Annuities Risk
With the market reaching lows we haven’t seen since the great depression and with retirement investments going in the tank faster than people could pull their money out of them many investors are wondering what the risks of investing in annuities are, and with good reason. Annuities are one of the more confusing investment options so understanding annuity risks is important before sinking your money in. Don’t worry, Annuities Explained is here to help.
Fixed annuities as a rule are relatively “risk free”, or at least more risk free than stocks or mutual funds since the rate of return on most fixed annuities is guaranteed by the issuer. The problem lies within the issuing company itself and its ability to make annuity payments as guaranteed.
Over the last few years insurance companies like AIG and banks like Wachovia and Washington Mutual really fell on hard times and if not for a government bail-out would have collapsed. When you put all of your retirement investments in a single company like this then you run the risk of not being able to recoup your investment should the company go under completely.
Unlike certificates of deposit, which are protected by FDIC up to $100,000, annuities are not protected by the FDIC and therefore present more risk. Annuities do have some protection however in that the companies are required to pay off annuity holders before paying off debtors, so if the company is liquidated you stand a chance of getting some or all of your investment back.
As a result of this risk it’s important to consider the financial strength of the company that you are investing with and gauging what kind of future this company will have, especially if you are far away from retirement.
In comparison to certificates of deposits, annuities have a much higher rate of return, but as mentioned earlier CDs have the benefit of FDIC protection which for the typical investor should cover their entire investment. When deciding whether or not to buy an annuity this is an option that should definitely be considered. Even if the bank goes under, you will still be guaranteed your money unlike what would happen if an annuity provider went under.
Another annuities risk that you have to account for is the risk of locking in to a rate of return that is lower than you could get with a similar investment option elsewhere. Since annuities have a guaranteed rate of return, they don’t return a high yield like stocks or mutual funds would. If you need anything other than a low risk, low yield rate of return then you would probably be wiser to look elsewhere, otherwise you are risking the loss of potential income and you can find some relatively low risk mutual funds or bonds to invest in.
Bottom line, annuities are a relatively low risk option but they aren’t 100% risk free. Anything short of a government backed investment option will always have some risk associated with it and annuities are no different. Before investing in any annuities, whether fixed annuities or variable annuities, be sure you understand all of the pros and cons of annuities and you will be better off in the long run.
