Are Annuities Bad Pros Cons and When They Fit
Why annuities create strong opinions
Annuities get strong reactions — sometimes deserved, sometimes not.
For some people, the word “annuity” triggers memories of high-pressure pitches or confusing paperwork. For others, it represents safety, predictability, and the comfort of guaranteed income.
The truth, as usual, lives somewhere in the middle.
There are simple, lower-cost annuities and there are complex, higher-cost ones. The difference often comes down to three things: cost, complexity, and purpose.
If you understand those three, you can usually tell the difference between a tool that fits your plan and a product that doesn’t.
Some contracts, especially variable and indexed annuities, can have total annual charges that add up to several percent. You might have a base cost, a rider cost for income or long-term care benefits, and underlying investment costs on top of that.
The main types of annuities
That’s a big hurdle to overcome — especially in a world where you can build a diversified portfolio for lower overall annual fees.
On the other hand, not all annuities are bad.
Plain-vanilla fixed annuities or immediate annuities can create predictable income for life. They’re simple — you give the insurance company a lump sum, and they send you a check every month for as long as you live. That’s it.
Those payments are guaranteed by the insurer and are subject to the financial strength and claims-paying ability of the issuing insurance company. They are not backed by the government, and guarantees depend on the insurer remaining solvent. The big insurers have strong reserves and track records that stretch back over a century.
For some retirees, that stability is worth it. It can take the pressure off your portfolio during volatile years and provide peace of mind that no matter what the market does, you’ll always have income coming in.
But guarantees come with trade-offs, and that’s the part most people miss.
Potential benefits for retirement income
An annuity isn’t a magic product — it’s a contract. Once you hand over your money, it’s often locked up for years. You might get limited liquidity, surrender charges if you take money out early, and reduced flexibility if your goals change.
That doesn’t make it bad — it just means you need to understand what you’re signing.
Before you agree to anything, ask a few key questions:
- What are the total fees, including riders? (Not just the headline number — all of them.)
- When and how can I access my money? (Some contracts allow 10% free withdrawals each year; others don’t.)
- What happens if I change my mind? (Know the surrender schedule and how long your money is tied up.)
Fees restrictions and surrender charges
If those answers aren't explained clearly and in plain English, that's a sign to slow down and ask more questions.
Related planning guidance: Retirement Planning & Income
Annuities aren’t inherently bad — the wrong annuity, used for the wrong purpose, is.
There’s nothing wrong with wanting stable income. But there’s a big difference between using an annuity as a thoughtful part of a plan and using it as the entire plan.
I’ve seen people walk into my office with multiple annuities — one for retirement, one for long-term care, another for “college savings,” and one for cash flow. When the answer is always an annuity, that’s when it’s time to slow down and evaluate the broader picture.
Every financial product has a place. The key is whether it solves the problem you actually have.
For example, if your goal is steady income, a simple immediate annuity might do the job. If your goal is flexibility, liquidity, and long-term growth, it might not fit at all.
There’s also the issue of timing. Buying a fixed annuity when interest rates are high can make sense — you’re locking in better payouts. But buying one when rates are low may mean giving up potential return for limited benefit.
Questions to ask before buying
And then there’s the tax side. The growth inside an annuity is tax-deferred, but when you eventually take income, it’s taxed as ordinary income — not capital gains. That can be a big difference, especially in retirement when every dollar of taxable income affects your Medicare premiums and potentially your Social Security taxation.
That’s why annuities should never exist in isolation. They need to be part of a coordinated financial plan that considers taxes, income needs, liquidity, and legacy goals.
It’s also why working with a Fee-Only advisor matters. Because we don't sell insurance products or earn commissions, we evaluate existing contracts or potential income strategies with complete objectivity. Brokers or agents tied to specific companies may be limited to their firm's approved product menu. A Fee-Only advisor can look at your situation objectively to determine whether an annuity makes sense at all, and if so, how to evaluate it without product sales pressure.
The point isn’t to love or hate annuities. It’s to understand what problem you’re trying to solve.
If you need guaranteed income, an annuity can provide it. If you need growth or flexibility, there are other tools available.
Either way, you deserve full transparency.
When another strategy may work better
Know what it costs, know how it works, and know exactly what you’re giving up in exchange for what you’re getting.
Because once you sign, it’s your name on the contract — not the agent's.
So before you sign, take a breath. Read the fine print. Ask the tough questions.
If you understand all the answers and the annuity still fits, great.
If not, there’s a good chance the right solution is simpler, cheaper, and easier to sleep on.
Blog 14: The True Cost of Annuities
