Annuities are common means of guaranteeing income for retirement, or as an investment choice for many. But they can be complicated, and someone who doesn’t have the proper knowledge or counsel could easily be misled.
After all, understanding the difference between good and bad annuity rates can be difficult. Plus, several different types of annuities work in different ways and could vary in the amount of income you can receive. In this article, we’ll break down some of the common forms of annuities, and lay out reasons to avoid annuities if you can.
In the end, what’s best for you is what should be taken into account the most, but because of some horror stories, there are a few reasons why a person might want to avoid annuities.
What Types of Annuities Exist?
There are three main types of annuities, and each has its own advantages and disadvantages. Below we break them down.
- Fixed annuities: These annuities offer guaranteed payments for income based on the money you contribute. In this model, market performance is irrelevant.
- Variable annuities: These annuities are invested into a certain field or market, and have the capacity to either make you lots of money or fail. Your income isn’t guaranteed, as this annuity form is more of a gamble based on market performance.
- Fixed-indexed annuities: These annuities place limits on your potential earnings and losses, and can track particular markets to determine which to invest in. But unlike variable annuities, you can only lose or gain so much.
There are also immediate or deferred annuities, depending on what payout method you choose. As their name suggests, immediate annuities provide payment immediately, whereas deferred annuities come with an annuitization timeslot, where your annuity funds can grow until you start receiving payments at a later date.
3 Reasons to Avoid Annuities
Annuities can serve many people well as they search for guaranteed income in retirement or through investment, but they aren’t for everyone. In the wrong hands, your investment could prove detrimental, and you can find yourself stuck in an agreement you don’t want. Below are three reasons to avoid annuities.
- Often, your annuity rates can’t keep up with inflation.
If you have a guaranteed income from your annuity that is locked in for an extended time period, it’s possible that those payments won’t keep up with the rate of inflation. Because of this, you can find yourself unable to get by despite having a guaranteed income from your annuity. Make sure you choose an annuity that will keep up with inflation rates, and find a trusted advisor to help you choose.
- The market could tank your funds
With certain annuities, like variable annuities, it’s a gamble whether or not you will be able to secure funds for income. If the market doesn’t perform as you hoped, you could lose money and not be able to set up a payment plan with security and longevity.
- Expenses can add up
Annuities are costly, and the wrong annuity provider could take advantage of an uneducated customer. Many firms work on commission, so they can be focused more on securing a sale or putting your name to paper than they are on your financial future.
Every person is responsible for deciding their financial future. While annuities are seen as a reliable choice to secure long-standing financial support as they grow older, they can be detrimental to others.
Be sure you’re educated on what goes into investing in annuities and if you decide you do want one, seek trusted and professional advice from someone in the industry before signing up.