Should you buy an annuity? Here’s 4 times when it doesn’t make sense to do so

Annuities can be a solid tool for generating guaranteed income in retirement, but they’re not for everyone. Despite promises of financial peace of mind, annuities come with some big trade-offs. They’re complex, often expensive and restrict access to your funds.

Before you tie up your money potentially for decades, it’s worth asking yourself if an annuity truly fits your financial situation. In plenty of cases, it might not.

1. You’re in poor health

Annuities are essentially a bet that you’ll live long enough to make the upfront investment worth it. You give an insurance company a lump sum or series of payments, and in return, they promise to pay you income — sometimes for life. The longer you live, the better your investment pays off, because no matter how long you live, those guaranteed payments keep coming.

However, if you have concerns about your health or your family history points to a shorter life expectancy, you may be better off keeping your money elsewhere.

You could spend $100,000 or more to buy an annuity and only get a few years of payments before ing away — leaving little to nothing for your heirs. Some annuities include a standard death benefit, which pays out the remaining contributions minus fees and withdrawals. (You contribute $100,000, receive $60,000 in payouts and your heirs inherit $40,000 minus fees.) You can also add a death benefit rider to your annuity, but that protection comes at an added cost — one you could avoid by skipping an annuity altogether.

Similarly, since annuities restrict access to your initial investment, it can be costly — if not nearly impossible — to access your money if your health rapidly declines and your financial outlook shifts.

In short, if your health isn’t solid, keep your cash more liquid and flexible somewhere else.

2. You already have a pension

An annuity is often described as a do-it-yourself pension. If you’re lucky enough to have a traditional pension from your job when you retire, you may already have guaranteed lifetime income.

Let’s say you’re set to get $3,000 per month from your pension, and your expenses are $4,000 per month. Maybe an annuity could cover the $1,000 gap — but so could a smart systematic withdrawal plan, not to mention the ultimate source of guaranteed income in retirement, Social Security.

If your pension covers all your essential expenses, an annuity contract will only complicate your retirement plan. You’re likely better off keeping additional funds in an IRA or a high-yield savings for emergencies and nondiscretionary spending.

3. You don’t have a high net worth right now

Annuities are for people who already have their basic financial house in order. If you’re still working on building up your emergency fund or paying off considerable debt, buying an annuity could make your overall financial situation worse, not better.

Why? Because annuities generally require a large upfront investment in order to produce any sort of meaningful income in retirement — think $100,000 and up. Most financial experts recommend putting no more than 25 percent of your savings into an annuity, so you should have plenty of money elsewhere before g a contract.

Because once you buy an annuity, getting your money out can be difficult. Annuity funds are notoriously difficult to access without getting hit with surrender charges and tax penalties. And once you annuitize your contract, meaning you start receiving payouts from the insurer, you may not be able to take an early withdrawal at all.

Annuities also generally don’t offer great growth potential or adjust payouts to keep pace with inflation (unless you pay extra). If you’re still trying to build wealth, you’re likely better off keeping your money in a Roth IRA or a brokerage .

4. You’re comfortable and confident managing your own investments

Annuities are most useful for people who want to outsource some of their retirement planning decisions — particularly when it comes to managing investment risk and timing withdrawals. The insurance company handles the investment, the payouts and manages the risk of outliving your money. But that convenience comes at a cost: high fees, rigid rules and less flexibility.

If you feel confident managing your own portfolio, it’s not very useful to pay an insurance company to do what you can already handle yourself. You’re likely to get better returns and more control by keeping your money invested and drawing it down in a tax-efficient way.

If you want a second opinion, a one-time session with a fee-only financial advisor could go a long way and cost only a few hundred dollars — a drop in the bucket compared to the potential hidden fees baked into many annuity contracts.

It’s still worth considering the benefits of an annuity

While annuities aren’t the right choice for everyone, there are valid reasons why they continue to be part of retirement planning conversations. The trade-offs are real, but so are the benefits — especially if you’re focused on long-term financial security.

First, not all annuities are expensive or inflexible.

• Multi-year guaranteed annuities (MYGAs): These are fixed-rate annuities that act more like CDs, but with deferred taxes. They’re simple, low-cost and don’t require giving up access to your money forever.
• Longevity annuities: These deferred income annuities are purchased at retirement but don’t start paying out until later — usually around age 80 or 85. Because they’re designed to cover only the later years of retirement, they require a much smaller upfront investment than annuities with lifetime payouts.

Second, you might feel confident managing your investments now — but what about in your 80s or 90s? Cognitive decline is a real possibility, and not everyone has a reliable person to step in and manage their finances. An annuity can automate your income and help protect you from poor decision-making later in life.

And finally, while annuities are often seen as rigid, there are ways to build flexibility into your contract. For example, you can add a long-term care rider if you’re worried about your declining health. Many contracts also allow annual withdrawals of up to 10 percent before you fully annuitize, giving you access to a portion of your money if you need it.

Ultimately, buying an annuity is a deeply personal decision. The best move is to talk through your options with a qualified financial advisor before moving ahead.

Bottom line

Annuities are heavily promoted as a solution to retirement planning, especially by sales reps and agents who make commissions selling them. But in reality, they’re far from a one-size-fits-all fix and there are plenty of times when buying an annuity simply doesn’t make sense.

If you’re on the fence, ask yourself what problem you’re actually trying to solve by purchasing an annuity. If it’s peace of mind, reliable income or protection against market volatility, there might be simpler, cheaper ways to get there.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.