Let Me Tell You About My Mom's Annuity
My mom bought a variable annuity in 2008. The advisor was charming, the brochure was glossy, and the "guaranteed income" sounded perfect.
What she didn't realize: 2.3% annual fees. A 7-year surrender charge. And a "death benefit" that she was essentially paying for but would never use.
It took me three years to get her out of it, and she lost about $18,000 in the process.
Annuities aren't inherently bad. But they're often sold to the wrong people, at the wrong time, with the wrong features. Let me help you figure out if one is right for YOU.
What Is an Annuity, Really?
Strip away the jargon and an annuity is simple:
You give an insurance company a chunk of money. In return, they promise to pay you a stream of income, often for life.
That's it. The rest is just variations on that theme.
The Three Main Types
1. Fixed Annuities
You get a guaranteed interest rate. Like a CD, but often with higher rates and tax deferral.
Pros: Safe, predictable, no fees to worry about
Cons: Returns might not keep up with inflation
Best for: People who want certainty and hate market risk
Current rates are actually decent - you might find 4-5% on multi-year guaranteed annuities.
2. Variable Annuities
Your money goes into "sub-accounts" that are basically mutual funds. Returns depend on market performance.
Pros: Growth potential, tax-deferred growth
Cons: High fees (often 2-3% per year), market risk, complexity
Best for: Honestly? Very few people. There are usually better options.
I'm not a fan of variable annuities for most people. The fees eat into returns, and you can get similar benefits from low-cost index funds in a regular IRA.
3. Indexed Annuities
Your returns are linked to a market index (like the S&P 500), but with a floor (you won't lose money) and a cap (your gains are limited).
Pros: Downside protection, some growth potential
Cons: Caps limit your upside, can be confusing, surrender charges
Best for: People who want some market exposure but can't stomach losses
These are the "in-between" option. Not as boring as fixed, not as risky as variable.
When Annuities Actually Make Sense
1. You've Maxed Out Everything Else
Have you already maxed out your 401(k)? Your IRA? Your HSA? If yes, an annuity offers additional tax-deferred growth.
If you haven't maxed those out yet, do that first. The fees are lower and the options are better.
2. You're Terrified of Outliving Your Money
This is the biggest legitimate use case. If the thought of running out of money keeps you up at night, an immediate annuity can provide peace of mind.
You hand over $300,000, you get $1,800/month for life. Market crashes? Still $1,800. Live to 100? Still $1,800.
That certainty has real value.
3. You Want a "Pension" But Don't Have One
Most private-sector workers don't have pensions anymore. An immediate annuity is essentially buying yourself a pension.
Social Security: $2,500/month
Annuity income: $1,500/month
Total guaranteed: $4,000/month
Now you have a floor. Everything else is gravy.
4. You Don't Trust Yourself
Some people know they'll make bad decisions with a lump sum. An annuity removes the temptation. You can't blow it on a boat because the money is locked up and coming out monthly.
There's no shame in this. Knowing yourself is wisdom.
When to Avoid Annuities
1. You're Under 50
Young people should almost never buy annuities. You have decades of compounding ahead of you - don't lock your money up in a product designed for retirees.
2. The Fees Are Crazy
If the total fees are above 1.5%, run. Variable annuities often have:
- Mortality and expense charges: 1.0-1.5%
- Investment fees: 0.5-1.0%
- Rider fees: 0.5-1.0%
That's 2-3.5% per year! On a $500,000 annuity, you're paying $10,000-$17,500 annually in fees. Insane.
3. You Need Liquidity
Annuities typically have surrender charges that last 5-10 years. If you need access to your money, you'll pay dearly for it.
Only annuitize money you won't need for other purposes.
4. Someone Is Pushing You Hard
High-commission products get sold hard. If an advisor is really pushing an annuity, ask: "What commission do you earn on this?"
Annuities can pay advisors 5-7% upfront. On a $300,000 annuity, that's $15,000-$21,000 to the salesperson. No wonder they're enthusiastic.
5. You're Buying It Inside an IRA
This drives me crazy. IRAs are already tax-deferred. Buying an annuity inside an IRA means you're paying for tax deferral you already have.
The only reason to do this is for the guarantee features, not the tax benefits.
The Annuity Questions Nobody Asks
Before buying, ask:
1. What's the total annual cost?
Get this number in writing. Include ALL fees, not just the "administrative fee."
2. What's the surrender charge schedule?
How much will you lose if you need to get out? For how many years?
3. What's the income guarantee actually worth?
Run the numbers. Often the "guaranteed income" sounds impressive but the actual payout rate is mediocre.
4. What happens when I die?
Does my spouse get anything? My kids? Or does the insurance company keep everything?
5. What's the insurance company's financial rating?
Your guarantee is only as good as the company behind it. Look for A-rated or better companies.
How to Calculate If It's Worth It
Use our Annuity Calculator to compare growth projections, and our Annuity Payout Calculator to see income estimates.
Here's a quick sanity check:
For immediate annuities (buying income now):
Payout rate = Annual payment ÷ Premium paid
If a $500,000 annuity pays $30,000/year, that's a 6% payout rate.
Is 6% good? At age 65, that's decent. At age 55, it's probably not worth it (you'd do better investing).
For deferred annuities (letting it grow):
Compare after-fee returns to a simple index fund.
If the annuity nets you 4% after fees and a Vanguard fund averages 7%, you're giving up 3% per year. Over 20 years on $200,000, that's roughly $260,000 you're leaving on the table.
The Annuity I'd Actually Consider
If I were buying an annuity, here's what I'd want:
Type: Single Premium Immediate Annuity (SPIA) or Fixed Indexed Annuity
Purchase timing: Age 65-70, not before
Amount: Enough to cover my "floor" expenses (housing, food, healthcare) when combined with Social Security
Features: Life with 10-year period certain (so if I die early, my heirs get something)
Fees: Under 1% (ideally much less for fixed)
Company: A-rated or better, been around 50+ years
I would NOT buy a variable annuity with living benefit riders. The fees are too high and the benefits are often not as good as they sound.
A Better Alternative for Many People
Consider this approach instead of an annuity:
This gives you guaranteed income, growth potential, flexibility, AND lower overall costs than putting everything in an annuity.
My Final Advice
Annuities aren't evil. They're tools. Like any tool, they work great for certain jobs and terribly for others.
If you're considering an annuity:
Use our Annuity Calculator to project growth scenarios and our Annuity Payout Calculator to see what kind of income different annuities might provide.
Take your time. This is a big decision. The right annuity can provide valuable peace of mind. The wrong one can cost you tens of thousands in fees.
Choose carefully.