Understanding Annuities: Myths vs. Facts

Annuities are one of the most widely discussed and often misunderstood tools in retirement planning. Some people view them as a powerful way to create reliable income. Others have concerns about cost, flexibility, or complexity. The truth is that annuities are neither universally good nor universally bad. Like any financial tool, they serve a specific purpose and may make sense in some situations but not others.

Most of the debate comes down to misunderstandings about how different annuities actually work. Here's what's fact, and what's outdated thinking.

Why Annuities Exist

One of the biggest challenges retirees face is turning savings into income that can last for decades. During your working years, income typically comes from a paycheck. In retirement, that paycheck has to be replaced through savings, investments, Social Security, and other sources. Annuities were built to address one specific concern many retirees share: the risk of outliving their savings.

In simple terms, an annuity is a contract with an insurance company. In exchange for a lump sum or series of payments, the insurer agrees to provide income either immediately or at a future date, for a set number of years or for life, depending on how the contract is structured.

Common Myths About Annuities

Myth: All annuities are expensive. Fact: Some annuities include fees, particularly those with investment management features or optional riders. Others, such as many traditional fixed annuities, typically carry no explicit ongoing management fees; the cost is instead built into the rate the insurer credits.¹ Cost structure depends entirely on the type of annuity and the options selected.

Myth: Once you buy an annuity, your money is locked up forever. Fact: While annuities often include a surrender charge period, many contracts allow penalty-free withdrawals of a portion of the account value each year, commonly up to 10%, depending on the contract.² Some also include income features or liquidity options designed to provide access to funds when needed.

Myth: Annuities replace investing. Fact: For many retirees, annuities aren't intended to replace investment accounts. Fee-based annuity products, designed to be used alongside a broader investment portfolio rather than as a standalone purchase, have doubled in sales since 2020, largely driven by growing adoption among fee-based advisors.³

Myth: Annuities are only for people who dislike market risk. Fact: Different annuities address different goals. Some prioritize stability and predictable income. Others, such as fixed indexed annuities, allow for growth linked to market performance, subject to the terms and limits set by the issuing carrier. It's a category that has nearly doubled in sales over the past five years, reaching $126 billion in 2024.⁴

A Note on Types

Annuities aren't a single product. Fixed, indexed, and immediate annuities each serve different needs, from predictable fixed growth to market-linked upside with downside protection to income that starts right away. For a full side-by-side breakdown of how these compare, see our guide, Types of Annuities Explained: SPIA, MYGA & FIA.

Where Annuities May Fit in a Retirement Strategy

No financial tool should be evaluated in isolation. Annuities are most useful when considered as one piece of a broader retirement income strategy. For some, they provide stability and income confidence; for others, a different mix of strategies may fit better.

Understanding the actual tradeoffs, benefits, and limitations, rather than the myths, is the first step in deciding whether an annuity deserves a place in your plan.