Annuities Pros and Cons

by Jeff Rose on May 24, 2012

If you’ve been investing for a while then you should be somewhat familiar with annuities and the security they can bring to any portfolio. A good annuity is the perfect nest egg for your retirement, and can even help you take care of expenses with your family, but don’t let the benefits and security blind you to an annuities pros and cons. Just as with investments, there are both benefits and drawbacks, gains and losses that can happen when you have an annuity.

Taking the time to look and decide whether an annuities pros and cons cancel each other out, or if the pros outweigh the cons, will help you make an informed decision, which is the best kind of decision to make when it involves your hard earned money.

The Advantages of Investing in an Annuity

The first, and most obvious, of any annuity benefit is that they are guaranteed. Your initial principal investment is guaranteed at a specific rate of return, and any accumulated interest is guaranteed to be paid out when due. Beyond a guaranteed return rate, there are also tax benefits when you have an annuity. Only the gains on your annuity are taxed, and even then only when you begin receiving payments from your company. But it gets better as well, if you begin receiving payments after retirement then the tax rates will most likely be lower than if you were working. With benefits like these, it’s not difficult to see why annuities are so popular.

The Disadvantages of Investing in an Annuity

Unfortunately, annuities have cons as well as pros. One such disadvantage is the similarity annuities have with certificates of deposit. Just like a CD, if you attempt to withdraw funds from your annuity before it has matured then you’ll have to pay early withdrawal fees. This one fact alone is why an annuity should never be part of a portfolio that needs a lot of liquidity. Another disadvantage of annuities is the higher fees. Compared to other investments that have 1% fees, the 2-3% usually charged on annuities can add up over time.

Now that you know about an annuities pros and cons, you can truly decide if investing in an annuity is the best option for you. A guaranteed rate of return combined with tax-deferred gains is enough for most people to disregard the lack of liquidity and increased fees, or maybe the cons are enough for you to disregard the benefits. Either way, an annuities pros and cons are an important factor to consider for any investor thinking of getting an annuity.

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