Too often, buying an annuity is a mistake. It doesn’t have to be. Watching for 5 simple, easy to identify red flags can help you avoid a costly mistake.

People buy annuities looking for a steady income stream and reduced risk. Unfortunately, too often, they get substandard products.

Bridget Sullivan Mermel CFP(R) CPA and John Scherer CFP(R) talk about how to sort it out.

John’s firm website: www.trinfin.com
Bridget’s firm website: www.sullivanmermel.com

For advisors around the US:
www.acplanners.org

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An annuity is a financial product that offers guaranteed income payments for a set period of time or for the rest of your life. While annuities can be a valuable tool for retirement planning, they may not be the right choice for everyone. Here are some reasons why buying an annuity could be a mistake.

1. Limited flexibility: Annuities typically come with restrictions on when and how you can access your money. If you need to withdraw funds for an emergency or unexpected expense, you may face hefty surrender charges or penalties. This lack of liquidity can be a drawback for those who may need access to their savings in the future.

2. High fees: Annuities often come with high fees and expenses that can eat into your potential returns. These fees can include sales charges, management fees, and insurance costs. Over time, these fees can add up and diminish the value of your annuity.

3. Inflation risk: Annuities may not keep pace with inflation, meaning that the purchasing power of your income payments could decrease over time. If inflation rises, your fixed annuity payments may not be enough to cover your living expenses. This risk is especially relevant for retirees who are relying on their annuity income to fund their lifestyle.

4. Lengthy commitment: Annuities are long-term financial products that require a significant upfront investment. Once you purchase an annuity, you are locked into the contract and may face penalties for withdrawing funds early. This lack of flexibility can be a drawback for those who want to maintain control over their investments.

5. Potential for better options: There may be other investment options that offer similar or better benefits than an annuity. For example, a diversified portfolio of stocks and bonds could provide growth potential and income without the restrictions and fees associated with annuities. Before purchasing an annuity, it’s important to explore all of your investment options to make an informed decision.

In conclusion, buying an annuity may not always be the best choice for everyone. While annuities can offer guaranteed income and peace of mind, they also come with limitations, fees, and risks. Before purchasing an annuity, it’s important to carefully consider your financial goals, risk tolerance, and investment strategy to determine if an annuity is the right fit for your retirement plan.