January 23, 2021

Healthy, Wealthy, and Wise


“What do you think about annuities?”  This is one of the most common questions retirees ask.  In a future article, we will discuss the different types of annuities, giving you a better idea which, if any, could be a good fit for your own retirement plan.  For today, we’re going to take a look at the good, the bad, and the downright ugly side of annuities and how they are sold.  Let’s start off with a couple of stories from past clients.  Can you relate with their experience?


 I met Bev in 2008 shortly after her husband had passed away.  For the first time in her life, Bev was solely in charge of the finances.  They didn’t have a lot of money saved up, but one thing Bev’s husband had done was set up an annuity that paid a monthly income as long as either were still living.  This was a tremendous relief for Bev, knowing that she could never outlive her money and that she didn’t have to make investment decisions.  This was especially relieving if you remember the market in 2008, as Bev had stability during one of the steepest market drops in US history.

Thirteen years later I still talk with Bev- she is in great health and often mentions how grateful she is that her husband continues to look after her, long after he’s been gone.


I was introduced to Harold a few years into his retirement.  An advisor already helped him roll over his 401(k), then sold him a few mutual funds and an annuity.  Upon review, the mutual funds had higher expense ratios- around 1%.  Harold didn’t know what “expense ratio” meant, but he understood once we showed him their cost- about $6,000 per year!  This part was easily fixed, but when we looked at the annuity, its expense was even higher at about 3.5%!  About half of Harold’s money was in the annuity, adding $21,000 of annual fees to the $6,000 he was already paying.  Harold’s annuity was expensive and full of benefits he never planned on using, so he thought, “Problem solved!  Let’s just move this like we did the mutual funds and I’m all set.” 

What Harold did not understand (perhaps because it was never explained to him), is that he was tied to his annuity for another 6 years.  If he got out now, he’d pay a 9% penalty of over $50,000!


CERTIFIED FINANCIAL PLANNER™ in what I call a “Fiduciary-Always” role, can cut through the sales-pitch and get down to the honest, objective truth.  This means seeing things for what they really are, rather than making bold proclamations that something is ALWAYS good or ALWAYS bad.

For Bev, the annuity was a great fit for her lifestyle.  Bev’s annuity would pay a modest return, did not have any fees, and most importantly, guaranteed that she would always have a certain level of income she could not outlive.  Additionally, she did not have to decide what and how to invest the money, nor worry about market swings that would keep her up at night.  Bev didn’t even have to pay an advisor to manage the assets.

There are many ways to create income in retirement, but only three that are guaranteed you cannot outlive: *Pensions, Social Security, and you guessed it- Annuities.  Pensions are becoming quite rare these days, but if your pension and Social Security do not cover the stress-free income you’d like to see each month, then an annuity may be a valuable addition to your retirement picture.

Aside from income that you cannot outlive, annuities have the ability to offer interest rates that may far surpass CDs, offer tax-deferral giving you more tax-timing flexibility, or allow you to participate in market-like gains without exposure to market losses.  Each of these require a more personalized conversation, but as you can see, annuities have their benefits and can be a good fit when the situation is right.

*lifetime income from Pensions, Social Security, and Annuities are guaranteed to the extent that they remain solvent


As Harold found out, getting into the wrong type of annuity can mean you are trapped in a long-term, high-fee product.  Even the annuities that do not have fees may have other moving parts- spreads, caps, and participation rates are “fee-less” aspects that hinder the upside of an annuity.  Think of a bank savings account- there may not be any outright fees, but if it is only paying ½ of a percent, does it really matter?

Selecting a highly-rated annuity company with a long track record of stability is also important.  As many have found out, certain terms and conditions can change within the life of your annuity contact.  Perhaps the 5% interest you received year one looked great, until it dropped to 2% the following year.  Some annuities may lock in these features so you don’t have to worry about this, while others may not.

No “step-up in basis”- if you own land, stocks, or any other assets, your beneficiaries likely receive a step-up in cost basis when you die.  Simply put, if you bought something for $100,000 and it’s now worth $200,000, with a step-up, your beneficiaries could sell the $200,000 asset and pay no tax on the gains.  If your annuity doubles in value, your cost basis of $100,000 carries over, and beneficiaries would have to pay tax on the $100k gain.  If you are using an annuity for growth and you do not plan to spend the money, you may find better solutions for passing your gains to future generations.


The ugly side of annuities often is a result of what you are NOT being told.  Let’s go back again to Harold’s story and review what perhaps he was not told: 

1. He may not have been informed that he was making a 10-year commitment with substantial penalties if he breaks the contract early. 
2. A full breakdown of fees was likely left out of the conversation, as Harold mentioned he would never have purchased something with $20,000 or more in annual fees.
3. Often the tradeoff for receiving an annuity’s benefits is reduced liquidity. Retirees are not always told they will have limited access to their investment.
4. Many insurance salespeople are masquerading as financial advisors.  Of course an annuity is the advised solution when that is all they are licensed to sell!  This leads to an over-recommended product, often by under-qualified “advisors.”
5. Let’s not forget the other side of the coin- if advisors get paid only by managing your money, annuities may be overlooked even when they are the perfect fit. The catchphrase “I hate annuities and you should too!” has even been used as a blanket statement, which can be just as damaging to your retirement plan!
6. And last on my list of ugly truths about annuities- the vast majority are sold by someone who does not have a fiduciary standard of care. Perhaps this alone leads to all issues listed above, as the fiduciary has a moral and ethical obligation to offer their best advice, while being legally bound to it as well.  If an advisor is not a fiduciary, by definition they are a salesperson.


If you are adding an annuity to your retirement plan, you should have a conversation about its pros and cons, any fees or moving parts, and the duration of your commitment.  Just as importantly, you should only add an annuity when you (or your advisor) understand how it fits into your overall plan.  This involves understanding your goals, risk tolerance, as well as the location and purpose of other assets.

When used correctly, annuities can be the perfect puzzle piece, completing your retirement picture.  Used incorrectly, they can look like someone tried to hammer a square peg into a round hole!

We will chat more in two weeks.  Until then, feel free to schedule a call for a complimentary review of your own retirement plan!


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