The Costs of Owning an Annuity

by Stan Haithcock

Listen to Stan Haithcock's presentation at the AAII Investor Conference!

I think we all can agree that annuities are the curse word of the financial world.

The consensus is that the annuity industry has earned its bad reputation and negative stigma with their maligned sales practices. That being said, over $200 billion of annuities are sold every year with multiple trillions already on the books.

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Stan Haithcock is an annuity specialist and nationally recognized annuity expert.


Discussion

Richard Waters from Massachusetts posted 7 months ago:

There is no such thing as a "surrender charge", there is a deferred sales charge that is paid by charging an additional 1% annual fee and there is a corresponding reduction of the deferred sales charge. If there is a remaining balance of the deferred charge when the annuity is surrendered that amount becomes currently due. The so called "surrender charge" doesn't disappear over time you pay it over time. The prospectus should make this clear. Does anyone read the prospectus?


C Pickering from Missouri posted 7 months ago:

Does anyone read the prospectus? Probably not. Many people do not read much these days--for many reasons.

Why not put the money, say $100,000, in a mutual fund account or several fund accounts (Fidelity or USAA funds, e.g.), get advice on fund selection from AAII's quarterly listing, as well as from Fidelity's or USAA's advisers, and go from there? I just don't understand the value of annuities compared to a personally-driven (with advice) investment program.


Barry Copeland from Colorado posted 7 months ago:

Annuities have a bad reputation because they are generally a really bad deal for anyone. One exception is a high-net-worth individual who cannot participate in an IRA.

Take the FIA for example. The insurance company takes your $100K, locks it up as far as being accessible to you, and then feeds your own money back to you in small chunks with ever decreasing purchasing power due to inflation. The insurance company keeps ALL of the gain on your money until you reach your life expectancy. If you live longer than that, then the insurance company pays you out of their coffers with money that has seriously fallen in purchasing power.

It's also a fact that most annuities never annuitize. They are a good deal for the sales guy and the insurance company, but a rotten deal for the individual buyer.


Bert Rock from Maryland posted 7 months ago:

I am trying to get a handle on whether an annuity might in general make sense. I understand that annuities, in general, pay out a lower percentage gain than if you had invested in equities or bonds.bond funds. But these investments are by no means guaranteed and it's possible to have negative returns. Is it not true that, going into retirement, if you put some portion of your savings into an annuity, that you can guarantee a particular rate of return at least on that portion?

Thanks for any input.


Bert Rock from Maryland posted 7 months ago:

I am trying to get a handle on whether an annuity might in general make sense. I understand that annuities, in general, pay out a lower percentage gain than if you had invested in equities or bonds.bond funds. But these investments are by no means guaranteed and it's possible to have negative returns. Is it not true that, going into retirement, if you put some portion of your savings into an annuity, that you can guarantee a particular rate of return at least on that portion?

Thanks for any input.


Suryakant Shah from New Jersey posted 7 months ago:

I am planning to invest in Defered Varaible Annuity offered by Fidelity. I am told that it's like investing in mutual fund with defered tax on gains. Also I can withdraw full investment after retirement.

Can appreciate any input on this.


Roger Grossel from Florida posted 6 months ago:

With so many other investment alternatives, I fail to see why anyone would consider an annuity. And buying one now subjects an investor to very high opportunity costs, given the high risk of rising interest rates.

This article explains some of the costs. It does not advise the AAII investor about potential major risks to undistributed funds or principal (his “P”) when the owner dies. If an unscrupulous agent sells a lifetime immediate income annuity with no period certain, upon death that insurance company keeps undistributed funds. Also, what happens after life expectancy?

In a private communication, the author assured me that HE does not structure such contracts.
But I wish he had included in his article guidance on setting up contract beneficiaries and riders when the owner eventually dies or reaches life expectancy. Or perhaps AAII could have discussed these issues, pre-publication, with the author.


Michael Flynn from Florida posted 6 months ago:

I found annuities to be a place for cash after making full contributions to tax deferred pension plans and investments. Variable annuities offer mutual fund like performance with tax deferment minus some extra fees. Vanguard and Fidelity have low fees and no surrender charges. Fidelity offers a stretch provision which allows a beneficiary to take over the annuity and keep it as their own. In this regard it has some estate planning attractiveness. Obviously there are many other considerations. Proper allocation of investments with suitable diversification needs to be considered for your situation. I think one might consider an annuity in lieu of long term care insurance. I see variable annuities as a long term horizon investment for those who have discretionary funds to invest. They are a choice among many options.


Victor Bradford from Colorado posted 6 months ago:

Good helpful article.
I, too, am considering diversifying into annuities and noticed one respected charitable organization offers a charitable gift annuity rate of 5.1% for someone around my age. Such an annuity also has a decent tax deduction, not just a deferral, and it supports your charity. Obviously, look into all the details, but you might consider charities as a reasonable alternative to brokerages or insurance companies.


Mark Holloway from Oregon posted 6 months ago:

I have seen annuities put in IRAs. What is your opinion of this?


Roberta Shuken from Florida posted 6 months ago:

I have a Variable Annuity through Vanguard. The main reason I bought this type of investment was because I could not contribute to my IRA accounts any more.

The fees were minimal and stopped after 7 years.

I have the account more than 10 years and my assets have doubled.

For me, this was a good investment


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