9 Reasons to Avoid Annuities

Some reasons to avoid annuities are dead-on legitimate: real fees, real lock-up periods, real trade-offs that don’t fit every retirement. Others are half-truths stretched thin by people who profit when you keep your money somewhere else. We’re ranking these nine from most legitimate to least, so you can tell the difference between a genuine red flag and a talking point built to protect somebody’s fee.

Here’s the angle most of these lists skip entirely: the loudest anti-annuity voices are often firms that earn a percentage on every dollar of your assets they manage, year after year. An annuity moves money out of that fee stream and into an insurance contract, so of course they’d rather you never bought one. That doesn’t mean every reason on this list is wrong; it just means you should ask who benefits before you decide the annuity is the villain.

A small percentage of something is far better than a big percentage of nothing, and avoiding a legitimate reason without checking the math has its own cost.

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The Short Answer on When to Avoid an Annuity

The strongest reason to avoid an annuity is having no income gap to fill; the weakest is a blanket “annuities are bad” pitch from someone who gets paid more when your money stays with them.

• For no income gap between Social Security and your basic expenses: an annuity is usually unnecessary.
• For needing every dollar liquid in the next few years: avoid a long-surrender contract, or look for one with strong free-withdrawal terms first.
• For assets already well under $300k with no cushion: an annuity likely can’t do enough to justify locking part of it up.
• For a fee-only or AUM-based advisor telling you to avoid one entirely: get a second opinion from someone who doesn’t lose a fee when you buy one.
• For a decades-long runway before retirement: skip it for now and revisit closer to the actual income need.
• For an advisor who can’t name the specific guaranteed rate, surrender schedule, or how they’re paid: that’s a reason to walk away from that contract, not from annuities as a category.

1. You Do Not Have an Income Gap to Fill

This is the most legitimate reason on the whole list: if guaranteed income already covers what you need to spend, there’s no gap for an annuity to fill.

The legitimate case

The math here is simple, and it’s the same formula I use with clients before we ever talk product. Take your essential monthly expenses, subtract Social Security (and a pension, if you have one), and whatever’s left is the gap an annuity would need to close. If a couple spends $6,000/month on essentials and Social Security already sends $6,000/month, the gap is zero, and there’s nothing for an annuity to solve. Buying one anyway just to have “more income” when you’re already covered is putting a saddle on a horse that’s already broke. Your retirement savings can stay invested, stay liquid, and keep working for growth and legacy instead of getting parked in a contract you don’t need.

Where it falls apart

Plenty of retirees run this math once at 65 and assume they’re covered for good, and that’s exactly where the reasoning breaks down. Inflation doesn’t pause because you did the math once. A gap of zero today can turn into a real gap in ten years as the cost of everything from groceries to health care climbs while Social Security’s cost-of-living bump lags behind. The bigger blind spot is what happens when one spouse dies: up to half of a couple’s combined Social Security income can disappear with the first death, and that survivor is left trying to cover the same expenses on a fraction of the guaranteed income. Run the gap calculation again assuming one of you is gone, not just as a couple today, before you decide an annuity has nothing to offer your retirement plan.

2. You Need All of Your Money Liquid

If there’s a real chance you’ll need your full balance in a hurry, avoid any annuity with a long surrender period.

The legitimate case

Some people genuinely can’t afford to lock money away, and it’s on me to say so instead of talking around it. If you’re past 75 with health issues already on the horizon, or you’re sitting on savings that also function as your emergency fund, a 10-year surrender schedule is the wrong tool no matter how good the crediting terms look. A surrender charge isn’t hypothetical money either. On a $100,000 contract with a 7% first-year surrender charge, pulling the full balance out early costs you $7,000 before you ever see a dime, and that number typically steps down by a point or so each year you wait. That’s a real cost, and it’s the single biggest reason a genuine need for liquidity should send you looking elsewhere.

