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| No matter how great an annuity plan sounds, it's almost always a bad investment. |
Annuities are sold as safe investment plans. Someone else manages your money and when you're ready to retire you receive income every month. It sounds like a dream come true. This will work for you with your social security and your 401(k) plan and your personal stock portfolio. Life will be grand if you just buy an annuity!
The first time anyone tried to sell me an annuity plan I was very young, just out of college. I eagerly took the brochure home to think about it. I called my mom and asked her what she thought. The first words out of her mouth were, ask your grandmother what she thinks.
And so I called my grandmum and explained what I was thinking of doing. She cut me off before I finished describing the plan. Don't do it. She said. Your grandfather bought and annuity and it locked up our money. When we needed help they wanted to charge us early withdrawal penalties.
The only certain thing in life is uncertainty. When unexpected needs disrupt your finances, you should have complete control over your money. Annuities take that control away from you and you'll never get all your money out when you need it.
Annuities Are Just One More Way for Someone To Take Your Money
If you look hard enough you'll find an economist or personal finance manager who explains why you shouldn't do any of these things:- Buy life insurance
- Invest in the stock market
- Buy your own home
- Buy your own car
- Rent
- Lease a car
- Buy annuities
- Invest in a 401(k) plan or equivalent
- Invest in an IRA
The bottom line for me is simple.
- How much does this financial plan cost me up front and every month?
- How much can I realistically expect to earn from it?
- Are there any penalties or fees for doing what I want or need with my money?
But if you're paying commissions to lock up money that you won't be able to use as you see fit when you need it for an emergency, you have nothing to gain.
Annuities are worse investment plans than 401(k) portfolios. I'm no fan of 401(k) investing but you have slightly more control with that money than with an annuity. Barely more than slightly.
The Only Advantage in Annuity Investing Is You Don't Think
If you earn more money than you need and you have maxed out every possible investment strategy, throwing a little extra money into an annuity is a lazy way of investing. You'll never have to think about where the money is invested or when you should cash out. Everything will happen automatically for you.And yet when I ask people how sure they are they will never need money they want to invest in a 401(k) or annuity, or an IRA, they tell me of course we can't be 100% sure!
And so I ask, then why do you want to take that risk?
Annuities are good investments for money you don't need and won't need in the future. They'll sweeten your retirement benefits.
If you're not sure how you'll support yourself in retirement, locking up your savings in an annuity is a foolish idea.
Some people would argue that being able to withdraw all your savings for an emergency is not a lifetime investment strategy either.
And yet many people living on annuities are forced by circumstance to incur early withdrawal penalties.
It's completely unfair to the investor to have to pay a penalty on withdrawing their own money. You'll never recover from that kind of expense. Annuities aren't designed to cover the costs of early withdrawal penalties.
There are Better Ways to Invest without Thinking
When you look at all the options you have for investing your money - where you don't need to manage it for yourself - you will see which strategies are more expensive.Investment expenses include any of the following:
- Administration fees
- Broker commissions
- Early withdrawal penalties
- Below market interest rates
- Rising premiums
Dividend reinvestment plans and commission-free investing services are your best friends. Never ask how much profit you'll make in 5 years. Think about how much your investments will be worth when you are ready to retire.
You don't need to be a financial wizard to stash money away for a rainy day or retirement. You only need to make sound, sensible decisions.
If it sounds like a great investment with only upside potential, there is something wrong with the offer.
Every investment comes with risk. Every investment has costs.
It's your job to understand the risks and ferret out all the costs. Whomever is trying to sell you an investment plan is putting their own needs first. They may be wonderful people but they live on the income they generate either for themselves or their companies by selling you advice or products.
