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Annuities are a popular retirement savings option, but investors must be aware of the risks, including default, inflation, poor investment choices, and high fees. Default is the biggest risk, as insurance companies can go out of business, causing investors to lose their savings. Inflation can also impact returns, while poor investment choices and high fees can negatively affect annuity performance.
Familiarity with the various annuity risks could prevent an investor from losing significant amounts of money in the annuity market. Annuities are a popular way to save for retirement, and there are several annuity risks that any investor should be aware of. Some of the most common annuity risks are the risk of default, the risk of inflation, the risk of choosing the wrong investments, and the risk of spending too much on fees.
One of the biggest annuity risks to worry about is the risk of default. When an investor puts money into an annuity contract, he or she is putting faith in an insurance company. The insurance company has to stay in business to honor the annuity contract. If the company goes out of business, the investor could lose all the money that has been set aside for the contract. Insurance companies occasionally go out of business, and when they do, it can drastically affect thousands of people who are saving for retirement.
Another of the big annuity risks is the risk that the returns will not exceed inflation. In many cases, the returns presented by an annuity are very minimal. When inflation is factored in, returns can become even less attractive. To be successful in saving for retirement, an investor must be aware of the impact of inflation.
If an investor is involved in a variable annuity, there is a chance that he or she could choose the wrong investments. Variable annuities allow the investor to choose which types of investments the money will go into. If the wrong decisions are made, annuity rates are going to suffer. If the individual chooses an indexed annuity, the index could underperform and negatively affect the annuity’s performance as well.
Another potential risk associated with an annuity is that the investor will spend too much of their money on fees. There are a number of different fees that an insurance company will charge when an investor purchases an annuity contract. The insurance company may charge a flat rate each year or a percentage of the portfolio’s earnings. Regardless of how the fees are collected, they will play a role in determining the effectiveness of the investment. Investors should make sure they understand how they are charged for an annuity purchase.
Smart Asset.
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