Living a prosperous life is just one of the many things that most people would hope for. Earning enough money that will suit your lifestyle and your family’s needs is just one of the many things that give you fulfillment.
However, no matter how prosperous your life can be today, or no matter how much money you make, there is a much bigger part of your life that you also have to think of and prepare for—your future.
Investing for your future is a whole new different story since there are various risks involved and there are significant decisions to make. Unlike when deciding on short term investments, there are more risks involved when you are venturing on an investment that entails your retirement plans.
There is a variety of investment options that you can encounter when considering your retirement plans, and one of those is investing on annuity.
At first, annuities can seem attractive because of its promising benefits, death benefit, and other investment options. However, it is important that you realize the disadvantages of annuities and why this is a bad investment for your retirement plans.
Editor's Note: See the retirement vehicle that our financial experts recommend
The most important thing that you have to know about an annuity is that you are making a lump sum investment with an insurance company—either through a broker or directly to the company. This means that you should ensure the reputation of the insurance company. The money is accumulated during a phase, and you can receive the pay-out at a given time, whether as one large payment or through a scheduled cash-out.
Choosing annuity as your investment for retirement is not a smart choice for the following reasons:
1. There are a lot of fees associated with your annuity purchase. This includes the commission you pay to your broker, the additional fees that you are required to pay depending on your investment options and other additional fees should you wish to redirect your annuity investment for mutual funds. There will also be transfer fees that you will be required to pay if you decide to move your money from your stocks to a mutual fund.
2. Annuities require a long-term commitment. As much as you want to have a guaranteed investment, you really cannot foresee unexpected circumstances that can affect your annuity. There may be a case when you have to use your annuity early and this will require you to pay a surrender fee. One of the major risks that you have to make is the assurance that the insurance company that you have chosen will still be capable of paying your retirement income.
3. There are no guarantees with annuities, hence there are a lot of variables involved in this kind of investment. Your mutual and stock fund split will also be affected by the stock market, economy, and other factors that can affect your retirement income dramatically.
4. Income taxes apply to your annuity payments once you start receiving them. Apart from this, you also need to pay a 10 percent tax penalty for receiving annuity payments before the age of 59 years and 6 months.