● Opportunity costs: One hidden cost that is not talked about enough is opportunity costs — when too much money goes into an annuity. "Too often, agents and consumers talk about the return of the investment and too little on when you will get your money back, the return of your investment," says financial advisor Jose Sanchez of LifeInsuranceToolkit.com.
For example, a 65-year-old might buy an annuity and defer income until age 70. At age 70, she gets lifetime income guaranteed for the rest of her life. It isn't until age 85, 20 years into the policy, that income received becomes greater than her initial deposit. "Placing too much money in an annuity might have a bigger opportunity cost than most people realize," Sanchez said.
Not only that, but a variable annuity just isn't right for certain customers. And often times, investors can earn more by choosing other, more flexible, options.
"If you aren't absolutely certain that you want to use this money to fund your retirement, you should look at other investment options," says financial advisor Taylor Schulte, founder and CEO of Define Financial. "For example, if you think you might want this money to start a business or buy a home in the future, a taxable brokerage account or a high yield savings account would likely be a better fit."
If you didn't know what an annuity illustration was before, you should be painfully aware by now how important it is to approach them with caution and an ounce of skepticism. What you see isn't always what you get, and illustrations can be deceiving.
— By Jeff Rose, founder and CEO of Alliance Wealth Management