There is no way around it, in order for an annuity to work to its maximum capacity, you need to let it sit and accumulate (typically for about 10 years). There are pretty severe penalties, called surrender charges that are imposed on the annuitant in the event that they want to withdraw from the investment prematurely. The earlier you take your money out of the annuity, the higher the surrender charge will be. To strengthen the point that these are long term investments, the IRS will take a 10% taxation on any withdrawal made by the annuitant prior to that client being 59 ½ years old (this is compounded by the income tax that comes on that withdrawal).
Annuities are geared to accumulate value and ultimately to take an income stream from. The process of taking this income is called annuitization. The annuitant has the option of taking their money one of three ways. The first option is to take the money as a lump sum. This option is typically exercised if the client wants to try to accumulate more on their money from another annuity or possibly an entirely new investment vehicle. The second option is to take income payments until a specified age. This option can be effective, but difficult, because many people outlive the specified time that income is taken. The third option is to take income in a lifetime stream. The client cannot outlive their income payments. These payments will not be as high as the second option, but the guarantee that the annuitant will receive the payments forever is very appealing. It is important to note that annuities are appealing for their income stream, not for their wealth accumulation.
For the reasons listed above, the wrongful purchase of an annuity can potentially be a drastic mistake for a younger investor. The goal of this investor should be steep wealth accumulation, which although annuities offer different riders, bonuses, etc., they are not the most efficient way to accumulate wealth. Another aspect that is important for a young investor is liquidity. You want to be able to move your money fairly quickly and put it in the most efficient vehicle for growth, at the drop of a hat.
We have all heard the phrase "time is money." This applies to the idea of a younger clientele investing in an annuity. Although annuities have guaranteed return of premium, they also hold you back from potential gains. Over an elongated time span, this could prove to lose an annuitant hundreds of thousands of dollars. If you invest $5,000 over a 40 year span, say you purchased an annuity that turned out to give you an 8% rate of return on your money annually. Your investment would now be $109,000. Say you invest in a stock or bond instead, which ends up getting you a 10% rate of return annually. In that same 40 year time span, you will have $227,000. It's better to be aggressive early, because you have time to make up for your losses.
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