Have you ever heard conflicting information about annuities? You’re not alone. With over a billion online results for the word “annuity,” it’s hard to know what’s true and what’s not. That’s why we’re here to break down the top six annuity myths and help you separate fact from fiction. Let’s get started.
Annuity Myth #1: The Agent is Just Trying to Make a Commission
No one works for free—we can all agree on that. And sure, there are people in every field who don’t always do the right thing. But when it comes to annuities, a responsible advisor should explain why they’re recommending a product for you, not just sell it for a commission.
Often, the complaint about “commissions” isn’t coming from the client but from another advisor, one who might be losing your business. It’s easy to flip the argument around and say the other advisor doesn’t want you to get an annuity because they don’t want to lose their own management fees. Instead of getting caught up in that, talk to several advisors until you feel confident you’re getting the best advice.
Key points to remember:
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- Always ask why a product is being recommended.
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- Get opinions from multiple advisors.
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- Don’t assume the person criticizing annuities has your best interests in mind.
Annuity Myth #2: Annuities Cap Your Growth Potential
It’s true that some annuities have caps, but that’s not the full picture. There are three ways to earn interest in an annuity:
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- Cap: A maximum limit on how much you can earn.
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- Spread: You earn any interest above a set spread amount.
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- Participation Rate: You earn a percentage of the index’s growth.
If your goal is to maximize growth, you can choose an option with a participation rate or spread, which may give you better earning potential. Comparing annuities to stocks is like comparing apples to oranges. An annuity gives you protection against loss, but you’ll have to accept some limits on growth.
Here’s a quick comparison of growth options:
| Growth Option | Explanation |
| Cap | Earn up to a certain limit on index performance |
| Spread | Earn interest above a fixed percentage (spread) |
| Participation Rate | Earn a percentage of the total index growth |
Annuity Myth #3: Annuities Lock Up Your Money
Annuities generally serve one of two purposes: growth or income. If you’re focused on growth, most annuities allow you to withdraw up to 10% of the balance annually. This should be part of your overall financial strategy, along with other investments that provide liquidity.
For income, many people think their portfolio is “liquid” just because they can see the balance on their screen. But if that money is tied up producing income for retirement, it’s not truly liquid. An annuity can help free up more of your money by covering a portion of your income needs.
Example scenario:
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- A couple has $1,000,000 in savings and needs $40,000 per year in income.
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- Without an annuity, they would need to keep the entire $1,000,000 invested.
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- With an annuity, they could invest $281,500 (in 2024) to generate $20,000 per year in guaranteed income. This frees up $218,500 as discretionary funds.
Annuities give you flexibility by providing guaranteed income, freeing up more of your assets for other purposes.
Annuity Myth #4: Annuities Have High Fees
When people say annuities have high fees, they’re usually talking about variable annuities. These can have fees as high as 4%. However, many other types of annuities have much lower fees or even no fees at all.
If your annuity includes an income rider, fees are typically between 0.9% and 1.25%. It’s important to understand what you’re getting for those fees. With an income annuity, you’re paying for guaranteed lifetime income, which is a significant benefit. Meanwhile, many people don’t realize they’re paying around 2% in fees for their managed portfolios without any guarantee of returns.
Fee comparison:
| Annuity Type | Average Fee | What You Get |
| Variable Annuity | 3%–4% | Growth with more market risk |
| Annuity with Income Rider | 0.9%–1.25% | Guaranteed lifetime income |
| Zero-fee Annuities | 0% | Growth and protection with no additional cost |
Annuity Myth #5: Annuities Are Too Complicated to Understand
Annuities may seem complicated, but understanding how they work is easier than you think. The key to understanding annuities is knowing how they grow in value. There are three main ways this happens:
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- Cap: You earn up to a fixed limit.
- Participation Rate: You earn a percentage of the index growth.
- Spread: You earn anything over a fixed spread.
Let’s say the index returns 10%. If your annuity has a 5% cap, you’ll get 5%.
If you have a 50% participation rate, you’ll get 50% of the growth, or 5%.
With a spread, if the spread is 5% and the index returns 10%, you’ll earn everything over the spread, which is also 5%. It’s that simple!
Annuity Myth #6: The Annuity Company Keeps Your Money
Many people worry that the annuity company will keep their money, but that’s not how it works. This myth stems from confusion about lifetime income annuities. The only annuity that forfeits remaining funds after death is a “life-only” annuity. This product is rare and outdated.
Most modern annuities offer options to ensure your beneficiaries receive any remaining balance if you pass away. So, if you don’t fully use the money, it won’t go to the annuity company—it will go to your heirs.
Another common misunderstanding is how annuities grow. Some think the company keeps any gains above your cap or participation rate, but that’s not true. The annuity company doesn’t keep any of your money above the set limits.
By understanding the truth behind these annuity myths, you can make informed decisions about whether annuities are right for you. If you want to discuss your specific situation, make sure to schedule a time on my calendar!
Podcast Episode 45: The Top 6 Annuity Myths
Download Episode 45: Debunking The Top 6 Annuity Myths on Apple Podcast