Insurance agents and financial advisors have been investing their clients’ retirement money in annuities for decades.

This practice has its detractors, with the criticism usu🎀ally focusing on the high commission൲s paid to annuity salespeople and stiff fees charged to annuity owners year after year.

In fact, if you compare the costs of an annuity to those for a 澳洲幸运5官方开奖结果体彩网:mutual fund, you'll find that a mutual fund is much less e🐠xpensive. So it🦩 pays to know the details about annuities before you invest.

Here’s a rওundown of the pros and cons of annuities and how they compare with other ways to inಌvest for retirement.

How Annuities Work

An annuity is a contract between an investor and an insurance company. The investor contributes a sum of money—either all up-front or in payments over time—and the insurer promises to pay them a regular 澳洲幸运5官方开奖结果体彩网:stream of income in return.

Immediate or Deferred

With an 澳洲幸运5官方开奖结果体彩网:immediate annuity, that income begins almost immediately. With a 澳洲幸运5官方开奖结果体彩网:deferred annuity, it starts at some point in the future💯, typ🍃ically during retirement.

The dollar amount of the income paymen💯ts is determined by such factors as the balance in the account and the age of the investor.

Annuities can be structured to pay income for a set number of years, such as 10 or 20, or for the life of the annuity own🃏er.

When the owner dies, any money remaining in the account typically belongs to the insurance company. However, if they live happily to, say, 120 years old🐽, the insurance company has to keep those ꦬregular payments coming.

Fixed or Variable

Annuities also can be fixed or variable. With a 澳洲幸运5官方开奖结果体彩网:fixed annuity, the insurance company 🍰pays a specified rate of return on the investor’s mon🐠ey.

With a 澳洲幸运5官方开奖结果体彩网:variable annuity, the insurer invests the money in a portfolio of mutual funds, or “澳洲幸运5官方开奖结果体彩网:subaccounts” chosen by the investor. The return fluctuates based on their perform🐬ance.

The Pros of Annuities

ᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚ Despite the criticisms, annuities do🦄 offer some advantages for investors who are looking toward retirement.

Guaranteed Income

The insurance company is responsible for paying the income 🔯it has promised, whether for a specific time period or however long a person lives. However, that promise is only as good as the insurance company behind it.

This is one reason investors should only do business with insurers that receive high ratings for financial strength from the major 澳洲幸运5官方开奖结果体彩网:independent ratings agencies.

Customizable Features

Annuity contracts can often be adapted to match the buyer’s needs. For example, a 澳洲幸运5官方开奖结果体彩网:death benefit prဣovision can ensure that the annuity owner’s heirs will receive something when the owner dies.

A 澳洲幸运5官方开奖结果体彩网:guaranteed minimum income benefit rider promises a certain payout regardless of how well the mutual funds in 🌱a variable annuity perform.

A 澳洲幸运5官方开奖结果体彩网:joint and survivor annuity can provideꦫ continued incomeꦰ for a surviving spouse.

All of these featu🍌res come at an additional cost, however.

Money-Management Assistance

Variable annuities may offer a number of professional money-management features, such as periodic portfolio 澳洲幸运5官方开奖结果体彩网:rebalancing for investors who’d rather leav𝕴e that work to someone else.

The Cons of Annuities

High Commissions

Commissions charged for selling annuities are almost always higher than those charged for 澳洲幸运5官方开奖结果体彩网:mutual funds.

Say that an investor rolls their $500,000 balance in a 401(k) into an 澳洲幸运5官方开奖结果体彩网:individual retirement account𓂃 (IRA). If the money is invested in mutual🅘 funds, the financial advisor might make a commission of about 2%.

If it is invested in an annuity that holds the same or similar mutual funds, the advisor could make a commission of 6% to 8%, or even higher.

Therefore, a $500,000 rollover into mutual funds would pay the advisor a $10,000 commission at most, while the same rollover into an annuity 🌠could easily pay the advisor $30,000 to $40,000 in commission. Not surprisingl🀅y, certain advisors will direct their clients into the annuity.

High Fees

Most annuities do not assess sales charges upfront. That may make them look like no-load inv🦩estments, but it doesn’t mean they don’t 🍰have plenty of fees and expenses.

Annuity contracts impose annual maintenance and operational charges that often cost considerably more than the expenses associated with comparable 澳洲幸运5官方开奖结果体彩网:mutual funds.

This has been changing somewhat in recent years, and some insurers are now offering annuities with comparatively low annual 澳洲幸运5官方开奖结果体彩网:expense ratios. Still, as always, inves💃tors😼 should scrutinize the fine print before they sign.

Surrender Charges

If an annuity owner needs to get money out of the annuity before a certain period of time has elapsed (typically six to eight years, but sometimes longer), they may be subject to hefty 澳洲幸运5官方开奖结果体彩网:surrender fees charged by the insurer.

No Added Tax Benefits Over IRAs

Annuities are 澳洲幸运5官方开奖结果体彩网:tax-sheltered. The investment earnings grow tax-free until the owner begins to draw income. If the annuity is a 澳洲幸运5官方开奖结果体彩网:qualified annuity, the owner is also eligible for a tax deduction for the money they contribute to it each year.

A traditional IRA or 401(k) has the same tax benefits. Plus, if invested in conventional mutual funds or ETFs, it typically costs much less than an annuity.

Importantly, investing in an annuity 澳洲幸运5官方开奖结果体彩网:through your 401(k), as investors may be urged to do by some salespeople, is redundant (because both are tax-advantaged) and needlessly expensive.

In other words, why use your retirement plan contribution to buy an already tax-sheltered product when you can invest in ܫhigher yielding taxable securities that will then grow tax-deferred?

A Compromise Solution

If you like the idea of an annuity but not the potential long-term cost, there's a practical solution. You can invest in mutual funds, ETFs, and other investments until retirement. Then move some of your money into an annuity, especially one with a downside protection rider.

That can keep the fees to a minimum during your workin🦹g years and guarantee a steady income in retirement. Consider consulting with a tax advisor about the tax implications of this approach.

The Bottom Line

Though annuities are one of the most established retirement savings options, they aren't necessarily for everyone.

Annuities work for people who are looking for simple, fixed payments—and who don't mind the disadvantages, such as high fees.

When considering an annuity, be sure to pay attention to all of the details in the contract. Evaluate all of the pros and cons, and co💎ntact a reputable financial advisor if you have any questions.