FYI: Plenty of people shudder when they hear the word, “annuity.” Many financial advisors sell them as if they’re life preservers. But they’re usually filled with holes.
Variable annuities, for example, are widely oversold. An advisor might croon, “These products guarantee that you won’t lose money. They’re also linked to the stock market. So when stocks rise, the value of the annuity rises too.” In 2005, columnist Scott Burns published, Seven Reasons To Avoid Variable Annuities. Today, his logic hasn’t lost its sting. Investors pay stratospheric charges, averaging 2.24 percent per year. That hurts investment returns. Variable annuities can also attract unnecessary taxes. And if investors withdraw early, they usually pay stiff exit penalties.
Fixed-income annuities, however, look more attractive to retirees. Here’s how most of them work: You pay an insurance company a lump sum. In exchange, they provide a regular income stream for life. It’s much like buying a defined benefit pension. But in most cases, there’s no upward adjustment to cover inflation. *