Why Annuities May Not be the Best Investment


A few weeks ago, I received a call from a retiree saying that she heard annuities were “good” for retirement, and wanted to get my opinion on it.

To lump all annuities into a single category is like saying all cars are the same. And while annuities have changed considerably over the last 15- 20 years, many large insurance companies have significantly reduced their annuity offerings, or exited the business entirely.

I told this woman what I tell all clients and prospects who ask the same
question—once in a great while, an annuity is in fact appropriate for a client’s
situation. But the vast majority of the time, in my experience, there are better

In more than 20 years in the business, I have found annuities to be the
most mis-sold investment and the reason has always been simple—they
have traditionally paid the highest commissions of any mainstream investment
product. I still get postcards from annuity companies with a picture of a cruise ship on the front.

While any discussion of the issues with owning annuities in retirement
accounts would be extensive, let me highlight a few drawbacks:

Many annuities charge
a surrender fee if liquidated prior to a
period of several years after purchase,
which could result in significant penalties.

Tax efficiency—
I can’t tell you

how many times I have seen a client
own a variable annuity, which is a tax deferred
investment vehicle, inside an
IRA account, which is a tax-deferred
account. Many advisors can’t explain
to their clients why it makes sense to
pay for this duplication.

Uncertainty of guarantees—
While this sounds like an oxymoron,
the “guarantees” offered by these products
are only as good as the insurance
company’s willingness and ability to
continue to offer them. Recently a
client, who had purchased an annuity
years before we worked together, said
she received a letter from the company
about how the guarantees in her contract
would be reduced going forward.

This has always been

the biggest knock on annuities, and
rightfully so. Many times, the all-in
internal expenses in a variable annuity
can be close to 3% per year, sometimes
even more when certain riders
are included.

Before you consider an annuity for your retirement account, make sure
you thoroughly understand the costs and what other investment alternatives
may be available.

David Novak, CFP® is a Certified Financial Planner™ at 
Novak & Powell Financial Services in Pinellas County.
Please note: he is not an attorney and this article
should not be construed as one offering legal advice.
For information about investment decisions and
financial planning, contact him at (727) 451-3440.


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