Key Points:

• Annuities have high fees and low liquidity; they’re often better for brokers than investors.
• Consider low-cost mutual funds or treasury funds for more flexibility.
• Avoid annuities unless absolutely necessary.
• Instead, look at true income investments like these 2 dividend legends to buy and hold forever.

Lee and Doug discuss the pros and cons of annuities, particularly as a financial product targeted at retirees. They note that while annuities offer a degree of safety, being insurance products with state and corporate guarantees, they often come with high fees and commissions, making them more beneficial for the broker than the investor. They also highlight the lack of liquidity as a major drawback, as annuities can impose significant penalties for early withdrawal. Instead of investing in annuities, they recommend looking into low-cost mutual funds, index funds, or conservative treasury funds through reputable firms like Fidelity (NYSE: FNF) or Vanguard (NYSE ARCA: VTI). Their overall conclusion is that annuities are generally not a good investment option and should be avoided.

Transcript:

One of the things that people look at financially, particularly as they get towards retirement, is annuities.

Now, annuities advertise on network TV, which is median age of 70, and AARP.

So what’s the message from a company that wants to sell you an annuity?

Well, the message really is that they are high-commissioned products that often have pretty high fees.

I mean, for years, especially in the 90s, variable and fixed annuities were a real go-to product for retail stockbrokers.

And they’re pretty simple in that a fixed annuity obviously has fixed income with no stock exposure, whereas a variable annuity usually has an index like the S&P 500 or the Dow 30 or things of that nature.

Now, typically, and this is something that I wanted to research, is when you have money in a bank or at a brokerage firm, there’s some insurance by the FDIC in a bank, and there’s insurance for brokerage firms as well that’s up to $250,000.

With annuities, since they are insurance products, state guarantees, corporate entities cover the investor up to $250,000.

So there is a degree of safety in annuities.

But again, one of the problems for investors is the very high commissions, the high expenses.

There’s two kinds of annuities: one that when you die, it ends, and then the other kind of annuity, you can have an extension to your benefactor or the benefactor of your annuity, and they can take it longer.

So again, it was a huge product 30 years ago.

I don’t know if there’s a lot of use for them now.

So fundamentally, if somebody knocks on your door and says, “Gee, here’s an annuity, I want to sell it to you,” what’s the alternative investment for somebody, you know, who’s no longer young?

I mean, what would you say? No, don’t do that. Do this. What is the this?

Well, and one of the reasons to avoid them is sometimes there’s no liquidity.

What if you have an emergency and you have to get out, or you have to have a cash flow emergency, or you need money?

It’s not a good vehicle for that because you’re somewhat pinned in.

And in some cases, if you come out early, you pay huge charges to come out early.

The best advice is go to Fidelity, go to Vanguard, go to low-cost mutual fund giants, and, you know, put your money in an index fund, put your money in conservative treasury funds, but do something where if you need that money, you can get to it.

Well, so our conclusion is stay away from annuities.

If somebody knocks on your door or your broker, the chances it’s a good idea are really low.

Yeah, it’s nil.

The chances are it’s a better idea for the broker.

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.