Chances are, somebody at some point has tried to dissuade you from even considering an annuity.
- Maybe it was your dad (the same person who cautioned you would drown if you went back in the pool sooner than an hour after eating) who gravely warned you to steer clear of annuities because you’ll lose all your money?
- Maybe it was a journalist writing about dinners for elderly retirees that started with a juicy steak and ended with a juicy commission in the salesman’s pocket?
- Or last but not least (certainly not in terms of their marketing budget), perhaps it was an ad that popped up on social media from a multibillion-dollar investment firm claiming to want to protect you from the perils of annuities?
There are lots of arguments the annuity bashers trot out and, like many folktales, some even contain a grain of truth. However, with record numbers of Americans reaching age 65 and retirement every day1, the benefits of annuities have never been more needed. It’s worth taking a look at the most common dings against a tool that provides more than one out of 10 American retirement savers with guaranteed lifetime income2, sorting fact from fiction, and deciding for yourself.
Annuities mostly benefit the person selling them. To understand this one, it’s important to acknowledge that, historically, annuities have been sold by agents and brokers who are paid steep commissions for product sales. Commissions increase the cost to the consumer and often erode benefits. And sellers often are incentivized by additional rewards for hitting sales quotas, like trips and gifts. That’s why you sometimes hear people say, “annuities are sold not bought.”
But today, just about every type of annuity is available without commissions built in. These “no-load” products are lower cost and often provide improved benefits over their commissioned predecessors, like higher income payout rates. Consumers can shop for, compare, and purchase commission-free annuities directly or access them through a fee-only financial advisor who doesn’t receive a hefty commission or other incentive to sell you an annuity. This new breed of commission-free annuity is built to be bought, not sold.
Once you get into an annuity, you can’t get out. This is another argument that is a vestige of commissioned annuities. Annuities that pay salespeople commissions tend to have long “surrender periods” and charge high fees if you want your money back early. That’s because insurance companies have to recoup the big upfront commission they paid the salesperson by investing your money for a period of time.
Most commission-free annuities don’t have surrender periods, and, if they do, it is typically so they can provide you with a better benefit—like a higher income payout rate or return. Besides, the notion of not having access to your money once you purchase an annuity only falls under one annuity type called a Single Premium Immediate Annuity or SPIA. This type of annuity locks in your money and the only way to get it back is through an income stream that generally begins immediately. Other annuity types offer options to withdraw a portion of your money each year, and to get your premium back if you want out of the contract. It’s important to understand your goals for the money you put into an annuity in order to select the solutions and features that are right for you.
You can match an annuity’s income stream with bonds and other investments. This one’s a favorite of those who spend millions on anti-annuity ads on Facebook and other media. But here’s what you need to understand: The people claiming annuities are inferior to “bonds and other investments” happen to manage—and charge fees on—bonds and other investments. In other words, the anti-annuity stance may be to protect their best interest rather than yours.
Setting aside their motive, building and maintaining an investment portfolio that can match the income an annuity can provide is extremely tough. And even if they pull it off for a while, an investments-only portfolio cannot protect against the risk of outliving your savings—it’s not designed to do that. An annuity is. As Nobel prize winning economist William Sharpe put it: “If you invest your money in almost anything except an annuity … you’re going to be subject to two kinds of uncertainty—investment uncertainty and mortality uncertainty.”3
An annuity is just a risky contract with an insurance company.This one’s easy. To claim that annuities are risky and therefore should not be considered ignores a fundamental truth – ALL investments carry some degree of risk. The same people who make this argument usually think nothing of investing in corporate bonds, stocks of companies that have yet to turn a profit, even virtual currency that no grocery store or gas stations accept.
That said, insurance companies that offer annuities specialize in risk management—that is their business. And they are among the most well-capitalized, highly regulated entities on earth. Between 1981 and 2023 insurance company defaults were the lowest of any sector—lower than banks and lower than nonfinancial companies.4 Their 10-year default rate averages 0.06%. Of course, before purchasing any financial product, it is prudent to do your research and select your provider carefully.
No other investment product can match the features of an annuity for generating predictable retirement income for life—That's why they’re often referred to as “personal pensions.” Maybe it’s time to stop listening to the naysayers—some of them well meaning, others perhaps not so much—and do your own research.
The water’s pretty nice. Maybe you don’t really have to wait an hour before jumping in.
1 “How 2024's Record Retirement Numbers Could Spark a Recession.” Wall Street Journal.
2 “How Much Do People Value Annuities and Their Added Features?” Center for Retirement Research at Boston College.
3 “Nobel Prize-Winning Economist on How to Solve the 'Nastiest, Hardest Problem' in Retirement.” Barron's.
4 “Default, Transition and Recovery: 2023 Annual Global Financial Services Default and Rating Transition Study.” S&P Global.