• October 17, 2019

Now that you’ve retired, you may be thinking that the next logical step is to open an annuity. If you don’t have a pension plan, an annuity can provide a guaranteed retirement income. However, as a long-term investment, you may want to proceed with caution. Here are some reasons why.

Your money may outlive you. Generally, an annuity is when you give an insurance company your money and in return, they pay you an income stream for the rest of your life. While it may be comforting to have a predictable source of funds, in some cases, if you die before you’ve received all of your money, the insurance company keeps it.

You may pay extra to pass on your money. As indicated above, in the event that you die before your original investment has been repaid to you, the insurance company, not your heirs, keeps the balance. Your monthly payments will stop and you will not be able to leave funds in your annuity contract to your spouse, children, or loved ones. You may have the option to leave a survivor benefit, but this comes at an extra cost and can be expensive.

You may be paying hefty fees. Annuities come with big upfront fees in the form of sales commissions. These can go as high as 10% of the lump sum you're depositing. These fees along with other associated charges, like administrative and management fees, can negatively impact your annuity by lowering your monthly payments by a fixed dollar amount or reducing your annual investment returns by a percentage.

You will pay penalties for early withdrawals. If you withdraw from your annuity before reaching the required age, you may be subject to a costly penalty of 10% or more. Since annuities are not particularly aggressive investment vehicles, you could stand to lose all your returns by making an early withdrawal.

Despite their shortfalls, annuities continue to be attractive since fixed annuities prevent losses. In other words, you are more or less guaranteed that the value of your principal will not go down regardless of what the stock markets do. However, you should be careful in trading the potential to earn better returns in an investment account over the protection of an annuity. The bottom line- before you enter into an annuity or any post-retirement investment account, be sure you are confident that you understand the benefits and risks.