What are the Most Common Annuity Risks?

Becoming familiar 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 into 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 potentially lose all of the money that has been set aside for the contract. Insurance companies occasionally go out of business and when they do, it can drastically impact thousands of people who are saving for retirement.

Another one of the big annuity risks is the risk that the returns will not beat inflation. In many cases, the returns that are presented by an annuity are very minimal. When inflation is taken into consideration, the returns may become even less attractive. In order to be successful in saving for retirement, an investor needs to be aware of the impact of inflation.

If an investor is involved with a variable annuity, there is a chance that he or she could choose the wrong investments. Variable annuities allow the investor to choose what types of investments the money will go into. If the wrong choices are made, the annuity rates are going to suffer. If the individual chooses an indexed annuity, the index could perform poorly and negatively impact the performance of the annuity as well.

Another potential risk associated with an annuity is that the investor will spend too much of his or her money on fees. There are a number of different fees that will be charged by an insurance company when an investor purchases an annuity contract. The insurance company might take a fixed fee every year or it might take a percentage of the gains of the portfolio. Regardless of how the fees are collected, they will play a role in determining the effectiveness of the investment. Investors need to make sure they understand how they are being charged for the purchase of an annuity.