What Sales-Driven Advisors Won’t Tell You—and Why It Matters More Than Ever Now
You’re planning your retirement, and someone recommends an annuity as a source of income. On the surface, it appears to be a smart way to ensure a steady cash flow for life. But here’s the problem: not all annuities are built the same, and bad advice—often disguised as “expert guidance”—can lead to permanent income shortfalls, costly mistakes, and irreversible loss of flexibility or control.
This guide breaks down the worst annuity advice you could receive, explains why each is dangerous, and helps you understand who might be affected most. We also offer better alternatives so you can make a truly informed decision.
“Just Buy the Annuity With the Highest Guaranteed Interest Rate”
Key Problem: Ignores how and when you’ll use the income
This advice often refers to a Multi-Year Guaranteed Annuity (MYGA) or a fixed annuity offering a set rate. But these do not provide a lifetime income. They only grow your money temporarily—and then you’re stuck deciding what to do next.
- Pros:
- Simple, predictable growth
- Safe alternative to bonds or CDs
- Cons:
- No lifetime income
- No inflation protection
- No income rider
Who Needs It: Someone with short-term savings goals (3–5 years) and no need for income now.
Who Doesn’t: Anyone looking for a reliable lifetime income stream starting now or in a few years.
Better Option: A Fixed Index Annuity with a GLWB rider designed for income, offering lifetime payments and potential for increases based on market performance.
“You Should Annuitize Your Contract”
Key Problem: You lose control, flexibility, and death benefit
Annuitizing means you hand over your principal in exchange for income payments. It sounds like a pension, but you often forfeit control and legacy value. If you die early, the insurance company may keep the balance.
- Pros:
- Simple to understand
- High payout for life-only contracts
- Cons:
- No access to funds
- No legacy for heirs
- No income increases
Who Needs It: Someone with no legacy concerns and who only wants maximum guaranteed income.
Who Doesn’t: Anyone who wants control of their assets, potential for increasing income, or to leave money to family.
Better Option: Use a GLWB (Guaranteed Lifetime Withdrawal Benefit) rider instead. You can receive a lifetime income without annuitizing, and most contracts offer income that can grow and provide a death benefit.
“Get a Variable Annuity—The Market Will Outperform Anyway”
Key Problem: You take all the risk but still pay high fees
Variable annuities invest your funds in mutual-fund-like subaccounts, exposing your retirement income to market losses, high fees, and poor transparency. Unless you add an income rider, there’s no guarantee your income will last.
- Pros:
- Unlimited upside potential
- Optional death and income benefits
- Cons:
- Market volatility
- Fees as high as 3%–4%
- Riders are expensive and complex
Who Needs It: High earners who’ve maxed tax-advantaged accounts and want tax deferral with equity exposure.
Who Doesn’t: Retirees who need stable income, low costs, and predictable withdrawals.
Better Option: A Fixed Index Annuity with a low-cost GLWB. It protects principal, allows for market-linked growth (with no losses), and provides income for life.
“Buy It Now Even Though You Don’t Need Income Yet”
Key Problem: Wrong timing can lower income potential or lock in bad terms
Buying an income-focused annuity too early can result in unnecessary fees or locking into unfavorable growth terms.
- Pros:
- Income planning starts early
- Avoids future rate declines (sometimes)
- Cons:
- Rider fees accumulate
- Missed higher future rates
- Income may not be needed yet
Who Needs It: Someone 5–10 years out from retirement with a clear income need and no flexibility concerns.
Who Doesn’t: Someone who is decades away from retirement or unsure when they’ll need income.
Better Option: Use a deferred FIA with GLWB only if you’re close to retirement. Or consider laddering MYGAs until income is needed.
“Put All Your Money in an Annuity”
Key Problem: Overconcentration kills flexibility
This “all eggs in one basket” strategy can devastate liquidity and limit your ability to respond to medical emergencies, market opportunities, or changes in spending.
- Pros:
- Maxes out income in a worst-case scenario
- Removes investment risk completely
- Cons:
- No liquidity
- No growth on excess income
- Inflexible
Who Needs It: Someone with a large pension, no heirs, and no emergencies anticipated.
Who Doesn’t: Anyone who values liquidity or legacy—and almost everyone does.
Better Option: Use partial annuitization—allocate just enough to cover basic living expenses, then invest the rest.
“Annuities Don’t Keep Up With Inflation—Don’t Buy One”
Key Problem: Ignores inflation-adjusting annuities and hybrid income growth options
Some advisors dismiss annuities outright because they “don’t adjust for inflation.” That’s outdated thinking. Some Fixed Index Annuities offer rising income when the index earns interest. Once income increases, it rarely drops.
- Pros (in newer models):
- Market-linked growth on income
- Locked-in gains
- Cons:
- Still capped vs. the equity market
- Not 1:1 inflation tracking
Who Needs It: Anyone worried about running out of money too early or retiring during a volatile market cycle.
Who Doesn’t: Short-term investors, or those who expect long-term market growth and are willing to manage drawdowns manually.
Better Option: A Fixed Index Annuity with a GLWB where the income increases based on earned interest. This beats the flat income of SPIAs or pensions over time.
“It’s Tax-Free Income”
Key Problem: Not understanding how annuity income is actually taxed
Annuity payouts are not fully tax-free. Any gains are taxed as ordinary income, not capital gains. While your original principal is tax-free when returned, the growth is taxable.
- ✔ Pros:
- Tax deferral during accumulation
- ✘ Cons:
- No step-up in basis at death
- Income taxed at your highest rate
Who Needs It:
Those who have maxed out other tax shelters and want to defer taxes until retirement.
Who Doesn’t:
Tax-sensitive investors who qualify for capital gains rates elsewhere or want legacy-friendly assets.
✅ Better Option: Understand the tax rules upfront. You can use QLACs to delay RMDs or life insurance with cash value for tax-free income, provided they are structured correctly.
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