The Cons of Variable Annuities

Let’s get something straight: I don’t sell variable annuities. But that doesn’t mean I ignore them, or that I don’t understand how they work. In fact, I’ve probably spent more time studying them than the people who do sell them.

This isn’t about bashing a product—it’s about putting all the cards on the table. I get calls every week from people asking what they should do with an old variable annuity. Sometimes the best move is to keep it. Sometimes it’s not. It depends on your goals, your timeline, and whether you understand what you actually own.

Start with the Goal—Always

The most important thing I tell everyone: define your goal first. If your goal is guaranteed income, then you work backward from that. Is an annuity the right fit? If yes, then which annuity gives you the strongest chance of reaching that goal with the least amount of risk?

That’s where variable annuities often fall short. When you actually break down the numbers, the cons of variable annuities usually outweigh the benefits—especially for people seeking predictable, low-risk retirement income.

A Too-Good-To-Be-True Scenario

Last week, a man told me he wanted $5,000 per month in retirement income. Great—we have a target. When he told me someone offered that using $467,000, I raised an eyebrow. I’ve been doing this a while, and I know what $5,000 a month costs. It’s closer to $600,000, give or take depending on timing and age.

So how is someone offering it for less than that? Simple: projections, not guarantees.

He was shown a variable annuity illustration based on market returns from the late 1990s—years that included 22%, 31%, and 20% growth. That’s a recipe for inflated expectations. The product was from Nationwide, and while I’ve done business with them before, I’ve seen this movie too many times.

The Income Gap No One Talks About

Here’s the part that gets glossed over in the sales pitch: the difference between what you’re shown and what you’re guaranteed.

In this case, the variable annuity illustration promised $57,000 a year in income. That’s what grabbed the client’s attention. That’s the number the salesperson emphasized.

But when I dug into the contract, the guaranteed income—the amount you’d actually receive if the market underperforms—was just over $31,000.

That’s a $26,000 difference. Every single year.

So let me put that into perspective. Imagine planning your retirement around $4,750 a month. You do the math, you feel good about the numbers, you start making decisions. Then five years in, the market underdelivers, the income rider doesn’t keep pace, and suddenly your check is $2,583 a month instead.

That’s the kind of gap that forces people to go back to work, cut their lifestyle in half, or start pulling from principal—just to cover the shortfall.

The reason this happens is because the projected income is built on non-guaranteed growth assumptions. In this case, it was modeled using late ’90s market performance—some of the best returns in history. If the next decade doesn’t mirror that stretch, those rosy income numbers collapse.

And remember, this is happening inside a product that charges 3.6% in fees. So not only does the market have to perform, it has to outperform those fees consistently just to stay on track.

This is one of the biggest cons of variable annuities: you’re shown an outcome that only works under ideal conditions—and you’re locking into it for life.

Guaranteed vs. Projected Income From a Variable Annuity

Using a $467,000 investment

Income Type	Annual Income	Assumptions
Guaranteed Floor	$31,000	Market performs poorly
Projected Growth	$57,000	Based on late ’90s returns

Note: A $26,000 annual gap is the difference between a stable retirement and a financial shock.

The Fee Drain That Doesn’t Get Mentioned

One of the most overlooked cons of variable annuities is the fee structure. These products often carry total annual fees between 3% and 4%—sometimes even higher once you factor in rider costs, subaccount fees, and mortality & expense charges.

In most market conditions, those fees create a headwind that’s hard to overcome. When the market is flat or down, they become an anchor. And when you’re counting on performance just to make your income rider worth it, that’s a problem.

If the market stalls, goes sideways, or dips—and you’re paying 3.6% in fees—you’re not going to see that projected income. You’re going to get the floor. In this case, $31,000.

Now, if you told me you could get a guaranteed $44,000 a year with a fixed or indexed annuity for the same $467,000, that’s a conversation worth having. That number exists. It’s real. It’s not based on fantasy growth from the tech boom. It’s not a gamble.

Why They Get Pushed Anyway

So why do variable annuities sell? Because broker-dealers want to keep your money under management. These products let them do that while layering in commissions, bonuses, and recurring revenue.

Are there rare situations where a variable annuity makes sense? Sure—if you’re only allocating 10% to 20% of your portfolio, and you fully understand the risks.

But when you’re putting 60% or more of your retirement savings into one of these contracts, you’re stacking risk on top of hope. And that’s not a solid retirement plan.

The Bottom Line

There are a lot of cons of variable annuities, especially for people approaching retirement who need clarity, consistency, and guaranteed income. Between high fees, performance risk, and misleading projections, most of these contracts promise far more than they deliver.

If you’re in a similar situation—staring down an illustration that looks too good to be true—it probably is. Run the numbers. Do the research. Compare it to guaranteed options. And ask the hard questions now, not after the contract is signed.

I’ve seen too many people sold on a dream with no one left to answer the phone when reality hits. You deserve better than that. You deserve facts. And more importantly, you deserve a strategy that actually works—without depending on a perfect four-year stretch in the stock market to fund your retirement.

If you’ve got something that doesn’t quite add up, I’m happy to take a look. I’ll tell you what’s real and what’s not. No sales pitch. No fluff. Just the straight story.