Buying an annuity may seem like a safe, stress-free option. All you have to do is put your retirement savings toward one of these insurance products, and you get a guaranteed income stream for life. But while annuities can work for some individuals, many people end having annuity regrets down the road.

While the specifics depend largely on the type of annuity purchased—whether that’s a variable annuity, indexed annuity, etc.—looking back 15 years from when someone bought an annuity, they may have regrets due to:

1. Underperformance

Annuities might seem like a great way to get a stable retirement income, but you could end up regretting the purchase if it turns out you short-changed yourself. In many cases, annuity payments underperform long-term returns from the stock market and other investment options that you could have put your money into instead.

For example, fixed annuities that promise, say, a 3% return from your retirement principal could pale compared with a strategy like the 4% rule. You may earn more retirement income from your savings by maintaining more of your principal, making relatively conservative investments, and slowly drawing down your assets over time, rather than locking yourself into a specified rate of return with an annuity.

2. Inaccurate Assumptions

Many people come to realize that they purchased an annuity using inaccurate assumptions. These assumptions can include overestimating the risk of hanging onto their retirement portfolio and drawing down their assets over time or underestimating how much inflation will eat away at annuity income. Several years later, you may come to realize that the annuity doesn’t look as good as it used to.

Even if you tried to get ahead of some of these issues, such as purchasing inflation-protected annuities, the cost could be much higher, as FINRA notes. Plus, you might not be able to adapt to inflation in a way that makes the most sense for your needs. With an investment portfolio, a financial advisor can help you realign your investments toward whatever inflation hedges make sense at the time.

3. Excessive Fees

Another common annuity regret relates to paying excessive fees. At first, you might think that annuity fees are just the cost of getting some peace of mind with monthly income. But when you add up the fees over the years, you may realize that you could have had more retirement income if you had gone a different route.

In particular, annuity fees can add up when you start making changes. As Annuity.org states, each rider you add to your annuity contract can incur an annual fee of 0.25-1%.

You will encounter fees with your investment portfolio as well. Ideally, you will select a portfolio designed to keep costs low or work with a financial advisor who adheres to a low-cost, tax-efficient investment philosophy.

4. Lack of Flexibility

Another common annuity regret is the lack of flexibility that these contracts provide. While there can be significant differences among annuity types, the bottom line is that you’re still entering a defined arrangement.

At the least, if you want to make changes to your annuity, you’re probably going to have to pay a fee. Worse, by having your retirement principal locked up, you may find you can’t readily respond to changes in your life.

Suppose your retirement goals change and you want to launch a side business to keep you busy and perhaps get other family members involved. With an annuity, you’re probably limited in terms of how much cash you have available. Depending on the annuity type you have, the insurance company may charge you for cashing out as well.

But if you keep your retirement portfolio, it could be fairly easy to unwind some stock and bond investments to free up cash.

5. Limited Inheritance Options

Lastly, some people have annuity regrets because the product limited their ability to pass on an inheritance. If you didn’t choose an annuity that benefits beneficiaries after you pass, the annuity payments could end when you die. In contrast, if you held onto your lifetime of retirement savings and drew them down over time, you could pass on whatever is left in your retirement accounts however you want.

Even if an annuity provides death benefits, it may lack the flexibility that could apply if you established your own inheritance plan. For example, later in life, you might decide to take some of your retirement savings to set up education funds for your grandchildren. Being able to do that ahead of time, rather than waiting until annuity death benefits pay out, could give those funds a longer timeline for growth.

Final Points

Overall, many retirees end up having annuity regrets once they realize that they gave up a lot of control and potentially money in exchange for what seemed like security at the time. That’s not to say that annuities are never a good option, but it’s important to realize that they may not always be the best fit for your needs, especially 15 or 30 years into retirement.

Before you buy, consider discussing your retirement plans with a qualified financial services professional, such as a fee-only financial advisor. The right advisor can help you set out on a course that meets your needs and that has the flexibility to change direction as your needs change.

Our fiduciary wealth management firm in Plantation, Florida, is happy to discuss whether annuities have a place in our clients’ long-term financial plans.

Schedule a complimentary consultation with one of our fee-only financial planners to discuss your personal situation.

This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.