Annuities Are Worse Than People Think, and High Yield Savings Accounts Are Better

There’s a reason people are often drawn to annuities, especially as retirement gets close. The nice thing about an annuity is that it could set you up with steady, guaranteed income for life. Plus, there can be certain tax benefits associated with annuities — namely, tax-deferred growth on your money.

But you should know that an annuity is not your only option for generating retirement income. In today’s interest rate environment, it could make a lot of sense to put your money into a high-yield savings account instead — especially with many accounts in that category paying close to 4%.

But that’s not the only reason to choose a savings account over an annuity. Not only can annuities be very complex, but they come with a few key drawbacks that don’t apply to savings accounts. Here are a few pitfalls you need to know about if you’re considering an annuity.

1. High fees

Annuities can come with various fees, including ongoing management fees and surrender fees. Plus, you’ll often pay a fee just to put an annuity in place.

With a savings account, there are many banks that don’t charge a fee at all for keeping your money safe. And of the banks that do impose maintenance fees, these are often waived completely if you keep a small amount of money in your account.

You should also know that over time, the fees associated with annuities can take away from their value. And worse yet, because annuity fee structures can be difficult to understand, you may not even realize what fees you’re being hit with.

2. Illiquidity

During an annuity’s surrender period, there can be fees for withdrawing your money. And you may also be limited to the amount you can withdraw during that time.

With a savings account, on the other hand, your money is yours to withdraw whenever you want. And you can take out as much as you want without having to worry about penalties.

Have a sudden expense, like a home or car repair? You don’t have to stress about your money being unavailable to you.

3. Potential losses

It’s possible to lose money in an annuity, depending on the specific type you open. You can’t lose money in a fixed annuity. With a variable annuity, on the other hand, there is the potential to lose money because these annuities are tied to the market’s performance.

With a savings account, meanwhile, your balance cannot lose value as long as you bank somewhere with FDIC insurance, and as long as your balance does not exceed the $250,000 FDIC insurance limit. This limit also rises to $500,000 if you have a joint account holder. Otherwise, the only way for your savings account to lose value is if you go in and take a withdrawal yourself.

While annuities may be right for some people, it’s a good idea to consider the benefits of sticking to a high-yield savings account instead. And if you shop around, you may end up with a rate you’re thrilled with.