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Annuities are contracts with an insurance company that guarantee income in retirement.
But, high fees and low returns can offset the benefits, financial planners say.
You may be able to make more money investing on your own, according to experts.
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Annuities aren't all bad. But, they might not be the right move for everyone, either.
Annuities are contracts with insurance companies that can provide guaranteed income in retirement. There are several types, including fixed, indexed, and variable annuities. While they can be the right move for some people who need help budgeting their retirement income, or feel uncertain about their financial future, they aren't the right move for everyone.
Financial planner Brian Walsh of SoFi said that there are upsides and downsides to these financial products. "Annuities are like anything else with personal finance, where they can have a place to be used appropriately. But unfortunately, a lot of times, they are used inappropriately," he said.
There are a few reasons financial planners caution their clients about annuities.
Financial planners don't like them for the fees involved
Annuities aren't free — you'll pay someone to manage the money put into them. And that work comes with a cost.
It's something financial planner John Bovard of Incline Wealth says he cautions clients about. "You're paying a financial advisor their fees on the annuities, and you're also paying an actuary fee for them to do basically those time value of money calculations and life expectancy calculations. You have there at least three to four layers of fees that are involved with annuities," said Bovard.
These fees can vary based on the annuity you choose, but there will be several fees attached. There's also generally a penalty for withdrawals before age 59 and a half.
Walsh said that the fees can sometimes eat up any growth. "Generally speaking, annuities come with very high expenses and fees that, especially if you're using them to save money, will really add up over a long period of time and offset any of the potential benefits," he told Insider.
They won't earn the same returns as investing yourself could
Financial planners say you're not going to grow your wealth much by putting money into an annuity.
"I equate them almost to like a checking account at a bank," said financial planner Jovan Johnson of Piece of Wealth Planning. "You're not going to get this crazy rate of return." Instead, they're more about guaranteed income and security.
The average stock market return is about 9.2% over the past 10 years, according to Goldman Sachs data. How much you'll get from an annuity will depend on several factors, though it is guaranteed not to drop in value.
"I think it's good for people that need that structure, and they're scared to have that money invested," Johnson said. However, if you feel confident in your savings and investments, you may be better off leaving them where they are than buying an annuity.
Liz Knueven
Personal Finance Reporter
Liz was a personal finance reporter at Insider.Before joining Insider, she wrote about financial and automotive topics as a freelancer for brands like LendingTree and Credit Karma.She earned her bachelor's degree in writing from The Savannah College of Art and Design. She lives and works in Cincinnati, Ohio. Find her on Twitter at @lizknueven.
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A more likely story, he suggests, is that advisors are unenthusiatic about annuities, in large part because it's difficult for them to get paid on annuity assets.
Some annuities can come with exponentially higher fees than other investment vehicles. Annuities can have sales commissions, administrative charges and investment expenses. In addition, sales agents might not discuss an itemized list of fees upfront, obfuscating how much the contract will cost.
One of the most popular arguments against annuities is that they have high fees, a common assumption that is perpetuated by people both in and out of the finance industry. However, the truth is that some annuities have no fees whatsoever, while others have fees that are discretionary based on the benefits desired.
With an annuity—especially a fixed annuity—they know what their monthly income will be (and can budget accordingly). This saves them the task of managing their retirement portfolio, a plus for those who worry they aren't capable of managing their own portfolio.
If you select an annuity today, you will be unable to take advantage of interest rate increases, since you have a fixed monthly payment. If you die prior to your life expectancy, you and your beneficiary, if applicable, may not collect the full value of your accrued benefit.
However, they can come with high annual fees, early withdrawal penalties and may not provide inheritance for heirs. The suitability of an annuity as an investment depends on individual financial goals, risk tolerance and retirement plans.
A straight fixed annuity is the easiest type of annuity to calculate a payment from. This is because fixed annuities work like bonds. If you use $50,000 to buy a fixed annuity paying 5% per year, for example, you'll earn $2,500 annually or about $208.33 per month.
The short answer is yes, while most types of annuities can provide a safe haven in volatile markets, in specific circ*mstances they can lose money. Annuities can be a safe option for people saving for retirement and looking for guaranteed income once retirement begins.
Yes, some annuities are safe in a recession. Some annuities are even securities. Fixed annuities provide guaranteed rates of return, which means that you know exactly how much you can earn at the end of the term.
Annuities are often used as a safe and effective way to guarantee income in retirement. For this reason, they may not make sense as part of a strategy for the ultra-wealthy (think those with net worths in the tens of millions or higher).
Let's get right to it: can a fixed annuity actually lose money? The answer is no! The insurance company will pay you a set interest rate no matter how the stock market performs. If the stock market tanks, your fixed annuity will not lose money.
In general, 401(k) plans — and the very similar 403(b) plans offered by nonprofit organizations — are a better way to grow your cash for retirement than an annuity.
A financial professional may collect 6% of the initial purchase price as compensation for the sale of a variable annuity, which is paid by insurer (versus a deduction from the premium). In contrast, investment advisers often levy an annual 1% fee on the balance of a retiree's investment portfolio.
The bottom line. Annuities may make sense to consider for seniors — and that's especially true for those who are looking to generate a stable income or protect themselves from growing prices.
Fisher argues that many annuity companies misleadingly call variable annuities “safe investments.” He says that this is false, and in reality, you can lose money in a variable annuity. Fisher is right: Variable annuities can bring substantial risk with them.
Annuities: Annuity commissions are generally built into the price of the contract. Commissions usually range anywhere from 1% to 10% of the entire contract amount, depending on the type of annuity. For example, fixed-indexed annuities generally earn advisors a 4% commission.
Orman states that SPIAs can therefore take the place of CDs or treasury notes to help provide income in retirement. Many people think that Suze Orman "hates annuities," but she concedes there are circ*mstances where they do make sense.
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