | Blog, Podcasts

When it comes to retirement wealth management, annuities are one of the many investment options in which an investor is presented. Unlike mutual funds, exchange traded funds, stocks or bonds, annuities are purchased from an insurance company which guarantees certain payments at fixed intervals or in lump sum. Payments could either be made immediately or at a future date to the owner of the annuity or their spouse in the event of the annuitant’s death. This insurance component wrapped around an investment product is what sets annuities apart from other investments. The most popular types of annuities are variable, index, immediate and fixed.

Annuities are especially enticing because they can offer a guaranteed monthly income during the later stages of a person’s life. The amount of income can vary depending on the type of annuity, but the thought of having some guaranteed income in one’s golden years can be very appealing given how volatile financial markets can be. While there are certain situations where annuities make perfect sense, there are also many situations where other investment options could be more suitable. Before purchasing an annuity, the following factors should be considered.

The Fees Associated with Annuities Might Cripple Your Wealth

wealth management fees

Depending on the type of annuity and the benefits offered, annuities can be very expensive. Over time, high fees can reduce investment gains and result in low overall returns relative to other investment options.

Wealth Management Requires Flexibility

Wealth Management Flexibility

Many annuities are illiquid. This means that they don’t allow investors to take early withdrawals without paying a penalty. Surrender charges can range from 7%-9%. If an investor needs the funds or changes their mind about how they want to invest this cost can be an enormous hurdle. Nothing in life is predictable and being locked into something can be financially painful.

Investment Options Are Fairly Limited with Annuities

locked into limited options

This is true with variable annuities where underlying investments must be selected. Limited investment options could mean that investors are not always investing in the best and/or most appropriate funds available in the market.

Other Wealth Management Options Have Tax Advantages

tax advantaged wealth management

In taxable accounts, annuity income is taxed as ordinary income whereas dividends are usually taxed at qualified dividend tax rates (typically 15%). If an investor is in a higher tax bracket, they could end up paying a higher share of their returns in taxes.

Inflation Can Eat Away at Your Annuitized Income

annuities have inflation problems

If an investor is receiving a fixed payment from the annuity, higher inflation can erode their purchasing power. Many annuities pay only a fixed payment and do not adjust for inflation over time.

Annuity Options Can Be Very Confusing

confusing wealth management

This is perhaps the biggest drawback with annuities. Investors often don’t know what features (riders) are offered with the annuity. Sometimes all the fine print can be confusing, and investors must rely on the annuity company to understand what their options are under different circumstances.

Annuitized Assets Might End with You

inheritance wealth

If an annuity is annuitized, it usually terminates at the death of the investor or the beneficiary and there is nothing left to pass on to heirs. This should be a consideration for individuals who plan to leave some of the nest egg as inheritance.

Get a Free Consultation with Dupree Financial Group, LLC

It is important to consider not just the pros and cons of annuities, but of every other investment option keeping in mind one’s present situation and future goals. Retirement planning can be a daunting task. This is why you need the experience of a trusted investment advisor that works outside of the insurance industry for a fresh perspective on your retirement portfolio. Contact us today.

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