Fixed annuities can be risky from the standpoint of opportunity cost. When someone thinks of fixed annuities, they tend to think of safety. Well, that’s not always the case. There are many risks when it comes to investing in these vehicles.
First and foremost, the lack of liquidity often poses a big risk for most people. When you invest in a fixed annuity, you automatically (for the most part) put yourself in a disadvantage as far as having access to your money. You are very limited as to when, how, and how often you can access your money. Most notably, the typical fixed annuity allows you to withdraw up to 10% per year without penalties (provided you are over 59 ½). However, what they fail to tell you, is that (in most annuities) you can typically take ONE withdrawal up to 10% per year. Therefore, if you make a withdrawal for 5% and try to take another 5% withdrawal that same year, you will get penalized on the withdrawal (and the penalties can be steep).
The risk of the insurance company failing
The next potential risk is the risk of the insurance company failing. This is the first time I put this out there but with the way the economy is right now, I think it is a SERIOUS risk to consider. I don’t even care if your company is A-rated. It is important to know how sound your insurance company is. Some professionals are now calling for an all out depression. If you look at the last depression (1930’s) insurance companies failed. This time may be no different.
In addition, a fixed annuity can be risky from the standpoint of opportunity cost. A fixed annuity is typically a longer commitment ranging from 3 years to 10 years or even longer. Interest rates do not stay fixed for very long. If you get locked into something that is low and rates happen to move up, you may be sitting in a vehicle that IS NOT WORTH STAYING IN. You must know that these vehicles are all about a time commitment and over time, rates change and your needs may change as well.
This is not meant to frighten you but it is meant to inform you. Just because a fixed annuity doesn’t have market risk, it does not mean it comes without risk.
Learn more about risks on fixed annuities
