Annuities have long been marketed as a safe investment option, but they may not be the right choice for some investors. Here’s why you may want to think twice before buying a Fixed or Variable annuity:
Limited Growth Potential
Fixed annuities don’t provide much opportunity for growth. Their returns are comparable to certificates of deposit, meaning your money will grow slowly and predictably. While annuities eliminate investment risk, they also limit your ability to achieve meaningful growth above inflation over time.
Variable annuities on the other hand have the potential for more growth, but they almost always come with multiple layers of fees that eat into your returns. These include commission fees to the annuity salesperson, management fees on the annuity’s investments, insurance fees, and fees for special features. The costs can really add up, reducing what you ultimately earn.
Lack of Liquidity
It’s difficult to get your money out of an annuity, especially during the first 5 to 10 years. There are usually heavy surrender charges if you want to transfer the funds elsewhere. Once you annuitize the contract, the principal is no longer yours – you’ve exchanged it for guaranteed periodic payments.
No Legacy for Heirs
When you make the decision to annuitize, the remaining value does not transfer to heirs when you pass away. Your heirs will not benefit from any unused funds, and the insurance company keeps the money left in the annuity pool.
While annuities offer safety of principal, that benefit comes at the cost of growth, flexibility, and legacy value. For many investors, taking on some risk in a diversified portfolio may be a better way to achieve financial goals. It’s important to consider your individual risk tolerance and time horizon when deciding if an annuity aligns with your needs. The security of annuities may come with too high an opportunity cost for growth-oriented investors.