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With more than 30 years of experience in the financial industry, Ric Edelman has heard and seen it all, and there’s one topic he’s sick of: annuities.
“Annuity products are a very common sales pitch because they generate big commissions for the guys who sell them to you, but they’re not in your best interest at all,” said Edelman, founder and executive chairman of Edelman Financial Services, one of the nation’s leading financial advising firms, and author of the new book “The Truth About Your Future: The Money Guide You Need Now, Later, and Much Later.”
Annuities are detailed and varied, but they’re basically a type of retirement fund held at an insurance company. You build up the fund either through small payments over a long period of time or as a lump sum. That money is invested and grows tax-deferred until you want to start receiving regular payouts of a set amount, at which point investment gains are taxed as income.
“[Marketers] promise that you’re not going to lose any money, there’s no stock market risk, and they guarantee income for life – sounds pretty good, what’s not to love? Well, there are a couple of things not to love,” Edelman told Business Insider in a recent Facebook Live interview.
Insurers make money from high management fees on your annuities. And as they invest your money, they’re able to keep any money beyond the established payments you’re set to receive. In other words, annuities seem safe and reliable because you’ll never end up with less than your principal investment.
But Edelman explains a few reasons why you should still be wary of annuities:
“No. 1, the interest rate is so low, it’s not going to compound your growth sufficiently for you to be able to achieve the goals that you have.
“No. 2, the income that they promise you is dependent on the insurance company’s ability to pay it. If that insurance company goes broke, your annuity goes broke.
“Third, taxes. You’re paying taxes at a maximum level. If you take the money prior to 59 and a half, you’re not only paying taxes, you’re also paying a 10% IRS penalty.”
Bottom line: As with any other financial decision, be sure you understand the scope of your investment before getting into it.
Watch Business Insider’s full interview with Ric Edelman below: