The 8 Annuity Myths That Cost Retirees Thousands of Dollars

Annuities are among the most misunderstood financial products in existence. They are praised by some advisors as the cornerstone of retirement security and condemned by others as expensive traps. The reality, as usual, is more nuanced — and the myths on both sides cost retirees real money.

Here are the eight most damaging annuity myths we encounter, along with the facts that replace them.

This is perhaps the most costly myth of all, because it leads people to dismiss an entire category of products based on a bad experience with one type.

The truth: There are fundamentally different types of annuities with very different risk profiles, cost structures, and purposes.

Variable annuities invest your money in market sub-accounts. Your account value fluctuates with the market. They carry investment risk and are classified as securities. They often have high fees.

Fixed annuities (including MYGAs) credit a guaranteed interest rate. No market risk. No fees. Simple and transparent.

Fixed indexed annuities credit interest based on market index performance, with a floor of zero. No market risk to principal. Moderate complexity. Optional riders for guaranteed income.

Immediate annuities convert a lump sum into an immediate income stream. Simple. No accumulation phase.

When someone says "annuities are bad," they are almost always talking about variable annuities — a product with legitimate criticisms. Fixed indexed annuities are a fundamentally different product with a fundamentally different risk profile.

This fear is widespread and almost entirely unfounded for modern fixed indexed annuities.

The truth: Fixed indexed annuities have death benefit provisions that pass your account value to your named beneficiary when you die. If you pass away during the accumulation phase, your beneficiary receives at least the greater of your account value or your original premium — outside of probate.

Even if you have activated a guaranteed lifetime income rider, most products include provisions for your remaining account value to pass to beneficiaries. The insurance company does not simply "keep" your money.

The scenario where the insurance company retains funds is a specific product structure called a "life-only immediate annuity" — a product that exchanges a lump sum for a guaranteed income stream with no death benefit. This is a legitimate product for specific situations, but it is not the default structure of a fixed indexed annuity.

This myth is true for some annuities and completely false for others.

The truth: Variable annuities can have total annual fees of 2–4% or more, including mortality and expense charges, administrative fees, and sub-account investment fees. These fees are a legitimate criticism.

Fixed annuities and MYGAs typically have zero explicit fees. The insurance company earns its margin through the spread between what it earns on its investments and what it credits to your account — similar to how a bank earns a spread between deposit rates and lending rates.

Fixed indexed annuities may have fees for optional income riders (typically 0.75–1.25% of the income base annually). These fees are disclosed and are the cost of the lifetime income guarantee. Whether they are worth it depends on your situation and how long you live.

The key is to understand exactly what you are buying and what it costs. A good independent advisor will explain every fee clearly before you sign anything.

The truth: Most fixed indexed annuities allow penalty-free withdrawals of 10% of the account value per year during the surrender period. After the surrender period ends (typically 5–10 years), you have full access to your funds without any surrender charges.

Additionally, most annuities include provisions for penalty-free access in cases of terminal illness, nursing home confinement, or death — protections that bank CDs do not offer.

Annuities are not designed for money you might need tomorrow. They are designed for money you are setting aside for retirement income — the same category of money most people put in CDs or bonds. If you are comfortable with a 7-year CD, you should be comfortable with a 7-year annuity surrender period.

The truth: The optimal time to purchase a fixed indexed annuity with a guaranteed lifetime income rider is often in your late 50s or early 60s — not your 70s or 80s.

Here is why: income riders grow the "income base" at a guaranteed rate (often 6–8% per year) during the accumulation phase. The longer the accumulation phase before you activate the income, the larger your guaranteed income payment will be.

A 60-year-old who funds an annuity and waits 10 years before activating income will receive a significantly larger guaranteed payment than a 70-year-old who activates income immediately. The math strongly favors purchasing earlier and letting the income base grow.

The truth: You probably can — over a long enough time horizon, with no withdrawals, and with the emotional discipline to stay invested through significant downturns.

But this comparison misses the point. Fixed indexed annuities are not competing with the stock market for your growth money. They are competing with CDs, bonds, and other safe money vehicles for the portion of your portfolio that you cannot afford to lose.

The relevant comparison is not "FIA vs. S&P 500." It is "FIA vs. bond portfolio" or "FIA vs. CD ladder" for the safe money portion of your retirement assets. On that comparison, FIAs often win on yield, tax treatment, and the addition of guaranteed lifetime income.

A well-constructed retirement plan uses both: growth-oriented investments for long-term appreciation and an annuity for guaranteed income and principal protection.

The truth: Some annuities are genuinely complex, and the industry has not always done a good job of explaining products clearly. But the core concept of a fixed indexed annuity is straightforward:

• Your principal is protected from market losses.
• Interest is credited based on market index performance, up to a cap or participation rate.
• An optional income rider provides guaranteed lifetime income.

The complexity comes in the details: specific crediting methods, cap rates, participation rates, rider terms, and surrender schedules. A good advisor will explain all of these clearly and answer every question you have before you commit to anything.

If an advisor cannot explain a product in plain English, that is a red flag about the advisor — not necessarily the product.

The truth: Annuity advisors are compensated by the insurance carrier, not by the client — similar to how a real estate agent is compensated by the seller. This creates a potential conflict of interest that is worth understanding.

The key distinction is between captive agents (who represent a single carrier and can only offer that carrier's products) and independent advisors (who represent multiple carriers and can shop the market for the best product for each client).

As independent advisors, we have access to dozens of carriers and hundreds of products. Our incentive is to find the best fit for each client — because our business depends on referrals and long-term relationships, not one-time transactions.

The right question to ask any annuity advisor is: "How many carriers do you represent, and can you show me comparisons across multiple products?" If the answer is one carrier, or if they cannot provide transparent comparisons, keep looking.

The annuity myths that cost retirees the most are the ones that lead them to dismiss a category of products without understanding what they are actually dismissing. A fixed indexed annuity is not a variable annuity. It is not a scam. And for the right client in the right situation, it can be one of the most powerful tools available for building guaranteed retirement income.

The best way to cut through the myths is to look at the actual numbers for your specific situation. That is exactly what we do — at no charge and no obligation.