Where it falls apart

Here’s where the “annuities lock up your money” line gets repeated way past where it’s actually true. A locked-in contract with no way out is a feature for whoever sold it to you, not for you, and most contracts written today aren’t built that way at all. Most fixed and indexed annuity contracts allow something close to 10% of the account value out every year without a penalty, and plenty waive the surrender charge entirely for nursing-home confinement or a terminal diagnosis. That free-withdrawal provision is the exact mechanism behind income strategies I build for clients who want access and growth without going all-in on a rigid income rider.

The honest caveat: that 10% free withdrawal is no longer standard on every contract, some carriers have trimmed it down to nothing to advertise a slightly higher headline rate, so you verify it on the specific contract in front of you, not on what annuities “usually” do. And the deferral-period anxiety is real too. Watching years pass before a contract starts paying, while your health or spending needs are already changing, is a legitimate source of stress, which is exactly why matching the surrender length to your actual timeline matters more than chasing the best-looking rate on the brochure.

3. You Are Too Young to Tie Up Retirement Money

If you’re decades away from retirement with plenty of runway to ride out market swings, an annuity usually isn’t the right tool yet.

The legitimate case

Most annuity buyers are in their 50s to 70s, and that’s not an accident. Someone in their 30s or early 40s still has 20-plus years for the market to work through its ups and downs, and that time horizon is exactly what makes low-cost growth investments the better fit for that stage. Retirement savings at that age should be focused on accumulation, not on converting a balance into guaranteed income you don’t need for decades. Keep saving, keep it invested for growth, and let the annuity conversation wait until you’re closer to actually needing income.

Where it falls apart

Here’s the part people miss when they treat “wait until later” as free advice with no downside: waiting has a cost too. The older you are when you eventually buy, the more of that survivorship-credit value you’ve left on the table, since that pooled-longevity benefit grows more valuable the closer you get to the age when you’d actually use it. That doesn’t mean rush out and buy something at 45. It means don’t let “you’re too young” become a blanket rule applied to someone who’s 58 with $400,000 saved and five years from retiring, which is a completely different situation.

The right time to buy an annuity is when you are ready to do it, full stop. Nobody should feel pressured into a contract before they’ve got a clear reason for it, and nobody should be talked out of one just because a rule of thumb says wait, when their own numbers and timeline say otherwise.

4. The Fees and Commissions Are Too High

Fees really can eat a big chunk of your gains, but that’s true of one kind of annuity far more than the others.

The legitimate case

Variable annuities are where this complaint hits hardest, and it’s earned. Stack a living-benefit rider, a death-benefit rider, the underlying fund expenses, and the core contract charge together, and you can land at 3% to 4% a year in total cost, every single year, whether the market’s up or down. Run the math on what that actually does: earn 9% before fees and pay 3% in costs, and your fees just consumed a third of your gain. That’s not a small drag, that’s a structural problem, and it’s the reason variable annuities with heavy rider stacking deserve real skepticism before anyone signs.

Commissions track a similar pattern. More complex products with longer surrender schedules tend to pay agents more, and that creates a real incentive to sell you the contract that pays the salesperson best rather than the one that fits your plan.

Where it falls apart

Here’s what gets lost when “annuities have high fees” gets applied across the board: not every annuity carries this cost structure. A MYGA is priced like a CD, the “fee” is simply baked into the rate you’re quoted, not stacked on top of it as a separate charge you’ll see on a statement. A SPIA works the same way, the payout you’re quoted already reflects the insurer’s cost of doing business, there’s no rider stack sitting on top eating into it year after year. Calling a MYGA or a SPIA expensive because a variable annuity with three riders is expensive is comparing a pickup truck to a monster truck and complaining they both burn gas the same way.

Commission transparency is possible too, and it should be the standard, not the exception. My own average commission runs just under 4%, which sits well below what a lot of the industry pays out on fixed indexed annuities with longer surrender schedules. Ask any advisor point-blank how they’re paid and what the specific fee structure is on the product in front of you. If they dodge the question, that tells you more than the fee itself does.

5. Surrender Charges Trap Your Principal

A long surrender schedule can genuinely cost you real principal if you’re forced to exit early, and that’s a legitimate reason to think twice before signing.

