A Financial Adviser's Defense of Annuities: They're Just Misunderstood

I hate annuities — and you should, too.

That infamous line, popularized by financial entertainers and clickbait headlines, has shaped a generation’s perception of annuities. But let’s be honest — most people who say it probably don’t understand how annuities work or why they exist.

As a financial adviser, I regularly hear objections like:

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• “I hear they’re bad, but I’m not sure why.”
• “I can get a better return in the market.”
• “There’s no death benefit — what if I die early?”
• “Aren’t my funds locked up for 10 years?”
• “Annuities are full of high fees.”

These concerns sound reasonable. And for some annuities, they’re true. But others are misunderstood — and in today’s market, that misunderstanding can come with a cost.

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

A wake-up call for retirees

In the last 90 days, we’ve seen how fast the market can shift. Inflation, tariffs and weak GDP data have shaken investor confidence. For retirees, this kind of market volatility isn’t just stressful — it’s dangerous.

Many Baby Boomers are entering retirement without pensions, relying instead on 401(k) plans — vehicles never designed to serve as lifetime income sources.

That means the burden of generating reliable income falls on portfolios that may be vulnerable to market swings, rising taxes and behavioral missteps.

That’s where annuities — when used thoughtfully — can provide stability and confidence.

What annuities actually do

Annuities aren’t one-size-fits-all, but they can address key retirement risks:

• Sequence of return risk. This is the danger of withdrawing during a market dip, which can permanently impair a portfolio
• Longevity risk. With more retirees living into their 90s, outliving savings is a growing concern
• Behavioral risk. Annuities help reduce panic-driven decisions by securing foundational income
• Inflation risk. Some annuities offer rising income features to help keep up with cost-of-living increases
• Taxation risk. Deferred growth lets you control when to recognize income, which can support tax strategy

Some annuities are designed for principal protection, others for lifetime income and others for modest, consistent growth. Certain annuities even allow for partial internal Roth conversions before triggering income.

Used strategically, annuities can serve as a “personal pension,” allowing other assets to stay invested longer and grow without being tapped prematurely.

The drawbacks of annuities

No investment is perfect, and annuities are no exception. Here are common downsides to watch for:

• High fees. Some annuities — particularly variable contracts — come with layers of costs (mortality and expense fees (M&E), rider fees, investment subaccount costs).
• Liquidity limitations. Most annuities have surrender periods, meaning withdrawals above a certain amount can trigger penalties in the early years.
• Complexity. Features like income riders, caps, spreads and participation rates can be confusing.
• Inflation risk. Not all annuities offer inflation protection. Some provide level payments that lose purchasing power over time.
• Tax treatment. Withdrawals are taxed as ordinary income, not capital gains. That can matter in taxable accounts.

The key is understanding what you’re buying — and whether it fits your needs.

What to look for in an annuity

If you're considering adding an annuity to your retirement plan, keep these seven practical steps in mind:

1. Define your goal. Are you looking for lifetime income, principal protection, growth or tax deferral? Your goal should drive the type of annuity you explore.

2. Understand the time commitment. Know the surrender period and when you’ll need access to the funds.

3. Compare fees and features. Ask for a fee summary. Low-cost fixed annuities may suit some, while others may need riders that justify higher expenses.

4. Vet the insurance carrier. Guarantees are only as strong as the insurer. Look for companies rated A or better by AM Best, Moody’s or S&P.

5. Ask about income flexibility. Some contracts allow flexible start dates, inflation-adjusted income or joint payouts with spousal continuation.

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6. Coordinate with your overall plan. An annuity should complement — not replace — other investments. Think of it as a strategic building block, not the whole foundation.

7. Work with a fiduciary. Choose an adviser legally obligated to act in your best interest, not someone just selling a product. (You can learn more about this in the article The Financial Fiduciary Standard Explained.)

The bottom line

Annuities aren’t inherently good or bad — they’re tools. For retirees lacking pension income or concerned about market volatility, they can offer a sense of security that investments alone may not.

But like any tool, they work best when used properly, for the right job and with a clear understanding of the trade-offs.

As you transition from the accumulation phase of retirement (growing wealth) to the decumulation phase (using it), it’s critical to work with someone who understands the shift — and how to structure income that lasts, regardless of what the market or tax code throws your way.

If an annuity can help you retire on your terms, sleep better at night and live with more freedom, it might be time to rethink your views on them.

Index or fixed annuities are not designed for short-term investments and may be subject to caps, restrictions, fees and surrender charges as described in the annuity contract. Guarantees are backed by the financial strength and claims-paying ability of the issuer.

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