4 reasons why annuities may not be good for your retirement portfolio
I’ve covered what are annuities and what they could do for your retirement portfolio in my earlier post. In this post, I want to provide a different perspective about annuities and why you may not want to have them in your retirement portfolio to give an all-round view about annuities. Like all financial products, there are pros and cons of annuities. As knowledgable investors, we need to decide for ourselves if annuities deserve a spot in our retirement portfolio.
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1. Annuities are illiquid
As we transition towards retirement, the need to have cash and investments that can be quickly liquidated becomes much more important. What if you are suddenly hit with a family emergency that requires immediate cash? If you had locked majority of your retirement portfolio in an annuity, you will suffer heavy surrender fees if you surrender your annuity prematurely.
2. The guaranteed income from annuities may not be not as good as you think
As the time when you look at the guaranteed pay out from an annuity, the figure is often very enticing and seems adequate for retirement planning. But once you factor inflation into the equation, you may be seeing a totally different story. This is because the dollar value of the guaranteed income from your annuity diminishes over time as costs of living increases.
3. Your money is better off in the stock market
If you are deciding if you want to get that deferred annuity that only starts giving you regular pay outs 20 years later, would your money be better off invested in the stock market? The SPDR® STI ETF tracks the Straits Times Index and has been listed in the Singapore Stock Exchange since 2002. Over the past 10 years, with dividends included, the SPDR® STI ETF returned 8.4% on an annualised basis. While past performance does not guarantee future results, imagine what investing in the stock market for the next 20 years would be like, compared to letting it sit in an annuity that is guaranteed to deliver mediocre results.
4. You are not leaving a legacy for your family
Do you plan to leave a legacy for your family? Putting your money in an annuity means in exchange for a lifetime (or a fixed period) of guaranteed income, you are willing to accept minimal returns or in some annuities, zero returns as pay outs may be drawn down from total premiums.
What’s my take on annuities?
Like all financial products, the reality is that there is no one size fits all solution for everyone. Depending on your retirement plan, financial status and family needs, you need to decide for yourself if annuity deserves a place in your retirement portfolio. Personally, I won’t be taking up an annuity right now because I am still young and have decades ahead of myself to grow my investments as much as possible. That said, when I am closer towards my ideal retirement age, I would definitely take a look and see what are the different annuity plans available to determine if I need one.