Why are annuities considered bad investments?

Why are annuities considered bad investments?
Annuities provide a guaranteed income during retirement. Despite the benefits they offer, they are overall a poor investment choice for several reasons that we will explore today. Finally, I will offer alternatives to annuities, and the best approach to doing an annuity if that is really the best choice or the preferable choice for you and your financial situation. If you are not staying for the entire video, let me warn you the high commissions sales people earn on annuity products. Do not allow a salesperson to do what is in their best interest, earning a high commissions, by selling you a financial product that may not make any sense for your financial situation.
They are intended to alleviate the fear of a retiree outliving their assets. After all, people are living longer, and many people will outlive their savings. Many of us will unfortunately find that our assets are not adequate to maintain our standard of living throughout our retirement. Therefore, annuities are particularly attractive for people that believe they will have long lives and risk outliving their assets. Therefore, annuities are a way to hedge against longevity risk, that is, the longevity of your own life.
They provide a steady stream of income over a specified period of time or the lifetime of the person who purchased the annuity. They can supplement retirement income by creating predictable cash flow. They are considered a type of insurance contract.
The first stage of the annuity is called the accumulation phase. The investor would purchase an annuity with either a lump sum or monthly premiums. Payments would commence during the annuitization period and continue either for a fixed period or for the rest of the life of the annuitant.
There are two types of annuities: immediate or deferred. Immediate annuities are purchased by people of any age that want to exchange a lump sum of money for cash flows in the future. So an immediate annuities is when we are immediately trading a lump sum of cash for future cash flows. A deferred annuity refers to a delay in when you will receive the cash payments. The money you are paying either as a lump sum or as monthly premiums is going to be invested by the company you purchased the annuity from.
Annuities can be either fixed or variable. A fixed annuity is going to pay a specific rate of return on what you invested. In contrast, a variable annuity is going to invest the money, and the returns will fluctuate.
The con that most people focus on when it comes to annuities is the high commissions. A financial advisor stands to make 6% to 8% or more in commission from selling an annuity versus 2% for a mutual fund. When we are talking about rolling over $500,000, the advisor stands to make $10,000 for the mutual fund versus $25,000 to $35,000 for the annuity. Therefore, it is in the financial advisors best interest to direct as many clients as possible into annuities because the commission is two or three times or more than that for a mutual fund.
Annuities have high fees that are not apparent at first. There are annual maintenance and operational charges that are considerably higher than that for mutual funds. There has been a lot of public backlash against these exorbitant fees and many insurers are having to reduce the expenses. However, low expenses are not a given and it is something that should be reviewed before you commit to a financial product.
Once money is tied up in an annuity, it is made purposely difficult to retrieve it. There are hefty surrender fees charged by the insurer to get the money out of an annuity before a period time has elapsed which is usually six to eight years, but sometimes even longer. There are also tax penalties of ~10% for early withdrawal.
Annuities already are tax sheltered. Therefore, it is redundant and offers no additional benefit to put an annuity in an IRA despite the urging of overly eager salespeople.
Annuities should only be considered by those with straightforward finances that desires simple and fixed payments. Annuities are not necessary for everyone despite being one of the most established way to save money for retirement. It is critical to evaluate all the possible fees associated with any financial or insurance product you are considering.
Alternatives to annuities include deferred compensation plans like 401(k)s, IRA, dividend paying stocks, variable life insurance, and retirement income funds.
Works Cited:
https://www.investopedia.com/articles/retirement/08/annuity-mutualfund.asp
https://www.investopedia.com/terms/a/annuity.asp
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