Annuities are often a part of a diverse, strong investment portfolio for retirement planning. They are technically an insurance product, which means their benefits are inherently long-term rather than short-term. While they might perform similarly to stocks and bonds, they generally have significantly less volatility associated with them. In other words, yes, annuities are generally safe.
However, that doesn’t mean annuities are entirely risk free. Any time you add a product to your investment or retirement portfolio, you should be certain you understand all of the benefits and risks associated with the strategies you implement.
Annuity payouts are primarily based on life expectancy. This can be complicated, because there is no way of determining how long you will live. The biggest annuity risk is that you will not necessarily get the full benefits from them.
There are also some other risks to be aware of, including the following:
- Liquidity: There is a risk with annuities that the funds in them will be tied up for years without you being able to access them. If you’re looking for liquidity in an investment, this is probably not the right choice for your portfolio.
- Purchasing power: With any long-term investment, inflation and how it could affect your future financial picture has to be a consideration. There’s a chance inflation could be higher than the guaranteed rate for your annuity. There’s nothing an individual can do to control those inflation rates.
- Credit: There’s a risk the insurer could become insolvent, which could result in some credit damage.
- Surrender risk: There is a risk with annuities that surrender penalties could result in losses if you are forced to withdraw funds early. You can avoid this by simply not withdrawing funds early, but if you fall on tough economic times, that may not be an option.
- Death: Keep in mind that annuities are essentially the opposite of life insurance. While life insurance is meant to pay out money to your loved ones in the event of your death, annuities are meant to provide payouts while you are still alive. With an annuity, you essentially bet that you’re going to live longer than the insurance company predicts. If you die early, the insurance company keeps the premiums and stream of income. You’d need to purchase an additional rider to prevent your heirs from losing that income. These riders can be expensive in some circumstances.
The good news is that recessions do not necessarily add any risk to annuities than what is already inherent with them. This makes them a little safer and more predictable than certain types of investments that rise and fall in greater swings along with the state of the economy in general.
For more information about annuity risks and for help determining whether an annuity could be a good addition to your portfolio, contact our experienced team at Safe Path Financial to arrange a consultation. We will be happy to answer any questions you have for us, and look forward to helping you plan for your future.