Annuity Warning
When they\'re great. When they\'re a trap.
The GOOD annuities (rare)
- SPIA — Single Premium Immediate Annuity. You hand over a lump sum; they pay you a monthly check for life. Simple. Low fees. Useful for some retirees.
- QLAC — Qualified Longevity Annuity Contract. Defers payments to age 80-85. Insurance against living too long. Reduces RMDs.
- MYGA — Multi-Year Guaranteed Annuity. CD-like. Locks in 5-6% for 3-7 years. Tax-deferred.
Buy these from low-cost insurers via fee-only advisors — Schwab, Fidelity, Vanguard, or Stan Haithcock\'s "annuityman.com".
The BAD annuities (most pitched to seniors)
- Variable annuity — invested in mutual funds inside the annuity. Fees often 3%+/year. Surrender penalties 5-10 years. Locks money up.
- Indexed annuity — promises stock market upside with "no downside". Reality: caps and "participation rates" capture 3-7% even when market does 20%. Heavy fees, complex.
- Fixed annuity (multi-year) ← good if simple MYGA, bad if loaded with riders.
Hallmarks of a bad annuity: long surrender period (5-10 years), commission to seller of 5-10% of your investment, multiple "riders" with extra fees, complex math you can\'t explain back.
Sales tactics to watch for
- "Free dinner seminar" — almost always a sales pitch. The "free" steak costs you when you buy the annuity.
- "Tax-free retirement income" — usually means cash-value life insurance or indexed annuities. Both have hidden costs.
- "Lifetime income rider" — adds 1-2%/year extra in fees. Often unnecessary.
- "You can\'t lose money" — but you can lose to inflation, opportunity cost, and fees.
- "Just trust me" — never. Get every claim in writing.
Already bought one — what now?
- 1035 exchange — IRS rule that lets you swap one annuity for another tax-free. May save fees. Talk to fiduciary advisor.
- Surrender period — wait until past surrender (often 5-10 years) to avoid penalty.
- Often locked in — accept the loss. Don\'t throw good money after bad.
Bottom line
If you want guaranteed income — SPIA from a top-rated insurer. If you want growth + safety — index funds + bond ladder, NOT a complex annuity. Always get a 2nd opinion from a fee-only fiduciary BEFORE signing.