The legitimate case

Surrender charges exist because the insurer fronted a commission when you bought the contract, and they want that money recouped if you leave early. On a poorly matched contract, that charge can run 7% or higher in year one, and some deferral periods have stretched 15 to 16 years, long enough to outlast what a lot of retirees actually need or will even live to use. Run the dollar math: on a $24,000 contract with a 17% surrender penalty, walking away early costs you roughly $4,000 of your own money before you see a dime, and on larger balances that number climbs fast. That’s exactly the pattern that gets people in trouble: a 15-year deferral sold to someone who needs the money for health care or assisted living well before year 15 arrives. When the surrender schedule doesn’t match the buyer’s actual timeline, it’s not a contract feature, it’s a mismatch that should never have been sold in the first place.

Where it falls apart

Here’s what the “annuities trap your money” argument leaves out: surrender charges are built to shrink every single year and disappear entirely once the contract matures. A 7-year schedule that starts at 7% typically drops by roughly a point annually, so by year five or six the exposure is small, and by year seven it’s gone. Layer in the free-withdrawal allowance most contracts carry, usually around 10% of the account value per year with no penalty at all, and the real bite of a surrender charge only shows up if someone needs a large lump sum, fast, early in the contract. That’s a real risk, but it’s a narrow one, not a blanket trap.

The fix isn’t avoiding surrender periods altogether, it’s matching the surrender length to your actual timeline before you sign anything. And watch for one specific red flag: a surrender period that runs longer than the guaranteed-rate period it’s attached to. If the rate guarantee is locked for 7 years but the surrender charge lasts 10, that mismatch benefits the carrier, not you, and it’s worth walking away from regardless of how good the headline number looks.

6. Annuities Offer Little or No Inflation Protection

A fixed annuity payment stays exactly the same size for as long as you own it, and that’s a real problem when the cost of everything around you keeps climbing.

The legitimate case

Most income annuities pay a level nominal amount, month after month, with no built-in adjustment for the rising cost of groceries, health care, or housing. That’s not a small technicality. From 1981 to 2021, a period the industry generally treats as the “tamed” inflation era, prices still roughly tripled. A $2,000/month payment locked in decades ago would buy a fraction of what it did when the contract started, even without a repeat of anything close to the runaway inflation of the late 1970s. Inflation is one of the five things that can quietly wreck a retirement plan, right alongside running out of income or losing control of your money, and a level annuity payment does nothing on its own to defend against it. That erosion is exactly why this concern undermines the whole point of buying guaranteed income in the first place if the payment can’t keep pace with what things actually cost down the road.

Where it falls apart

Inflation riders do exist, so this isn’t an unsolvable problem, but the trade-off needs to be said plainly instead of buried in fine print. An inflation-adjusted payout starts noticeably smaller than a level payment from the same premium, and it can take a decade or more of built-in increases just to catch back up to what the level payment was paying on day one. That’s a real cost for real protection, and whether it’s worth it depends on how long you expect to need the income and how much of your budget that payment actually covers.

There’s a cleaner fix I use more often than paying for a pricey rider: buy a small additional income annuity every five to ten years instead of loading one big contract with an inflation adjustment upfront. Each new purchase locks in current rates and adds a fresh layer of income on top of what you already have, which spreads your inflation protection out over time instead of betting it all on one rider’s math holding up for 20 or 30 years. It’s not free, and it takes some planning to execute, but it beats pretending a level payment from 2026 will still feel the same in 2046.

7. You Might Not Live Long Enough to Come Out Ahead

If you buy a life-only income annuity and die early, you can recover only a fraction of what you paid in, and that’s a legitimate worry worth naming honestly.

The legitimate case

A life-only payout is structured to pay the most money per month precisely because it stops the moment you die, with nothing left over for family. Pick that option and pass away in year two or three of a twenty-year expected payout, and the insurance company keeps what would have gone to your heirs. For people whose family’s financial security matters as much as their own income, that structure alone can feel like a bad bet, especially if there’s a history of shorter lifespans in the family or health concerns already on the table. It’s a fair concern, and I’d rather say so than pretend every annuity buyer is comfortable with that trade-off.

