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Most people have been conditioned to avoid annuities, usually based on something they heard on the radio, read in a blog comment section, or saw in a marketing video from someone selling stocks or real estate. Unfortunately, these misconceptions cause people to walk away from guaranteed income, principal protection, and tax-deferred growth—features that no mutual fund or ETF can promise.
This guide explains the full story behind the biggest annuity myths. While it’s true that some annuities are expensive, complex, and misused, there are many that are low-cost, easy to understand, and solve real retirement problems. If you’re within 10–18 years of retirement or already retired, you can’t afford to ignore this.
1. “Annuities Have Hefty Fees.”
Only certain types do—and you never pay them out of pocket.
✔ Pros:
- MYGAs and income annuities like SPIAs and DIAs have zero annual fees.
- Fixed Index Annuities (FIAs) typically have no fees unless you add a rider.
- GLWB riders—used for guaranteed lifetime withdrawals—cost around 1% per year, which is less than most mutual fund portfolios.
✘ Cons:
- Variable annuities can charge 3%–4%+ in layered fees (M&E, admin, subaccount fees, rider costs).
- High-fee annuities often give the entire industry a bad name, even though they’re not the majority.
Who Needs It:
People who want to avoid high asset management fees but still receive guarantees.
Who Doesn’t:
Investors are chasing returns and are fully comfortable with market risk and DIY management.
Helpful Add-on:
A fixed index annuity with a GLWB rider offers guaranteed income for life with far fewer fees than most managed accounts or robo-advisors.
2. “Annuities Have Hefty Commissions.”
True—but they’re built into the product, and you never write a check for them.
✔ Pros:
- Commission is paid by the insurer, not deducted from your deposit.
- Most fixed annuities pay brokers 1%–4%, one-time.
- Unlike managed accounts, there’s no ongoing advisory fee.
✘ Cons:
- Some agents push high-commission products that aren’t the best fit.
- Variable annuities can include trail commissions, encouraging longer holds that benefit the seller more than the buyer.
Who Needs It:
Those who value guidance at no out-of-pocket cost and want to avoid ongoing investment advisory fees.
Who Doesn’t:
Investors who only want to work with fee-only fiduciary advisors and are comfortable paying flat or hourly planning fees.
Helpful Tip:
Choose an independent broker who works with multiple companies. Captive agents often recommend products based on their commission schedule—not your needs.
3. “Annuities Are Too Complicated.”
They can be—but not all are. Some are simpler than bank CDs.
✔ Pros:
- Multi-Year Guaranteed Annuities (MYGAs) are basically fixed-rate CDs issued by insurance companies. You know exactly what you’ll earn and when.
- SPIAs and DIAs are straightforward: pay a premium, receive guaranteed checks.
- FIAs provide growth linked to market performance with no risk of loss.
✘ Cons:
- Contracts with riders, index strategies, spreads, caps, and income roll-ups can be overwhelming without professional help.
- Lack of transparency in some illustrations or marketing materials creates confusion.
Who Needs It:
Anyone wanting to protect their retirement income but willing to work with an advisor who will explain the details in plain English.
Who Doesn’t:
Investors are unwilling to rely on guidance or read more than a one-page summary.
Helpful Tip:
Ask for a summary illustration with side-by-side comparisons of fees, income projections, liquidity, and surrender schedules.
4. “Annuities Don’t Provide Good Returns.”
Depends on your definition of ‘good.’ They aren’t designed to beat stocks—they’re designed to protect you.
✔ Pros:
- MYGAs now offer guaranteed interest rates over 5%—better than most CDs or bonds.
- FIAs can average 4%–6% over time with no risk of loss.
- GLWB income riders provide contractual withdrawal rates of 5%–8%, depending on age and timing—guaranteed for life.
✘ Cons:
- You give up some upside potential—FIAs have caps or spreads limiting growth in strong markets.
- Returns are predictable and stable—not explosive.
Who Needs It:
People who need a predictable income, want to avoid market losses, or need to hedge against longevity risk.
Who Doesn’t:
Younger investors in the accumulation phase focused on building long-term wealth through growth stocks.
Helpful Add-on:
Use an annuity as a bond replacement and keep your equities for growth. That way, you avoid selling stocks in a down market to pay your bills.
5. “You Lose Your Money When You Die.”
Only if you choose the wrong payout option. Most people don’t.
✔ Pros:
- Most annuities return any unused value to your beneficiaries.
- Joint life annuities ensure income for both spouses.
