Are Annuities a Good Investment? Pros and Cons to Consider

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When picking the best investment or retirement plan, it helps to have a clear-cut idea of what your options are and what will work best for your finances and needs. When it comes to something like annuities, there is comfort in knowing they can provide reliable income. Often enough, though, you don’t get your money’s worth if you die unexpectedly early.

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There are many savings or financial products that are also worth considering. These could come with lower fees than annuities. However, keep in mind that you can customize the best annuity to fit your needs if you are comfortable with a slightly lower income per month. 

What Is an Annuity?

Though there are different types of annuities, essentially an annuity is a long-term contract with an insurance company where you invest your money as a form of retirement planning. When you buy an annuity, you get regular payments as income. You can also opt for a lifetime guaranteed income benefit at an additional cost as an investment option. 

Here are some different types of annuities: 

  • Immediate payment annuity: This type pays immediately after the annuitant deposits a lump sum.
  • Deferred annuity: Deferred income annuities don’t begin payment after the initial investment. You’ll specify the date when you’d like to start receiving payments. 
  • Fixed annuity: This is when you get regularly scheduled payments over a period of time.
  • Variable annuity: You can get bigger future payments depending on whether the annuity fund does well, or smaller payments if it doesn’t. It’s riskier than a fixed annuity, but can have a higher reward in returns. 
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Pros and Cons of Annuities: Quick Take

Annuities’ pros and cons can be a multifaceted and nuanced series of payments. As with any investment, there are benefits and drawbacks, so make sure to research which could work for you and still remain within your financial risk tolerance

Annuity Pros and Cons Breakdown

Pros Cons
Can provide money management assistance in retirement Higher fees and commissions than other financial products or investments
Allows you to depend on a reliable and guaranteed income source Surrender charges for withdrawing money before the surrender period expires are quite high.
Annuities are customizable and flexible to fit your needs. Annuities can come with certain tax penalties.

The Surrender Period for Annuities

The surrender period is the time frame in which you cannot withdraw money from an annuity without paying surrender charges. Be aware this period can be for several years. If you try to withdraw your funds before the surrender period is expired, you could incur extremely high fees or penalties. 

What Is Better Than an Annuity For Retirement?

Annuities might not be a retirement investment potentially for a few reasons. Depending on the annuity you choose, you may or may not be able to recover some of the principal invested in the account. There is no refund of the principal for lifetime payouts. The payments simply continue until the beneficiary dies, unless there are death benefits set up. A fixed annuity is set over a period of time, so you may be entitled to a refund of any remaining principal.

Final Take To GO: Are Annuities a Good Investment?

In many cases, annuity payments can provide a reliable income stream in retirement, though it’s not the most tax advantageous. You may not get your money’s worth if you unexpectedly die early. Annuities often have high fees compared to similar financial products such as mutual funds or S&P 500 investments. You may want to speak with a financial advisor to help customize an annuity to fit your needs, to see if this is the right retirement move for you.

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FAQ

Here are some answers to frequently asked questions about whether or not annuities are a good investment as well as some pros and cons to investing in annuities.
  • What is an annuity?
    • Simply put, an annuity is a long-term contract with an insurance company where you invest your money as a form of retirement planning. When you buy an annuity, you get regular payments for income. You can also opt for a lifetime guaranteed income benefit at an additional cost as an investment option.
  • Is there a downside to annuities?
    • Yes, there can be drawbacks to annuities, such as:
      • Higher fees and commissions than other financial products or investments.
      • Annuities can come with certain tax penalties.
      • Surrender charges for withdrawing money before the surrender period expires are quite high.
  • What are the different types of annuities?
    • There are a few different types of annuities you should familiarize yourself with before investing such as the following:
      • Immediate payment annuity: This type pays immediately after the annuitant deposits a lump sum.
      • Deferred annuity: Deferred income annuities don't begin payment after the initial investment. You'll specify the date when you'd like to start receiving payments.
      • Fixed annuity: This is when you get regularly scheduled payments over a period of time.
      • Variable annuity: You can get bigger future payments depending on whether the annuity fund does well, or smaller payments if it doesn't. It's riskier than a fixed annuity, but can have a higher reward in returns.
  • What is the surrender period for annuities?
    • The surrender period is the time frame in which you cannot withdraw money from an annuity without paying surrender charges. Be aware this period can be for several years. If you try to withdraw your funds before the surrender period is expired, you could incur extremely high fees or penalties.
  • Is it a good idea to invest in an annuity?
    • Annuity payments can provide a reliable income stream in retirement, however, you may not get your money's worth if you unexpectedly die too soon. Annuities often have high fees compared to similar financial products such as mutual funds or S&P 500 investments, but can be a good idea to invest in them if the following benefits make sense for your financial situation:
      • Can provide money management assistance in retirement.
      • Annuities are customizable and flexible to fit your needs.
      • Allows you to depend on a reliable and guaranteed income source.

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