Episode 22: Is an Annuity a Good Investment?
Thank you for joining us for Episode 22 of our Money Wisdom Question Series, where we answer common financial and retirement investment questions. Today’s question is, “Is an annuity a good investment?”
Not All Annuities Are Investments
Here’s the confusion around annuities. Some annuities are considered savings vehicles – they’re not actually what are called securities and investments. Technically with these types of annuities, your money is at risk.
However, for many annuities, your money is not at risk. It is principal, which means the money is guaranteed by an insurance company.
There Are Four Different Types of Annuities
One type of annuity is a variable annuity, which is usually what we hear all kinds of bad things about such as high fees and your money is at risk. Your money is exposed to the stock market, while the insurance companies make all this money and the people selling these annuities make a lot on commission. That’s the variable annuity and many people are not a fan of these. Again, your money is at risk and you basically have mutual funds that you’re paying a lot of increased fees on.
There are some benefits and sometimes in higher interest rates environments. To me right now, as we sit here in 2020-2021, there are not a lot of advantages to variable annuities.
Three of the four annuities that exist are called fixed annuities, which means they’re insurance contracts and you can’t lose your money. They’re very simple. You put your money with an insurance company, and they guarantee your principal.
Let’s say they maybe give you an interest rate for five years of 3%. You get 3% for five years and when that time is up, you can cash out your annuity. You take your principal and interest back too. There is no risk. Also, there are no fees from a contractual standpoint. So, it looks like a CD. Although, legally it’s not considered a CD because instead of being issued by a bank, it’s issued by a company.
Another example is an immediate annuity, which acts like a pension. If you’re collecting a pension from a company, you’re getting a monthly check. That is an annuity, from a legal standpoint. When people say, “I don’t like annuities.” I always like to say, well if you’re getting a pension, you better get rid of the pension because it works the same way as an annuity would.
An Annuity can be Great to Own
There’s a lot of confusion around annuities, but depending on your situation, an annuity can be a great thing to own. My mom and dad have a significant amount of their retirement savings in the type of annuities where they get their principal guaranteed and when they earn interest they can never go backward, and they like that. I have some of my money in an annuity. It may not be appropriate for you to have any of your money in an annuity. It depends on your individual situation. Annuities are neither good nor bad. It’s how they are used that can be either good or bad.
Thanks for joining me and I hope you found this information helpful!
P.S. If you enjoyed this topic and want to learn more, download our free guide, “The ABCs of Fixed Index Annuities”.
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