Is an Annuity a Good Retirement Investment? Here’s What Dave Ramsey Thinks

The idea of running out of money at some point in life can be scary. But as good a job as you might do of saving for retirement, there’s unfortunately no guarantee that your nest egg will last as long as you need it to.

Granted, the more careful you are in taking IRA or 401(k) withdrawals, the less likely you are to outlive your savings. But if you want more of a guarantee, you may want to consider investing in an annuity.

An annuity is a contract you sign with an insurance company that could guarantee you income for the rest of your life. Ramsey says an annuity is a lot like ordering a burrito at Chipotle because these products can be customized to meet your personal needs.

With an annuity, you can decide:

• How you want to pay for your annuity, whether it’s a single payment or multiple payments
• When you start receiving annuity payments
• Whether you want your payments to be fixed/predictable each month or variable

Ramsey says that there are some benefits to having an annuity. And there’s something to be said for having an investment that’s guaranteed to pay you money for the rest of your life.

But Ramsey also has some big problems with annuities. And it’s important to know what they entail.

Why Ramsey is not a fan of annuities

The main reason many people are drawn to annuities is that they’re afraid of running out of money. But Ramsey has a few big problems with annuities you should know about.

First, he warns of hefty surrender charges, which come into play if you take money out of your annuity within a few years of buying it or try to cancel your contract.

Secondly, one of the reasons insurance companies love selling annuities is because they can charge expensive fees. Plus, the individual people who sell these products tend to make big commissions off of them — commissions you pay for.

Also, it costs money to invest and manage an annuity. You pay those fees, and they can eat into your annuity’s returns.

Furthermore, Ramsey warns that many annuities do not do a good job of keeping up with inflation. This especially holds true for fixed annuities. You could instead put your money into other assets that are likely to keep up with or beat inflation.

Finally, annuities can be complex. It’s generally not a good idea to put your money into things you don’t understand, and an annuity might fall into that category.

Should you buy an annuity?

An annuity may be worth considering if you’re truly worried about outliving your money. But before you commit to one, you may want to consider other stable investments that could end up paying you more than an annuity — without all of the fees and confusion.

Remember, too, that you probably have access to an income stream that’s guaranteed for life — Social Security. And if your monthly benefits are large enough, you may not need an annuity on top of them, which would make the case to invest your money elsewhere.