The pros and cons of investing in annuities

Finally, as far as annuities go, SPIAs have a relatively low commission rate paid to the agent. As a general rule, the more you pay in fees, the less for you. ​ CONS​ As mentioned, annuities

are not without downsides. The biggest risk is inflation. Over the past year ending in March, inflation ran at 8.5 percent. Had I bought this paycheck a year ago, I’d have lost that much

spending power in that one year alone. What will my paycheck buy in 25 years? Well, if inflation goes back to the 2.2 percent long-run average since 2013, my $535 monthly paycheck will buy

me about $311 of goods and services. If inflation stays at 8.5 percent, it buys only about $70. Not too long ago, insurance companies did sell SPIAs that adjusted with inflation, but they

have since withdrawn that product. Although you can buy a SPIA that has a fixed annual increase, those actually have more inflation risk, since your paycheck is less in the early years but

the larger payments in later years buy far less. ​ You also wouldn’t want to buy a SPIA if you think you have a short life expectancy. Finally, if leaving a legacy to your children is

important, then I wouldn’t consider a SPIA. Although you can buy the product that has what’s known as a period certain that would pay out even if you died in the earlier years, the monthly

payment is far less than a lifetime payout. I don’t think it makes sense to buy a product to pay to protect for both a long life as well as a short life. ​MY DECISION​ I decided not to

explore this product further. Insurance companies stopped offering SPIAs adjusted for inflation because they see the risk as too high. Not that we know what inflation will run over the next

25 years, but it’s an ever-present risk. So if you buy a SPIA, make sure it’s only a piece of your retirement plan and understand the check is mostly return of your own money. And remember

that the real buying power of the annuity a couple of decades from now could vary greatly. ​Rather than take Social Security at age 65, I’m going to wait until I turn 70, when I’ll get

nearly an extra $1,159 a month. Unlike the SPIA, I get inflation protection and my wife will continue to get this paycheck as a survivor benefit should she outlive me, which, of course,

women typically do. ​SPIAs can sometimes make sense for part of one’s retirement plan. The fact that you may not have been pitched one is because commissions aren’t as juicy as many other

annuities. But proceed with caution and understand the risks. _Allan Roth is a practicing financial planner who has taught finance and behavioral finance at three universities and has

written for national publications including _The Wall Street Journal_. Despite his many credentials (CFP, CPA, MBA), he remains confident that he can still keep investing simple._