3 Things 8-25-25

 Thing One

Why You Should Buy an Annuity

Annuities can be a compelling option for individuals seeking financial security and predictable income, particularly in retirement. One of the primary benefits of an annuity is its ability to provide a guaranteed income stream for life or a specified period, which can offer peace of mind in an uncertain economic environment. Fixed annuities, for example, deliver consistent payments regardless of market fluctuations, shielding you from the volatility that can affect other investments like stocks or mutual funds. This reliability is especially valuable for retirees who need to cover essential expenses, such as housing or healthcare, without worrying about outliving their savings. With life expectancy increasing—U.S. data shows the average 65-year-old can expect to live into their mid-80s—an annuity’s promise of lifelong income can address longevity risk effectively.

Another advantage of annuities is their tax-deferred growth, which allows your investment to compound without annual tax liabilities on gains. Unlike taxable investment accounts, where dividends, interest, or capital gains are taxed yearly, annuities let your money grow undisturbed until withdrawals begin. This can be particularly beneficial for high-income individuals or those in higher tax brackets looking to maximize their savings over time. For example, if you invest $100,000 in a deferred annuity at a 4% annual return, the tax deferral could result in significantly more accumulated wealth compared to a taxable account over 20 years. This feature makes annuities an attractive complement to other tax-advantaged accounts like IRAs or 401(k)s, especially for those who have maxed out contributions to those plans.

Annuities also offer customization to suit diverse financial needs, making them versatile for different stages of life. Immediate annuities can start payouts soon after purchase, ideal for those already in retirement, while deferred annuities allow you to build savings for future income needs. Optional riders, such as cost-of-living adjustments or enhanced death benefits, can tailor the annuity to your specific goals, like protecting against inflation or leaving a legacy for heirs. For risk-averse investors, fixed-indexed annuities provide a middle ground, offering potential for higher returns tied to market indices while guaranteeing principal protection against losses. This flexibility allows you to align the annuity with your risk tolerance and financial objectives, whether you prioritize safety, growth, or a combination of both.

Lastly, annuities can serve as a hedge against poor financial decision-making or market downturns. Behavioral finance studies show that many investors struggle with emotional decisions, such as panic-selling during market crashes—U.S. equity markets saw a 20% drop in early 2020, prompting many to sell at lows. An annuity removes some of this risk by locking in a portion of your portfolio for steady income, reducing the temptation to react impulsively to market swings. For those nearing or in retirement, this stability can be a cornerstone of a diversified financial plan, complementing other assets like stocks or bonds. While annuities come with fees and limitations, their ability to deliver guaranteed income, tax advantages, and tailored solutions makes them a worthwhile consideration for those seeking long-term financial security.

Thing Two  

Why You Shouldn't Buy an Annuity

Annuities, often marketed as a secure way to ensure a steady income stream in retirement, come with significant drawbacks that may make them unsuitable for many investors. One primary concern is their high cost. Annuities typically involve hefty fees, including sales commissions, administrative charges, and mortality and expense risk fees, which can eat into your returns over time. Variable annuities, for instance, often charge annual fees of 2-3% or more, significantly higher than low-cost investment options like index funds or ETFs, which can cost as little as 0.03-0.2%. These fees can erode the value of your investment, especially in a low-return environment, making it harder to achieve your financial goals. Additionally, surrender charges—penalties for withdrawing funds early—can lock you into the product for 7-10 years, limiting your financial flexibility.

Another reason to reconsider annuities is their complexity and lack of transparency. Annuity contracts are often laden with fine print, making it difficult to fully understand the terms, risks, and limitations. Features like guaranteed income riders, death benefits, or variable return options sound appealing but often come with restrictive conditions or additional costs that may not align with your needs. For example, the "guaranteed" income from fixed annuities may not keep pace with inflation, reducing your purchasing power over time. Moreover, the returns on variable annuities are tied to underlying investments, which introduces market risk without the full upside potential of direct investing due to caps or participation rates. This complexity can obscure whether the annuity truly serves your financial interests compared to simpler, more transparent alternatives like bonds or mutual funds.

Liquidity is a critical issue with annuities, as they often tie up your money for extended periods. If unexpected expenses arise—such as medical costs or family emergencies—accessing your funds can be costly or restricted due to surrender periods or tax penalties. Withdrawals before age 59½ typically incur a 10% IRS penalty, plus ordinary income tax on gains, which can be a significant hit. This lack of liquidity is particularly problematic for younger investors or those with uncertain financial needs. In contrast, other investment vehicles, such as stocks, bonds, or even real estate, offer greater flexibility to adjust your portfolio as circumstances change, without punitive costs.

Finally, annuities may not be the best fit for your financial goals if you prioritize growth or legacy planning. For younger investors or those with a longer time horizon, the stock market historically offers higher returns—averaging 7-10% annually after inflation—compared to the often modest returns of fixed or indexed annuities. If your goal is to pass wealth to heirs, annuities can complicate estate planning, as many contracts do not transfer remaining funds efficiently to beneficiaries, unlike other assets held in taxable accounts or trusts. Tax-deferred growth, a key selling point of annuities, is also available through other vehicles like IRAs or 401(k)s, which offer greater investment flexibility and lower costs. Unless you have a specific need for guaranteed income and fully understand the trade-offs, alternatives like diversified portfolios or fixed-income securities may better serve your financial objectives.

Thing Three

Just A Thought  

"It all depends on how we look at things, and not how they are in themselves." — Carl Jung