Annuities shouldn't be in your future

Rolled up money in a nest

At some point in your life an insurance agent will try to sell you an annuity.

No matter how persuasive the pitch might be, the appropriate answer is always the same: "No, thank you."

There are just better ways to save for retirement.

An annuity's chief selling point is security.

You pay the insurance company a premium, say $20,000 or $100,000, and it guarantees you'll get a monthly check. You choose when the payments begin and how long they last -- five years, 15 years or every month for the rest of your life, even if you're still kicking around at 90 or 95.

Some annuities even promise to take the risk out of investing in the stock market by guaranteeing a 3% return even if the market goes down.

That plays to the common fear that we'll outlive our savings.

The problem is that you'll pay dearly for the security, collecting a pretty puny check for the amount you've invested, the risk you've taken and the aggravation you may have endured.

There are two major reasons you can find better places for your money:

Annuities are the most complicated retirement plan you'll ever see.

How much you're paid depends on the amount of your premium and which of the three types of annuities you decide to buy. The more you put in, and the more risk you're willing to take, the bigger your check should be.

But the contracts are long and impenetrable, full of terms and conditions even savvy savers aren't familiar with. You'll have to make some tough investment decisions and figure out whether any of the optional coverage you'll be offered -- from stepped-up death benefits to long-term care insurance -- is worth the extra cost.

As a result, most buyers are heavily dependent on the advice of their agent -- a salesperson who is being paid a commission by the insurance company. That makes it too easy for buyers to misunderstand -- or be misled about -- the costs they'll face and the benefits they'll receive, resulting in some nasty surprises down the road.

Annuities come with a bewildering variety of fees and charges that make it almost impossible for them to earn as much as other investments.

Any mutual fund that charges you more than 1.5% a year to manage your money is charging too much. Yet insurers routinely charge 2% to 3% to manage your annuity. If your annuity is invested in a mutual fund you'll have to pay management fees to both.

On top of that, some annuities will cap the rate of return you can earn. If, for example, your contract sets an upper limit of 7% a year, and your investments gain 7.2%, only 7% would be credited to the annuity.

If a stock or mutual fund is a dog, you can always sell it, paying no more than a nominal broker's fee. If you're not happy with an annuity you'll have to pay a surrender fee to get your money back during the first six to eight years of the contract. Those charges typically begin at around 7% of the amount you invested during the first year of your contract and decline by 1% a year until it is eliminated.

It's not hard to see how lots of other investments might provide a better return -- and a more secure retirement.

That's why almost every financial expert says the first and best place to save for retirement is your company's 401(k) plan. You can contribute up to $15,000 a year (and another $5,000 if you're over 50) and your employer will usually match a percentage of the money you put in, often adding up to 3.5% to your pay.

Another option is an individual retirement account, or IRA, that allows you to sock away $5,000 a year, and, as with a 401(k) you can choose your investments.

If you're one of the lucky few putting the maximum amount in your 401(k) and IRA each year, some money managers say you should consider an annuity. But making annuities a third or fourth choice for retirement savings doesn't make them a good choice.

If you still have money to invest, look at certificates of deposit, which are insured by the federal government and cost you nothing to purchase or maintain. Our interest rate comparison charts can help you find the ones that pay the most.

Other risk-free savings opportunities include money market accounts, which can pay 5% or more and provide instant access to your money, with some restrictions. Or you can choose an old-fashioned savings account.

Granted, most of the 5% and higher re savings accounts are available from online banks.

But they are insured, accessible, and look at the difference: Chase, one of the nation's biggest banks, is paying 0.40% APY on a regular savings account, while many e-banks are paying upward of a 5%. On $2,000 you could earn $8 a year from Chase or $100 from an e-bank.

You have lots of options when it comes to saving for your future. Be smart and start planning now.

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