Is an annuity right for you? To answer that question you should compare the pros and cons of getting an annuity.
The advantages of annuities.
Arguably, the main advantage of annuities, besides receiving regular payments, is that you can stash away a larger amount of cash while deferring paying taxes. That means you can contribute money before having to pay any taxes.
Speaking of contributions, there are no annual contribution limits. This gives annuities a leg’s up against other tax-deferred retirement accounts like 401(k)s and IRAs. As a result, you can put even more money into your retirement — which is perfect for older individuals hoping to catch up.
What’s more, the money you invest compounds annually — without receiving a dreaded tax bill. Why’s that important? It ensures that the money you invest keeps working for, and not against, you.
Also, when it comes to payouts, you have several options, which was just previously covered. As such, you can choose a method that works best for your financial and retirement goals. In fact, many people use annuities to complement other retirement income sources like pension plans.
And, finally, there are the death benefits. While certainly grim, this could help cover expenses like your funeral or ensuring that your beneficiaries can live comfortably.
The disadvantage of annuities.
Despite the perks listed above, there are plenty of reasons to approach annuities with caution. At the top of the list are the hidden fees involved. As previously discussed, these can include commissions, surrender charges, and annual fees.
On average, you can anticipate a 10% initial commission fee, as well as 2% to 3% a year for management fees. Separately, that may not seem like much. But when added up, they can definitely put a crack into your retirement nest egg.
Also, just like with a 401(k) or IRA, if you withdraw money before the age of 59 ½ you’ll be slapped with a 10% early withdrawal penalty. Some annuities may even hit you with an outrageous initial 20% surrender charge fee! In most cases though, surrender charges are up to 7% of your investment.
As if that weren’t enough to dissuade you, annuities come with misleading high-yield rates and financial risks if the insurance company isn’t in the best of financial health. Also, it may be difficult to pass it onto a beneficiary. While there are plans that permit this, they tend to be more expensive with lower monthly payments.
Overall, annuities can be very pricey if you’re not careful. And, this is most concerning since fee structures are infamous for being complex and vague.