Annuities or; How I learned to stop worrying and embrace risk
They are expensive, and the payouts are often not as high as promised.
Many investors flee to the “safety” of annuities at the worst possible time. Investors often see these low payout rate annuities, compare it to what they could earn on a 10-year certificate of deposit (CD) at 3.25% at time of writing, and think that an annuity is not a bad deal. But the safety comes at a steep price. In exchange for the promise that you'll get paid, you're also agreeing to give up the opportunity to earn more elsewhere. Below are 5 bullet points on why annuities are not a panacea for most investors and why a portfolio of stocks and bonds should be considered instead.
1. Lack of liquidity: Once you invest in an annuity, your money is tied up for a set period of time and you may not be able to access it until you retire. This can be problematic if you need to access your money for an emergency situation.
If you need to access your money for an emergency situation, you may not be able to get to it. This can be costly if you have an unexpected medical bill or need to make a repair to your home.
2. High fees: Annuities typically have high fees associated with them, which can eat into your investment returns.
Annuities typically have high fees associated with them, which can eat into your investment returns. For example, you may be charged an upfront commission, ongoing fees, and back-end charges if you cash out early. These fees can significantly reduce the amount of money you have available to invest, which can impact your long-term financial goals.
3. Complexity: Annuities can be complex products, which can make it difficult to understand how they work and what fees you are paying.
A 60/40 portfolio is a much simpler way to invest your money than an annuity. With a 60/40 portfolio, you simply invest 60% of your money in stocks and 40% in bonds. This portfolio is easy to understand and manage, and it offers a good balance of risk and reward. Additionally, you are not subject to high fees or Surrender Charges, and you can access your money at any time.
4. Poor investment returns: Many annuities offer poor investment returns, which can leave you worse off than if you had invested your money elsewhere.
Annuities typically offer lower investment returns than a 60/40 portfolio (a portfolio consisting of 60% stocks and 40% bonds). This is because annuities are designed to provide a guaranteed income stream in retirement, which means that they are not focused on maximizing investment returns.
5. Risk of losing your money: Some annuities come with Surrender Charges, which means you may lose a percentage of your investment if you cash out early.
Investors often flock to annuities during market turbulence as a way to protect their investments from the ups and downs of the market. However, this can be the worst time to invest in an annuity as you are locking in lower returns. When the market eventually recovers, you will be stuck with the lower returns from your annuity while other investors will have enjoyed the higher market rates.