Annuities can sound straightforward in a sales pitch, but the contract details tell a very different story. Here’s how to know if one is right for you.
Annuities are having a moment. At least, that’s what insurance companies and sales reps want you to believe when they describe the promise of “guaranteed income for life.” Who doesn’t want an income that never runs out?
But here’s the reality: annuities are complicated insurance contracts. They are not investments. And if someone is getting paid to sell it, the agent is simply recommending their product—it’s not financial advice.
Before you lock your savings into an annuity contract, let’s talk about what you’re really buying and what you might be giving up.
The Only Way to Know: Professional Evaluation
Annuities can sound straightforward in a sales pitch, but the contract details tell a very different story.
So, the most important step when considering an annuity is getting an objective, fee-only financial advisor to review the contract line by line. These are the only advisors whose loyalty is fully to you, not the insurance company.
Annuities come with fees, surrender charges and pages of legal jargon that can trip up even the savviest saver. Without a professional evaluation, it can be difficult to know if the product actually fits your needs.
I’m not alone in saying this. A 2023 Consumer Reports survey found one in four annuity buyers regretted their purchase. Why? High fees, lost access to money or terms they didn’t fully understand. That’s a lot of unhappy retirees who thought they were buying peace of mind.
When Fees Devour Your Retirement
The cost of an annuity isn’t always obvious up front, and over time, those fees can quietly eat away at your savings and create long-term headaches. To show you what I mean, let me share a real-life example from my MoneyTrack series.
An 89-year-old man put $500,000 into a variable annuity inside his IRA. He paid a 5% commission upfront – that’s $25,000 gone on day one. Annual fees of 3% added up to another $92,000 over seven years. In the end, he lost $116,000 and had his money tied up in an account he couldn’t easily touch.
Here’s the kicker: he didn’t even need the income. His Social Security and pension already covered his expenses. Worse, he bought the annuity inside an IRA, which already gave him tax-deferred growth. He was paying for a feature he already had.
If Social Security, pensions and other investments already cover your essential expenses, another annuity may not add much value. Once you factor in fees and restrictions, it could even work against you.
Access to Your Money Matters
Furthermore, annuities can lock up your money for years. Emergencies, medical costs, home repairs – life happens. If your cash is stuck inside an annuity contract, you could find yourself in a financial squeeze.
Again, that’s why a professional evaluation matters. You need someone who will look at your full financial picture and ask whether tying up your money this way makes sense.
Ways to Create Income Without Losing Flexibility
If you want reliable income but don’t want the lockup or high fees, consider other strategies.
For instance, building a bond or CD ladder lets you create predictable cash flow while keeping access to your principal. Dividend-paying stocks or funds can provide income with growth potential, provided you can tolerate some market risk. A balanced portfolio with a flexible drawdown strategy gives you options. Even partial Roth conversions can help by reducing future taxes and creating tax-free income streams.
The Questions to Ask Yourself
Before you buy, ask: Am I truly seeking out this annuity, or is it being sold to me? Do I fully understand the fine print (written, by the way, by insurance company lawyers)? Am I comfortable giving up access to my money and paying layers of fees?
Here’s my pro tip: only a fee-only registered investment advisor will give you an unbiased evaluation. They’ll compare the annuity contract against everything else in your retirement plan.
Don’t get me wrong, some annuities can make sense in certain situations. But they are never one-size-fits-all. Whether you’re hearing about an annuity as part of a workplace retirement plan or from an eager salesperson, don’t take the promise of “guaranteed income” at face value. Read the fine print. Get an independent evaluation. And make sure that any guarantee you’re buying actually supports your retirement – not someone else’s paycheck.
Not sure where to start with finding a financial advisor? Let this free tool play matchmaker and connect you with a financial advisor who fits your vibe and your vision.
MORE ON HERMONEY:
WE DO DELIVERY! Own your money, own your life. Subscribe to HerMoney to get the latest money news and tips!