The Promise of Steady Income
Imagine you’re 62 and looking ahead to retirement. You see your 401(k) go up and down with every market shift. It’s stressful. Then your advisor hands you a shiny brochure. It says:
“Guaranteed income for life.”
“No more worrying about market crashes.”
It sounds safe and comforting, like a warm blanket. But is it really that simple? Let’s take a closer look—so you can make a smart, confident choice.
What Is an Annuity?
An annuity is a contract between you and an insurance company. You give them money now. In return, they promise to pay you income later—usually for the rest of your life.
There are many kinds:
- Immediate annuities start paying right away.
- Deferred annuities pay later.
- Fixed annuities offer steady payments.
- Variable or indexed annuities change based on the market.
Each one works differently—and comes with trade-offs.
Why Some Advisors Recommend Annuities
Let’s be honest. Some advisors recommend annuities because of how they get paid. Many annuities offer a commission—money paid to the advisor when you sign the contract.
- A typical commission is 5% to 7% upfront.
- On a $250,000 annuity, that’s $12,500 to $17,500.
- A basic index fund might pay your advisor nothing.
That doesn’t mean the annuity is bad. But it does mean you should ask how your advisor gets paid—and whether other options were considered.
What Makes Annuities So Appealing?
Insurance companies are very good at marketing. They focus on your biggest fears:
- “What if I run out of money?”
- “What if the market crashes after I retire?”
- “How will I cover basic expenses every month?”
Annuities are built to answer those worries. They offer:
- Steady, predictable income
- A feeling of safety
- Long-term peace of mind
But every guarantee comes with something in return—often high fees, long lockups, or lower flexibility.
Let’s Talk About Fees
Annuities often have more costs than people realize. Here’s a basic breakdown:
Upfront Costs
You may pay a sales load (a percentage taken out right away). This can range from 1% to 8%, depending on the product.
Ongoing Annual Fees
These vary but can add up:
- Mortality & Expense Risk Charge: ~1.25%
- Administrative Fees: ~0.3%
- Investment Management Fees: 0.6% to 3%
- Rider Fees (for extra benefits): 0.25% to 1.5%
That means some variable annuities cost 2% to 4% per year—which is $6,000 to $12,000 annually on a $300,000 account.
Surrender Charges
These are penalties for taking money out early. You might pay up to 7% in the first year, with the fee shrinking over 7–10 years.
What About Taxes?
Annuities grow tax-deferred, which means you don’t pay taxes while the money grows. But when you take it out, it’s taxed as regular income—not at the lower rates used for long-term capital gains.
This means you could owe up to 37% in taxes, depending on your bracket.
When Annuities Can Be Smart
Here’s when annuities might help:
1. Covering Essential Costs
If Social Security doesn’t cover your basic monthly bills—like housing, food, or healthcare—an annuity can fill the gap.
Hypothetical Example:
Lisa is 66. She needs $3,800 per month to live comfortably. Social Security gives her $2,200. She uses $300,000 to buy an annuity that gives her $1,600/month—helping her feel secure.
2. Longevity Protection
Some people worry about outliving their money—especially women, who tend to live longer. Annuities offer a safety net that can’t be outlived.
3. Investment Behavior Help
If you tend to panic during market dips or chase high-flying stocks, an annuity’s steady payment can help you avoid mistakes.
If You Already Have a Pension—Be Extra Careful
If you’re a government employee or retiree with a pension, you may already have guaranteed income—often more secure than what an annuity could offer.
Some advisors may try to convert or “annuitize” part of that pension through rollovers or lump-sum withdrawals. Why? Because they can earn commissions by moving your pension money into an annuity they sell.
This can be risky and irreversible. Before doing anything:
- Ask if your pension already covers your essential needs.
- Compare the guarantees. Government pensions usually offer strong, lifetime payments—some with inflation protection or spousal benefits.
- Get a second opinion from a fiduciary who does not earn money from selling annuities.
Bottom line: If you already have a pension, you may not need an annuity at all. In fact, buying one could reduce your flexibility and increase your costs.
When to Be Cautious
Watch for these warning signs:
- High-pressure sales tactics: “This offer won’t last!” or “Act now!”
- Complex language: If it’s hard to explain to your spouse, it might be too complicated.
- Overconcentration: Putting most or all your savings in one product isn’t wise. Diversification matters—even in retirement.
Your 3-Step Decision Framework
Step 1: Know Your Goals
- What monthly income do you need?
- Do you want flexibility or steady checks?
- Do you plan to leave money to heirs?
Step 2: Compare Other Options
- Could a bond ladder offer similar income with more control?
- Would drawing from a diversified portfolio give you more upside?
- Are you maximizing Social Security first?
Step 3: See the Numbers
Ask your advisor to show:
- Total costs over time
- Break-even point vs. other strategies
- Projections for different market scenarios
Smart Questions to Ask
Before you sign anything, ask these:
- “How are you paid for recommending this?”
- “Can you compare this to a basic stock/bond plan?”
- “What happens if I need money beyond my limit?”
- “Will my income keep up with inflation?”
- “Can you explain this to my spouse or kids in simple terms?”
Should You Keep the Annuity You Already Bought?
If you already own one, don’t panic. It might still fit your needs. But it’s worth asking:
- Are the fees eating away your growth?
- Could you get more income another way?
- Is it worth the penalty to move to something better?
Final Thought: It’s All About You
Your retirement plan should help you sleep better—not feel confused or rushed. Sometimes annuities help. Sometimes they don’t.
The best choice depends on your goals, your comfort level, and your complete financial picture—not someone else’s sales pitch.
Want a second opinion?
We offer independent reviews. No pressure. Just honest answers to help you retire smarter.
About the Financial Planning Author
Alexander Langan, J.D, CFBS, serves as the Chief Investment Officer at Langan Financial Group. In this role, he manages investment portfolios, acts as a fiduciary for group retirement plans, and consults with clients regarding their financial goals, risk tolerance, and asset allocation.
With a focus on ERISA Law, Alex graduated cum laude from Widener Commonwealth Law School. He then clerked for the Supreme Court of Pennsylvania and worked in the Legal Office of the Pennsylvania Office of the Budget, where he assisted in directing and advising policy determinations on state and federal tax, administrative law, and contractual issues.
Alex is also passionate about giving back to the community, and has participated in The Foundation of Enhancing Communities’ Emerging Philanthropist Program, volunteers at his church, and serves as a board member of Samara: The Center of Individual & Family Growth. Outside of work and volunteering, Alex enjoys his time with his wife Sarah, and their three children, Rory, Patrick, and Ava.
About Langan Financial Group: Financial Advisors
Langan Financial Group is an award-winning financial planning firm with offices in York, Pennsylvania and Harrisburg, Pa.
With over 100+ 5-star reviews, Langan Financial Group is an independent financial planning firm established in 1985, offering a broad range of financial planning services.
With an open architecture platform, our advisors have access to a diverse range of products, free from any sales quotas.
Our team of 11 financial experts, each with unique specialties, enhances our ability to focus on delivering value to our clients.
Disclosure
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice.
Please consult legal or tax professionals for specific information regarding your individual situation.
The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC.
Investment Advisor Representative, Cambridge Investment Research Advisors, Inc. a Registered Investment Advisor. Cambridge and Langan Financial Group, LLC are not affiliated.
Cambridge does not offer tax or legal advice.