- Optional death benefit riders can lock in minimum payouts.
✘ Cons:
- Life-only options (commonly used in pensions and SPIAs) do not refund remaining value at death.
Who Needs It:
People who want a guaranteed income and the option to leave a legacy.
Who Doesn’t:
Single individuals without heirs who want to maximize monthly income only.
Helpful Add-on:
Add a refund option, a period certain, or a joint payout to ensure loved ones receive something if you die early.
Execution Tip: Knowing the truth is only half the battle; buying the right contract is the rest. Read our checklist on how to avoid these annuity mistakes—like buying inside an IRA or selecting the wrong payout option—so you don’t accidentally ruin a good plan.
6. “You Can’t Access Your Money.”
False. Access is built into most annuity designs—but early withdrawals have conditions.
✔ Pros:
- Most deferred annuities allow 10% penalty-free withdrawals per year.
- Some contracts waive penalties for long-term care or terminal illness.
- GLWB riders allow income for life, even if your balance runs out.
✘ Cons:
- Withdrawals above the free amount during the surrender period (usually 5–10 years) face fees.
- SPIAs are irreversible—no access to principal once payments begin.
Who Needs It:
People with other liquid assets and a plan for income distribution.
Who Doesn’t:
Anyone needing full liquidity for real estate, college, or large one-time expenses.
Helpful Add-on:
Laddering annuities with different maturities can provide built-in liquidity each year.
7. “You Should Wait Until Rates Are Higher.”
Waiting might cost more than it saves—especially if you need income soon.
✔ Pros:
- Many annuities offer deferral bonuses of 6%–8% per year.
- GLWB payout rates increase each year you delay, locking in more income.
- Today’s rates are among the highest in a decade.
✘ Cons:
- You may lose access to current offers if rates fall or your health declines.
- Inflation or market downturns in the meantime could shrink your assets.
Who Needs It:
People within 10 years of retirement or already retired who want to secure an income now and lock in a floor.
Who Doesn’t:
People with 20+ years to go before retirement and other time-based growth strategies.
Helpful Add-on:
Use a ladder strategy—buy annuities in stages instead of waiting for a mythical “perfect rate.”
8. “All Annuities Are the Same.”
This is the most dangerous myth of all. There are dozens of types, each serving a unique purpose.
✔ Pros:
- SPIAs: Simple, irreversible monthly income
- MYGAs: CD-like savings alternative with guaranteed fixed interest
- FIAs: Market-linked growth with no loss
- GLWBs: Lifetime income, even if the account balance hits zero
✘ Cons:
- Confusing names, acronyms, and illustrations often discourage smart buyers
- Choosing the wrong product for your needs can lead to poor results
Who Needs It:
People who want customized retirement solutions based on income needs, market concerns, or estate planning.
Who Doesn’t:
People are looking for an all-in-one solution without putting in any time to compare.
Helpful Add-on:
Work with a broker who compares over 25+ companies to find the best contract for your exact needs.
9. Misconceptions Spread by Influencers
Popular personal finance influencers like Dave Ramsey and Clark Howard often provide advice on various financial products, including annuities. However, their advice can sometimes perpetuate myths and inaccuracies. For example:
- Dave Ramsey often criticizes annuities for their fees and complexity, focusing on the negative aspects without acknowledging the benefits and suitability for specific financial goals. Based on my professional experience, Dave appears to have little or no field experience with annuities, instead spewing soundbites that are all over the place and inaccurate.
- Clark Howard has expressed skepticism about annuities, highlighting potential downsides like high fees and a perceived lack of flexibility, which may discourage individuals from considering annuities as part of a well-rounded financial plan. Clark Howard has zero field experience in annuities and only talks about them to advertise on his website. His writer is a freelance writer and not even in the industry. This is a HUGE RED FLAG, so you obviously don’t take advice from personalities. It’s all about advertising on his website for their benefit, not yours.
While it’s important to consider different viewpoints, it’s equally crucial to conduct your own research and consult with financial professionals who can provide personalized advice based on your specific circumstances.
Bottom Line
Yes—annuities can be fee-heavy, complicated, and misused. But when structured correctly, they’re one of the few ways to create guaranteed income, protect your principal, and remove financial uncertainty from retirement.
Don’t let outdated myths or commission horror stories stop you from solving your retirement income puzzle.
Contact The Annuity Expert today for a free quote comparison and plan review. No pressure. No obligation. Just clarity.
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