Where it falls apart

Here’s the thing almost nobody selling against annuities mentions: you don’t have to choose the life-only version at all. Nearly every income annuity contract offers a period-certain option, a cash-refund option, or a joint-and-survivor structure that protects your family if you die early, and the cost of adding that protection is smaller than most people assume. Add a 10-year certain guarantee to a joint life annuity in your 60s and the difference in monthly payment can run as little as $7 a month. That’s not a typo, and it’s not a rounding error, it’s close to free insurance against the exact scenario people worry about most.

The bigger reframe worth sitting with: an income annuity isn’t really a bet that you’ll die early and lose. It’s a bet that you’ll live a long time and need the income to keep showing up, which, statistically, is exactly what happens to most couples. A 65-year-old couple today has roughly a coin-flip’s chance that one of them reaches 90, and outliving your money is a far more common and far more damaging retirement outcome than dying too soon after buying an annuity with reasonable death-benefit protection built in.

8. The Growth Is Limited Compared to the Market

Fixed and indexed annuities cap how much you can make in a strong bull market, and that’s simply true, not a myth to be debunked.

The legitimate case

A fixed indexed annuity credits interest based on a formula, a cap, a participation rate, or a spread applied to an index like the S&P 500, and every one of those formulas limits your upside compared to owning the index outright. Historically, credited FIA returns have averaged in the low single digits, nowhere close to what a strong stock market run can deliver over the same stretch of years. If the market puts up a big year, an annuity with an 8% cap locks in 8% while the index itself might have delivered two or three times that. That’s the honest math, and anyone who tells you an FIA is going to match stock market growth over time is selling you something, not educating you.

Where it falls apart

Here’s where this objection goes sideways: it assumes an annuity is supposed to compete with the market in the first place, and it never was. A fixed indexed annuity trades away some of that upside specifically to remove the risk of loss, it’s a straight-up exchange, not a bad deal. You’re not choosing between an annuity and market growth, you’re choosing between full market exposure and a smaller, protected slice of it. For money you genuinely can’t afford to see cut in half in a bad year, that trade makes sense; for money you can leave invested for decades, it usually doesn’t.

This is also exactly where the advertised 7%, 8%, or 9.3% headline rates get people into trouble. Those numbers are almost never asset growth, they’re roll-up rates applied to an income base that only matters if you annuitize into lifetime payments, not a reflection of what your actual account value earns. Confusing the two is how people end up disappointed two years in, wondering why their contract value looks nothing like the number in the brochure. An annuity isn’t a replacement for your investment portfolio, it’s a complement to it, protected principal and modest growth sitting next to money that’s still working for you in the market. Bought for the right slice of your savings, with the actual crediting formula clearly explained upfront, it does exactly what it’s designed to do and nothing more.

For a closer look at how a specific contract’s crediting formula stacks up, our annuity and second-opinion reviews break down the real numbers behind the headline rate.

9. Your Advisor Says to Avoid Them (Follow the Incentive)

An advisor telling you to avoid annuities is sometimes giving you good financial advice, and sometimes protecting their own paycheck, and you should know which one you’re getting.

The legitimate case

Healthy skepticism of anyone pushing a single product is smart, full stop. Annuity salespeople have real conflicts of interest: some earn commissions that climb with the complexity of the contract, and a rushed pitch toward the priciest product in the lineup is a legitimate reason to slow down. If an advisor takes one look at a contract you’re being offered and says it’s genuinely wrong for your situation, that a variable annuity with three riders doesn’t fit someone who just needs a floor under their income, they may well be right, and you should listen. Not every “avoid this” recommendation is self-serving.

