In the world of finance, advisors are sometimes scolded for selling annuities. Dave Ramsey is especially popular for doing this. While I agree that annuities aren’t always the best option for every individual. There is a time and place for everything. When you’re trying to keep expenses to the client as cheap as possible, achieve an overall comprehensive plan, which includes everything, their asset protection, savings, investments, taxes, etc., an annuity considered holistically may not be the best recourse. However, I have used annuities for clients. So what are some reasons you don’t need an annuity?
The first reason you don’t need an annuity is that you are smart enough to control your own money. You don’t have to allow annuity companies to manage it for you. Sometimes better investment tools exist, like mutual funds or exchange-traded funds. Even if you know nothing about investing you can typically invest money with a broker for cheaper than you can invest in an annuity.
If an advisor sells you the product instead of explaining how it fits in your comprehensive plan, don’t buy it.Click to tweet
Another reason why an annuity might not be the best selection is, the fees are typically extremely high. While you may think they don’t cost you, there are several things you need to consider. How much is the surrender charge? What is the M&E charge? What is the cap rate? Are they going to participate in dividends? The list goes on and on. So when you start asking these questions and compare the answer to the fees of a no-lo mutual fund, an ETF or even an index fund, you often find that fees are two and three times that of what you’ll get on the open market.
If you manage your finances well, spending less than what you make then you probably don’t need an annuity. If you like to control how your money is invested, then you likely don’t want an annuity. While they mimic mutual funds, they aren’t mutual funds. They aren’t traded on the market; insurance companies trade them. If you’re using a fixed annuity or an index annuity, then companies are putting your money into their general account. So if controlling your investments is important to you then an annuity isn’t the proper vehicle of investing for you. If you want to get the maximum return, you can’t do it an annuity. They contain a two, three, four percent charge. In the market, you can buy a mutual fund and get whatever return the market gives. You just can’t get that in an annuity.
The biggest advantage to an annuity—tax deferral. However, if you don’t need a tax deferral, then you don’t need an annuity. If you feel like you want a custom plan and don’t want to be another number, then you don’t need an annuity. If you can’t and don’t understand the details of an annuity, then don’t buy it. These incredibly complex investment vehicles cost you if you lack comprehensive knowledge about them. If an advisor sells you the product instead of explaining how it fits in your comprehensive plan, don’t buy it. If you already have a hefty nest egg, don’t buy an annuity. The purpose of an annuity is to keep us from outliving our money. Many times with the options out there today, that isn’t the case anymore. In future blogs, we’ll look at some of the reasons why you might want to invest in an annuity.