Who Should Not Buy an Annuity?

Annuities are a diverse group of products that can help customers achieve a number of goals, from creating a retirement income stream to building up value with little risk. However, some types of people may not be able to get a lot out of these products. Here are some situations where an annuity probably does not make sense.

You Are Still Young

Safety and built-in security are the main selling point of most types of annuities. These products offer stable ways to both grow money at a steady rate and to guarantee payments that you can receive to supplement your retirement.

This is typically not the ideal way to operate when you are still young.

When you have decades before retirement, significant growth and accumulation are often the priorities. This is not the purpose of annuities, where you essentially trade massive growth potential for certainty and low risk.

When you are younger, risk is much less of a concern since you have years to make up downswings in the market or significant losses.

Annuities are also often attractive to seniors due to their effective ability to combat longevity risk. Buying an annuity that creates a guaranteed income stream to last the rest of your life can ensure you never have to worry about running out of money no matter how long you live.

This feature is wasted on a younger person, since they are obviously many decades away from having to worry about longevity risk.

Buying an Annuity Will Exhaust Most or All of Your Savings

While annuities provide many benefits, locking up most or all of your savings into one can be a mistake.

Annuities are generally illiquid products. The tradeoff for the guaranteed growth and security they provide is that it can be difficult to remove money from the account before it is annuitized.

Most major annuity companies allow you to unexpectedly withdraw up to 10% of the money you placed into the product without incurring a penalty. Withdrawing any amount beyond that will require you to pay a surrender fee, which can be significant.

Annuities are typically employed as a supplemental piece of a larger retirement income strategy. For this reason, it may not make sense to place money into an annuity that you would need if you experience a financial emergency.

Note that many annuity contracts do include outs for situations such as if you are diagnosed with a terminal illness or confined to a nursing home. In such cases, you would be allowed to withdraw the full value of the product without penalty.

You Have a Short Life Expectancy

Annuities can serve as incredibly effective tools in combating the risk of running out of money late into your retirement.

You can structure the stream of guaranteed payments provided by an annuity to last the rest of your life. This ensures that no matter how old you get, you will still have a monthly source of income to help keep you afloat.

However, if you have a short life expectancy or do not anticipate having a long retirement, then an annuity may not do much for you beyond locking up money that you could be using in the short term.

Most annuities are meant to serve as years-long products. Whether it’s a deferred annuity that builds up value over time or an immediate annuity that converts a lump sum into lifelong payments, the goal of the product is based on your long-term financial situation.

Such a product therefore may not provide much value for someone who does not have a long life expectancy.

Buying an annuity is just like buying any other financial product; it’s the right choice for some and not for others. A solid financial plan should be made up of all different types of products and be based on age, need, goals, lifestyle, investment experience and other factors specific to that investor. Annuity products, as good as they are for the right investor, can be a bad investment for many others.

Aamir Chalisa, MBA, LUTCF, MDRT

You Want Huge Returns From Your Investments

Annuities offer a safe, low-risk way to grow your money. This means your returns will not be as large as you might see from riskier, more traditional investing.

Take a fixed index annuity. These products allow you to participate in market gains by tying the annuity’s performance to that of an index. However, you are guaranteed to never lose any of your principal, in exchange for a cap on growth.

This can be a great option for someone who is risk-averse but still wants to experience growth, without any serious risk attached.

On the other hand, if you are looking to dramatically grow your money, then a product that caps your earnings obviously will not make sense for you. 

It’s important to weigh how much you value growth versus level of risk when considering if an annuity is the right product for you.