When Do Annuities Make Sense (Almost Never!)

Sean Sevey |

When do annuities make sense in a portfolio? In my opinion, rarely! After over two decades of experience, I personally feel the drawbacks of annuities fail the Fiduciary Standard that clients are entitled to. Here are the 5 reasons I avoid using annuities:

1. Complexity and Fees: Annuities can be complex financial products with a variety of fees and charges. Some annuities may have high administrative fees, surrender charges for early withdrawals, or commissions for brokers or agents. These fees can eat into the overall return on investment and reduce the amount of income received.

2. Limited Liquidity: Annuities are designed for long-term financial planning and typically have restrictions on withdrawals or surrendering the annuity before a specified period, often several years. If you need access to your money for emergencies or other purposes, annuities may not provide the flexibility you require.

3. Potential Lack of Flexibility: Annuities often come with limited investment options. You may not have control over how your funds are invested or be able to adjust your investment strategy as your needs or market conditions change. This lack of flexibility may not align with the investment preferences of some individuals.

4. Tax Considerations: Annuities are often subject to complex tax rules. While the growth of funds within an annuity is tax-deferred, withdrawals or income received from annuities are generally taxable as ordinary income. This can impact the overall after-tax return and the amount of income you receive.

5. Inflation Risk: Annuities may not keep up with inflation effectively. If the income you receive from an annuity does not increase over time, the purchasing power of that income can diminish as the cost-of-living rises. This can be a concern for those who rely heavily on the income from annuities for their living expenses.

Questions to Ask:

  1. Does your advisor have an annual annuity sales goal?
  2. What are the fees associated? Please break down every level of fees.
  3. Why, specifically, is an annuity the best way to meet an income gap? Listen for “We feel there should be a GUARANTEED source of income…”

At Sevey Wealth, we have answers to these and any other questions you have! Please let us know how we can help.