31 Jul The 3 Hidden Risks of Investing in an Annuity
Annuities — fixed sums of money paid out to an individual for a pre-determined sum of years — can be a great way to protect against outliving your retirement savings. At the same time, an annuity can be a very complex financial tool whose nuances are tough to understand.
It’s undeniable that an annuity can be one of the best ways to stretch out your finances over a long-term period and help maintain a steady income throughout your retirement years. However, as is the case with most other financial tools, there are certain risks that come with annuities. Here are three of the biggest hidden risks of annuities and annuity settlements that you can’t afford to ignore:
Low interest rates
At almost any other time, hearing the words “low interest rates” would be a good thing. With annuities and annuity settlements, however, low interest rates can be a bad thing. Investments in annuities typically require 15 to 20 years before their rate of return meets or exceeds the rate of return of other types of investments. When annual annuity fees can take as much as 3% out of your fund, this can make it tough to build your investment over time.
Say you’ve purchased an annuity, but need to withdraw money from your annuity fund before you’ve reached 59½ years of age. If this happens, you will be required to pay income taxes on your annuity, along with a 10% early-withdrawal fee. If you want to avoid these kinds of fees, you might be better off selling your annuity in exchange for a lump sum.
Insurance companies going under
When you purchase an annuity from an insurance company, the idea of the insurance company going under is likely the last thing on your mind. However, it has happened to plenty of people before. For this reason, it’s important to choose your insurer wisely — the right insurance company will have a strong credit rating.
Have any other questions about selling your annuity or getting cash for structured settlements? Let us know in the comments below.