At one time, annuities may have looked like an ideal retirement vehicle: you put in a lump or periodic sum, the principal is "guaranteed" with an insurance benefit and the headline in the brochure claims you'll receive "$4,000 a month for life" - this seems like plenty to live on in your golden years. However, annuities have somewhat lost their glow. There are several reasons for this, including:
- Market performance.
- "The fine print" on returns.
- Hidden costs.
Every retirement vehicle (to be fair to annuities) has become less certain due to the less predictable, lower-returning mutual funds underpinning most of them. Annuities are no exception. Global uncertainty, brought on by the crisis in Europe and events such as the 2008 recession, is a good indicator of this fact.
Why Are Annuities Attractive?
For people absolutely disinterested in managing their own finances, annuities offered a simple menu. The participant must decide on only three things: lump or periodic inputs (contributions), deferred or immediate income, and fixed or variable returns. Many investors have chosen variable over fixed annuities at times, when roaring mutual funds usually mean high returns compared to the conservative and seemingly "safe" fixed option.
In the fine print, "fixed" usually means the returns will be re-evaluated in one to five years due to market variances. Contracts simply can't guarantee 6% if the fund manager is only making all-in yields of 5%.
Why Have Annuities Lost Their Glow?
The old joke about annuities is that you make a fortune on the headline and then the fine print takes it all back. In many cases, this hasn't been too far from the truth. Introductory rates may be like 0% interest on car loans, and are indeed much like loss leaders in a supermarket promo. Those large promises suddenly evaporate after the first six months or a year when rates are adjusted and fees kick in.
Here are a few of those fees that can be buried deep within an annuities contract, or not shown at all:
An annuity is basically insurance, so some nice salesperson gets a cut of your return or principal for selling the policy to you.
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