Last month, I had coffee with a friend who’s getting ready to retire. When annuities came up, she physically cringed.
“Aren’t those the complicated things that lock up all your money forever?” she asked. “My brother-in-law says they’re terrible.”
Her brother-in-law, I should mention, sells stocks for a living.
Annuities tend to attract strong opinions- usually formed by a sales pitch, a bad experience, or a half-remembered conversation from years ago. Very few people pause to ask what annuities actually do, who they’re for, and when they make sense.
Let’s slow this down and separate myth from reality.
Myth #1: Annuities Are Too Complicated to Understand
The Reality: Some are. Some aren’t.
A simple immediate annuity, where you give an insurance company a lump sum and receive a monthly check for life, is straightforward. My 85-year-old aunt understands hers perfectly.
Where confusion enters is with variable and indexed annuities loaded with riders, caps, participation rates, and fine print. These products can be genuinely complex, even for financially savvy people.
Here’s my rule: If you can’t explain an annuity back to me in plain English, you shouldn’t own it.
Complexity isn’t automatically bad, but unnecessary complexity is often a warning sign.
Myth #2: You Lose All Access to Your Money
The Reality: Access depends on the type of annuity and contract terms.
Annuities are designed for long-term income, not short-term liquidity- but that doesn’t mean your money disappears.
Many annuities include:
- Annual withdrawal allowances
- Death benefits for beneficiaries
- Waivers for nursing home care or terminal illness
- Surrender options (often with early-year penalties)
That said, annuities are the wrong place for emergency funds or money you may need soon.
I once worked with a recently widowed client who wanted to annuitize all her assets out of fear. We chose instead to annuitize only a portion. Two years later, when she needed a new roof, she was grateful we’d preserved liquidity.
Myth #3: Annuities Are Bad Investments
The Reality: Annuities aren’t investments- and that’s the point.
Annuities are insurance products, not growth vehicles. Comparing them to stocks is like comparing car insurance to a savings account.
You don’t buy insurance to outperform, you buy it to protect against risk. In retirement, that risk is running out of money or being forced to cut income after a market downturn.
The retiree with guaranteed income in 2008 didn’t see that income drop. The retiree fully invested often did.
Different tools serve different purposes.
Myth #4: Annuities Are Only for Wealthy People
The Reality: People with modest savings often benefit the most.
If you have $10 million, you can self-insure against longevity risk. If you have $250,000 and no pension, guaranteed income matters more.
I often work with single women and couples who use annuities to cover essential expenses- housing, food, healthcare. Once that foundation is secure, they’re actually more comfortable taking appropriate risks with the rest of their portfolio.
The mistake isn’t using annuities. It’s using too much and sacrificing flexibility.
Myth #5: Annuities Don’t Make Sense in Today’s Economy
The Reality: Uncertainty is when guarantees matter most.
There’s always a reason critics say “wait.” Markets are too high. Rates might rise. Volatility will pass.
Meanwhile, the person who needs income keeps waiting and worrying.
The right time to consider an annuity isn’t when conditions are perfect. It’s when you have a problem that guaranteed income can solve.
Insurance is rarely purchased at the “perfect” moment. It’s purchased because protection matters.
Better Questions to Ask About Annuities
Instead of asking whether annuities are “good” or “bad,” consider:
- Do I have enough guaranteed income to cover essential expenses?
- How would I feel if markets dropped early in retirement?
- Am I concerned about outliving my money?
- Do I have sufficient liquid savings set aside?
- Do the costs and guarantees make sense for my situation?
These are planning questions, not product questions.
When Annuities Often Make Sense
Annuities are frequently helpful for:
- Single women planning for long retirements
- Couples with different risk tolerances
- Families with strong longevity history
- Retirees without pensions
- Anyone who wants confidence they’ll “be okay”
When They Usually Don’t
Annuities are often the wrong fit for:
- Those needing near-term liquidity
- Individuals with shortened life expectancy
- People focused primarily on inheritance goals
- Those with ample guaranteed income already
- Anyone who doesn’t fully understand the product
Let’s Figure Out What’s Right for You
After decades of working with retirees, here’s what I know: no two situations are the same. Your concerns are valid. Your goals matter.
Maybe an annuity fits. Maybe it doesn’t. Maybe it’s a “not yet.”
The real question isn’t “Should I buy an annuity?”
It’s “What combination of strategies will help me feel secure and enjoy retirement?”
If you’d like to explore that conversation, I’d welcome the opportunity. We’ll look at your full financial picture and determine, without pressure, whether annuities belong in your plan.
Schedule a conversation to discuss your retirement income strategy.
Because good retirement planning isn’t about using every product available.
It’s about using the right ones for your journey.
I aman experienced, highly-trained,CERTIFIED FINANCIAL PLANNER™ professionalandBehavioral Financial Advisorin West Saint Paul, Minnesota.I am a financial planner who is an advocate for my clients ALL THE TIME – afiduciary financial planner. I provide guidance based on clients’ best interests, not commissions or sales quotas. And yes,I’mstill taking on a few great families to be part of my financial planning practice. Clients come to me fromWest Saint Paul, Minnesota and, thanks toZoom,fromacross the country.
Dunncreek Advisors LLCdoes not provide legal or tax advice, nor is this article intended to do so.This article is for educational purposes only and does not constitute financial advice. Individual circumstances vary, and personalized planning is essential.
Annuity FAQs
1. Are annuities a good idea for retirement income?
Annuities can be useful when you need predictable, guaranteed income in retirement. They’re not designed for growth, but for reducing the risk of running out of money- especially when Social Security and pensions don’t fully cover essential expenses.
2. What are the biggest downsides of annuities?
The main tradeoffs are limited liquidity, complexity in some products, and fees. That’s why annuities should only be used for money you won’t need in the near term and only after fully understanding how the contract works.
3. Will I lose access to my money if I buy an annuity?
Not necessarily. Many annuities allow annual withdrawals and include death benefits for heirs. However, annuities are long-term tools, so they’re not appropriate for emergency funds or short-term needs.
4. Are annuities better than investing in the stock market?
Annuities and investments serve different purposes. Investments are designed for growth, while annuities are designed to provide stability and income. In many retirement plans, they work best together rather than as replacements for one another.
5. How do I know if an annuity belongs in my retirement plan?
An annuity may make sense if you’re worried about outliving your money, uncomfortable with market volatility, or lacking guaranteed income. The decision should be based on your goals, risk tolerance, and overall financial picture—not on headlines or sales pitches.