Numerous annuities sound like fantastic moneymakers, but you will find frequently hidden charges that may reduce into any earnings the annuity pays out, so purchaser beware.
Commissions: For starters, most annuities are sold by insurance coverage brokers or other sales individuals who gather a commission that may be steep – as a lot as 10% or so.
Surrender charges: You are also most likely to face a prohibitive surrender charge for pulling cash out of an annuity inside the very first a number of years following you purchase it. The surrender charge usually runs about 7% of one's account worth in the event you leave following 1 year, and also the charge usually declines by 1 percentage point a year till it gets to zero following year seven or eight. Note that some annuities include even heftier surrender charges – as much as 20% within the initial year.
Higher annual charges: In the event you invest inside a variable annuity you will also encounter higher annual costs. You'll have an annual insurance coverage charge that may run 1.25% or much more; annual investment management charges, which variety anyplace from 0.5% to greater than 2%; and charges for numerous insurance coverage riders, which can add an additional 0.6% or much more.
Add them up, and also you might be paying 2% to 3% a year, if not much more. That could take an enormous bite out of one's retirement nest egg, and in some instances even cancel out a few of the advantages of an annuity. Evaluate that to a normal mutual fund that charges an typical of 1.5% a year, or index funds that charge much less than 0.50% a year.
Also, as having a 401(k) or IRA, in an annuity it is usually not a great concept to take out any cash till you attain age 59 ? simply because withdrawals produced before which are hit having a 10% early withdrawal penalty.