Where it falls apart

Here’s the angle almost nobody says out loud: some of the loudest voices telling you to avoid annuities altogether run asset-management firms that only get paid while they’re managing your money. Move money into an annuity and it leaves their fee base entirely, so an annuity isn’t a neutral topic for them, it’s a direct competitor for your dollars. One well-known fee-only firm built a whole “I hate annuities” ad campaign as a customer-acquisition funnel while charging roughly 1.25% a year on assets under management, all while, at various points, holding stock in annuity carriers themselves, including American Equity and Prudential/Jackson. That’s not analysis, that’s marketing dressed up as advice, and it cuts exactly the same way the commissioned-agent conflict does, just pointed in the other direction.

The fix is the same one I’d give for any financial recommendation: ask who benefits before you weigh the advice. It’s not annuities or investments, it’s annuities and investments, used where each one actually fits your plan. If someone won’t answer how they’re paid, or dismisses an entire category of product without looking at your specific numbers, that tells you more about their incentive than it does about whether an annuity belongs in your retirement.

If you want a second opinion from someone who isn’t managing a fee off the outcome, that’s exactly what a second opinion review is built for. No pressure either way, just the math laid out plain.

Bryan

Reasons to Avoid Annuities at a Glance

The table below lines up all nine reasons to avoid annuities side by side, so you can scan which objections hold up, which ones depend on your situation, and which ones are mostly marketing. Each row also names the contract-level fix where one exists, since several of these objections disappear once the right feature is added to the contract.

How We Weighed Each Reason

Every reason on this list gets run through the same four questions, so entry #1 and entry #9 get judged by the same yardstick instead of whichever argument sounds most convincing that day. Here’s the lens, laid out once so it doesn’t need repeating nine times below.

Whose interest the reason serves

Annuity salespeople aren’t the only ones with a conflict of interest here. An advisor who earns a percentage of your assets every year has just as much reason to steer you away from annuities as a commissioned agent has to steer you toward one, since either way money leaves their management. Some field reports on advisor incentives echo this pattern directly: verify who gets paid and how before you weigh their opinion on annuities at all, and ask outright whether they’re held to a fiduciary standard.

Whether it applies to all annuities or just some

Most anti-annuity arguments get built around one product type and then applied to the whole category, which is sloppy thinking dressed up as caution. A variable annuity’s market exposure has almost nothing to do with a MYGA’s fixed rate or an FIA’s principal protection, and a SPIA’s income-for-life structure works completely differently from either one. We name which products a given reason actually applies to, because lumping them together is how good products get blamed for bad ones.

What it actually costs you

This criterion means running the dollar figures, not trading vague impressions back and forth. A surrender charge, a rider fee, or a lost year of market gains all have a real number attached, and we show that number instead of just saying something is expensive. Compare apples to apples: a cost only means something next to what you’d have paid, or given up, doing it another way.

Whether a fix exists inside the contract

Plenty of objections that sound fatal actually have a contract-level answer already built into modern annuities. A period-certain rider solves the “what if I die early” objection, a free-withdrawal provision solves a big chunk of the liquidity complaint, and skipping an unnecessary income rider solves the fee objection on products where you don’t need one. Where a fix exists, we say so; where it doesn’t, we say that too.

For a deeper look at how this scoring plays out contract by contract, our second-opinion review process applies these same four questions to a policy you already own or one someone’s pitching you.

How to Decide Whether to Avoid an Annuity

Run your own numbers through the four checks below before you decide an annuity is wrong for you, or right for you, because either answer should come from your situation, not from a headline.

Start with your income gap, not the product

Before you weigh a single one of the nine reasons above, calculate your essential monthly expenses minus your guaranteed income from Social Security and any pension. That number, the gap, tells you whether an annuity is even solving a real problem in your plan or just sitting there as an extra layer of complexity. Skip straight to product comparisons before doing this math and you’ll end up debating fees and caps on something you may not need at all, or dismissing something that would genuinely help close a real shortfall.

Check whose incentive is behind the advice

Whoever is advising you, whether they’re pitching an annuity or telling you to run from one, ask directly how they get paid. A commissioned agent earns more from certain contracts than others, and an advisor managing your investments earns less the moment money moves into an annuity, so both sides of this argument carry a financial stake in your answer. Straight talk means the advisor tells you plainly how their compensation works and lets you weigh the advice with that in mind.

