Annuities Aren’t What They Seem: Why High-Yield Savings Accounts Are a Better Option
Key Points:
- Annuities provide guaranteed income but may not suit everyone’s needs.
- Risks associated with annuities should be considered before committing.
- With current savings account rates, keeping extra money in the bank could be a better choice.
As retirement approaches, many people are attracted to annuities for their promise of guaranteed, steady income. Additionally, annuities offer some tax benefits, such as tax-deferred growth.
However, they are not the only option for generating income. In today’s financial landscape, high-yield savings accounts may offer better returns, with some accounts paying nearly 4% interest.
Why High-Yield Savings Accounts Are a Smarter Choice
While annuities may seem appealing, there are several drawbacks that make high-yield savings accounts a superior choice for many. Here are some important reasons why:
1. High Fees
Annuities often come with hidden fees, including management and surrender fees. Some even charge an upfront fee just for setting up the annuity.
- Savings accounts, in contrast, typically have no fees or minimal fees that can be waived by maintaining a small balance.
- Over time, annuity fees can erode your earnings, and the complexity of the fee structure makes it difficult to fully understand the costs involved.
2. Illiquidity
Annuities are illiquid during their surrender period, meaning you can face penalties if you withdraw money before a certain time. Additionally, there may be limits on how much you can withdraw.
- In a high-yield savings account, you can access your money anytime with no penalties. Whether it’s an emergency or a planned expense, your money is always available.
3. Potential Losses
Certain types of annuities, such as variable annuities, are tied to market performance, meaning you could potentially lose money.
- With a savings account, your balance is protected under FDIC insurance up to $250,000 per depositor ($500,000 for joint accounts). As long as you don’t withdraw more than your balance, it’s impossible for your savings account to lose value.
While annuities can be a good choice for some individuals, the fees, illiquidity, and potential losses they involve may outweigh their benefits for many. In today’s interest rate environment, high-yield savings accounts provide a safer, more flexible alternative. You can access your money anytime while earning competitive interest rates—without the complex fees associated with annuities.
