Fixed
annuities are poor investments
Fixed annuities are often criticized as poor investments for several reasons, despite their reputation for providing stable, predictable income. Here are the key drawbacks and concerns:
High
Fees and Commissions
- Internal Fees: Fixed
annuities can carry a range of fees, including administrative charges,
mortality expense risk fees, and rider fees. These can add up to 2%–4% per
year, significantly eroding returns over time.
- Commissions: Sales
agents and financial advisors often receive high commissions for selling
annuities—sometimes as much as 5%–8% of the invested amount. This creates
a financial incentive for advisers to recommend them, even when they may
not be the best fit for the client.
- Comparison to Other Investments: Mutual funds and ETFs typically have much lower fees and commissions, making them more cost-effective for long-term growth.
Limited
Growth and Inflation Risk
- Fixed Returns: While
fixed annuities provide a guaranteed return, this also means you miss out
on higher potential gains from market-based investments during strong
market periods.
- No Inflation Protection: Fixed annuities generally do not offer built-in inflation protection. Over long periods, inflation can significantly reduce the purchasing power of your annuity payments unless you pay extra for a cost-of-living rider, which further increases costs.
Lack
of Liquidity and Accessibility
- Surrender Charges: Most
fixed annuities have long surrender periods (often 5–10 years or more). If
you need to access your money before this period ends, you may face
surrender charges of up to 10%–25% of your principal.
- Limited Withdrawals: Annuities typically restrict the amount you can withdraw each year without penalty, making it difficult to access your money in an emergency.
Tax
and Penalty Considerations
- Tax Penalties: Withdrawals
before age 59½ may be subject to a 10% tax penalty in addition to regular
income tax.
- Tax Treatment of Gains: Growth in non-qualified annuities is taxed as ordinary income when withdrawn, which can be less favorable than capital gains treatment for other investments.
Other
Concerns
- Complexity: Annuity
contracts can be difficult to understand, with complex terms and
conditions that are not always clearly explained to investors.
- Insurance Company Risk: While rare, there is a risk that the insurance company issuing the annuity could become insolvent, potentially putting your investment at risk.
Although fixed annuities can provide predictable income and security for risk-averse investors, their high costs, limited growth, and lack of liquidity make them a poor choice for many investors seeking long-term growth or flexibility. The key exceptions would be the rare times when interest rates are extremely high, as they were in the early 1980s. Short of that, the main incentives for the sale of fixed annuities are the commissions for the salespeople.
N.
Russell Wayne
Weston, CT 06883
203-895-8877
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