Match the contract to your timeline

If you need liquidity soon, or you’re older with health considerations already on the table, steer toward short surrender periods or skip deferred products altogether. The product type matters more than the brand name: a MYGA fits predictable, CD-like growth, a SPIA fits maximizing income today, and a fixed indexed annuity fits protected growth with some upside tied to a market index. Picking the wrong category for your timeline causes more regret than picking the “wrong” company within the right category.

Get a second opinion before you sign

Have someone with no stake in the outcome, no commission on the sale, and no fee riding on you keeping your money elsewhere, run the actual numbers on any contract you’re considering or already own. That’s the one step that catches both the oversold product and the wrongly dismissed one, because it removes the incentive problem from the room entirely. Education before the sale only works if the person educating you isn’t also the one collecting a check either way.

If you’ve been pitched something and want a plain-numbers read on whether it actually fits your five keys of retirement, income, market volatility, inflation, control, and legacy, book a no-pressure strategy call or call 800-438-5121. No deadline, no pressure, just the math laid out so you can decide for yourself.

Bryan

Frequently Asked Questions

Are annuities ever a bad investment?

Annuities aren’t really an investment at all, they’re an insurance contract designed to guarantee income or protect principal, so judging one as a bad investment is often the wrong comparison from the start. Used as a substitute for money you need growing aggressively for decades, an annuity usually underperforms that goal. Used to guarantee income you can’t outlive or to protect a portion of savings from market loss, it’s doing exactly the job it was built for, and whether that job matches your situation is the real question.

Which type of annuity should you avoid?

The annuities most worth avoiding are variable annuities loaded with multiple riders, since the combined fees on those can run 3% to 4% a year regardless of market performance. Beyond that, avoid any specific contract you don’t fully understand, regardless of type, including the surrender schedule, the crediting method, and exactly how the agent gets paid. A simple MYGA or a plain fixed indexed annuity is a very different animal from a variable annuity stacked with living and death benefit riders, and lumping them together as “annuities” obscures more than it explains.

Do all annuities have high surrender charges?

No, surrender charge structures vary widely by product type and by specific contract. A multi-year guaranteed annuity or an income annuity often carries a shorter or simpler surrender period than a deferred variable or indexed annuity, and some products are built without any surrender charge at all in exchange for a lower rate. The charge itself typically declines each year and disappears once the contract matures, so the real question isn’t whether a surrender charge exists, it’s whether its length matches how soon you might need the money.

Why do some financial advisors hate annuities?

Some advisors genuinely believe annuities are poorly suited to their clients based on real experience with bad contracts, and that skepticism can be well-founded. Others run fee-based practices that earn a percentage of assets under management every year, and money moved into an annuity is money that stops generating that fee, which creates a financial incentive to discourage annuities regardless of fit. Both motivations exist in the industry, and the honest move is to ask any advisor, on either side of the debate, exactly how they get paid before weighing their opinion.

Can you get your money out of an annuity early?

Yes, most contracts allow a free withdrawal of around 10% of the account value each year without triggering a penalty, though that allowance varies by contract and isn’t guaranteed on every product. Beyond that free amount, early withdrawals typically trigger a surrender charge that declines over the surrender period, though many contracts waive it for events like nursing-home confinement or a terminal diagnosis. A 1035 exchange also lets you move funds tax-free into a different annuity without a taxable withdrawal, which is useful if the fix is switching contracts rather than cashing out entirely.

Are annuities safe if the insurance company fails?

State guaranty associations back annuity contracts if an insurer becomes insolvent, typically covering at least $250,000 per owner per company, though the exact limit varies by state. This is a real backstop, but it’s also information insurance agents are generally not permitted to use as a selling point during a pitch, since leaning on it to imply guaranteed safety oversteps what regulators allow. Choosing a financially strong carrier still matters, the guaranty system is a safety net, not a reason to skip due diligence on the company issuing the contract.

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Last Updated on July 24, 2026 by Bryan Anderson