The Only Annuities Worth Buying

Most buyers don’t need a lot of bells and whistles.

Senior couple discussing papers. (Dreamstime)

Annuities get a bad rap, and deservedly so in many cases. They can be complex and pricey, yet consumers don’t know how much they cost because the broker’s commission is usually baked into the product. Insurance companies adjust features like surrender charges, upside caps, and payout rates in ways that are invisible to the buyer.

Yet annuities come in lots of flavors, and to condemn the whole category is to miss out on potential opportunities. Plain vanilla income annuities can plug a funding gap in retirement plans. As fewer Americans retire with pensions, there’s a lot to be said for an alternative that delivers guaranteed income for life.

Most retirees can skip the fancier annuities. In that category I’d put the popular RILAs, or registered index-linked annuities. These are typically positioned as accumulation vehicles rather than an income option. They link your money’s growth to the performance of a stock index like the S&P 500. The pitch is that you get to participate in much of the market’s upside while getting cushioned on the downside. So if the market goes down 20% and your buffer is 10%, you would lose only 10%. And if the market goes up 20% and your upside cap is 15%, you’d forfeit just 5%.

But you can’t have your cake and eat it too. Upside caps are only guaranteed for a set period and are typically reset lower when that ends. Many RILAs come with surrender periods of several years, and you’ll pay a penalty if you need to access most of your money before then. And if the market has a few years of blockbuster returns, you’ll miss out on gains.

If you truly can’t stomach being invested in the market, these market-adjacent products might make sense. Ditto if you’re a high earner and are looking for tax-deferred growth after already maxing out your 401(k), IRA and HSA. Generally speaking, though, you’re better off building a buffer into your asset allocation.

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