Annuities: A Retirement Income Tool Worth Considering – or Skipping?

Annuities have been around since ancient Rome. Back then, people would trade a lump sum of money for a guaranteed annual payment (called an annua) for life.

That idea hasn’t gone away. In fact, annuities are heavily promoted all over the place, from primetime television to an entire Rolling Stones concert tour.

On the surface, they sound like the perfect solution, so what’s not to like?

Plenty, actually, if you’re not careful. While basic annuities can play a role in a retirement plan, many are oversold by insurance agents promising a simple fix for every financial challenge.

The truth? Annuities can be complex, expensive and an inefficient way to manage your hard-earned retirement savings.

If you’re considering one, here’s what you need to know first.

Key Takeaways:

• Annuities can provide predictable income, but often at the expense of flexibility, growth potential and control.
• They’re not “one-size-fits-all” solutions, despite how they’re often marketed.
• In many cases, there are simpler, lower-cost ways to achieve the same goals.

What Is an Annuity?

An annuity is a contract with an insurance company. You give them money now, and they promise to give you income later, either immediately or in the future.

But what used to be simple has evolved into a wide, often confusing marketplace of products. Many complex annuity types come with high fees, restrictive terms and questionable benefits.

Immediate vs. Deferred: When Do You Want to Get Paid?

• Immediate annuities start paying income soon after you purchase one. They're typically marketed to retirees looking for reliable monthly income now.
• Deferred annuities delay payments until later, allowing your investment to grow tax-deferred. Some people use them as an extra savings tool outside their 401(k) or IRA.

While that sounds appealing, keep in mind: the returns on deferred annuities can be underwhelming compared to other long-term investment strategies.

How Your Money Grows (or Doesn’t)

Annuities come in different flavors:

• Fixed annuities pay a guaranteed interest rate, usually conservative.
• Indexed annuities grow based on the performance of a stock market index, but with caps, participation rates and complicated formulas.
• Variable annuities allow investment in subaccounts, like mutual funds, but often with high fees.

Sales pitches may focus on “upside with no downside,” but these benefits usually come with tradeoffs, like limited gains or confusing restrictions that make performance hard to track.

Who Gets Paid and for How Long?

Annuities can be structured to pay out:

• For just your lifetime (single life),
• For both your and your spouse’s lifetime (joint life),
• Or for a set period of time (period certain).

Single-life annuities offer the highest payout. But if you die early, the payments stop. Joint-life annuities offer more protection for couples, but pay less.

Again, it’s a tradeoff. And once you “annuitize,” the decision is usually irreversible.

The Costs You May Not See Coming

Most annuities come with surrender charges if you try to access your money early. These fees can start at 7–10% and last for years. If you withdraw before age 59½, the IRS may also hit you with a 10% penalty.

Then there are the ongoing fees, especially with variable annuities, which can easily exceed 2% annually. That’s a heavy drag on returns, especially when lower-cost investment options are available.

Is Your Money Safe?

Annuities are insurance products, not FDIC-insured bank accounts. They’re regulated by state insurance departments and backed by state guaranty associations if the insurer goes bankrupt.

But coverage limits vary by state, and not all annuity providers are created equal. You’re relying on the long-term health of the insurer, so it’s worth checking their financial strength ratings before signing anything.

So, Are Annuities Ever a Good Idea?

In some cases – like when a retiree wants to lock in a small portion of their savings for guaranteed income – a simple, low-cost annuity might make sense. That peace of mind can help people navigate market downturns and even feel more comfortable spending in retirement.

But for many people, annuities are not the best path to financial independence. Certainly not, if someone suggests you hold multiple annuity products in your portfolio.

There are often more flexible, transparent and cost-effective ways to generate retirement income, especially when working with a fiduciary financial adviser who puts your interests first.

The Bottom Line

Annuities are often marketed as an all-in-one retirement solution. But buying in one is not appropriate for all.

At Advance Capital Management, we don’t sell annuities. Our goal is to help you build a retirement plan that gives you flexibility, confidence and control.

Thinking about an annuity? Explore all your options first, so you can make the most informed decision possible. You can get started by scheduling a free financial consultation with a financial adviser today!