If you've ever looked into an annuity, you may have walked away with more questions than answers. We're tackling some of the biggest ones.
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Annuities are among the most misunderstood – and perhaps the most underestimated – financial products in retirement planning. If you’ve ever looked into one, you know they have a complicated reputation. And if you’ve ever tried to learn more? There’s a good chance you walked away with more questions than answers. What are the real costs involved? How do you know if you’re getting sound advice? Could a guaranteed income stream, in the form of an annuity, be the missing piece in your retirement plan?
To help cut through the noise, two leading minds in retirement income – Michael Finke and Tamiko Toland of LIMRA’s Retirement Income Institute – joined the HerMoney podcast to bust some of the biggest annuity myths out there and answer questions straight from the real women in our community. Here’s what they had to say.
MYTH #1: ANNUITIES ONLY BENEFIT THE PERSON SELLING THEM
This one came up again and again in different forms: Annuities are designed to benefit the person selling them, not the person buying them.
Experts say that’s not the case; instead, those interested in purchasing an annuity should think of the process as similar to working with a mortgage broker. Yes, the broker earns a commission on the mortgage they find you – but they’re also putting in the work to connect you with a product you actually want and need.
“In the same way, someone who may be selling you an annuity is giving you a product that you want, which is a guarantee of a lifetime income in retirement,” says Finke. “So there is going to be a commission as part of the sale because there has to be. There’s no other way to get human beings to call people up and explain a complex financial product to them. That’s the compensation for being sold the annuity. And it’s a one-time compensation, and it’s actually baked in.”
MYTH #2: THE FEES ARE OUTRAGEOUS
Yes, there are fees — but they’re worth understanding in context. As Toland explains, most annuities are still sold on commission, but more fee-based options are emerging to better align with how different advisors work with clients. The key is understanding what you’re paying for.
“Certainty costs money,” she shares. “The insurance company is saying, regardless of what the outcome is, I’m going to make sure I’m going to be true to this promise…the insurance company has to set money aside; they have to manage assets on their end of things in order to support the guarantee. And that’s why the fee is there.”
But – as one of our listeners asked – is there a benchmark for a “good” fee? In the world of personal finance, we’re used to comparing things like expense ratios on mutual funds and ETFs to see if we’re getting a good deal. But Finke says annuity fees are better understood as insurance premiums.
For example, when you buy homeowner’s or car insurance, a portion of your premium gets paid back to policyholders who file claims — and you get the payout when you need it most.
“The same thing happens with a retirement income product, like an annuity,” explains Finke. “You pay that insurance premium, and some people are not going to need it, some people are going to need it, and some people are going to get a very large claim because they live a long time. It is an insurance policy to ensure that if your retirement is very expensive, then you’re not gonna have to pay as much out of pocket.”
YOUR QUESTIONS, ANSWERED
Now, onto your big questions. Here’s what’s on the minds of HerMoney community members when it comes to annuities:
Q: “Is there a right age to buy an annuity?” – Nancy, who wants to retire in five years.
Good news, Nancy – the window you’re in is actually ideal. “Five to ten years before retirement, when it becomes a little bit more clear what you want,” says Toland.
There can also be a financial incentive to buying early and waiting to draw income. “You basically get a bonus for waiting because the money that you’re giving to the insurance company is able to grow,” she explains.
Many annuities also include explicit bonuses for deferring income [with certain products] — which can be “very, very meaningful” during that five-to-ten year window, Toland adds. Another perk: you maintain control over when you actually start taking income, which matters if your retirement timeline is still in flux.
Q: “Is a fixed annuity a good fit for a single Gen X woman?” – Michelle, who’s single and wants consistent retirement income.
For Michelle, Finke says the biggest advantage of a fixed annuity is the certainty it provides – regardless of what’s happening in the world or the markets.
“It’s kind of like buying a pension,” he shares. “What it gives you is the peace of mind of knowing that no matter what happens in the world, I’m always going to be able to get that income at that age. Having that sort of a safety net provides me with a certain level of peace when it comes to the inevitability of volatility and the rest of my investments and all these things happening…I know I’m going to always be able to get that income.”
Q: “Why do men get a bigger payout from annuities? And isn’t that discrimination?” – Jill, who has a $220,000 annuity she’ll tap at 65.
Jill’s frustration is valid, but the explanation is actually a point in women’s favor. Men receive higher monthly payouts because, on average, women live longer. The pricing reflects that reality.
“I think it’s valuable to think about the fact that there’s an entity that has made a promise,” explains Toland. “And one of the ways that they’re able to keep to that promise is by doing things like pricing the annuity fairly so that they know that they’ll be able to keep sending you those checks.”
In other words, the tradeoff for a smaller monthly payout is typically more months of getting paid.
And speaking of longevity, here’s something that might surprise you: annuities can actually help you spend more in retirement. The math makes sense when you think it through. Without guaranteed income, a retiree who doesn’t know how long she’ll live may feel compelled to stretch her savings all the way to age 95 – or even 100 and spend less along the way.
An annuity changes that equation by pooling risk. The insurance company uses actuarial tables to estimate average life expectancy — around age 88 or 89 for a healthy 65-year-old woman — and charges a premium based on those averages to generate a certain amount of income.
“Because you’re sharing that risk with other retirees, you get to spend about 30 to 35% more every year. And it’s not magic; it’s just the insurance company using actuarial tables,” explains Finke. “By averaging it all out, they can charge a premium that’s lower than the amount of money that you’d need to set aside to fund income to the age of 95 or 100.”
SO, IS AN ANNUITY RIGHT FOR YOU?
If an annuity sounds like it would fit well into your retirement plan, here’s how Toland and Finke suggest getting started.
First, get clear on your income picture. What will your expenses look like in retirement? What guaranteed income do you already have (Social Security, a pension)? How much more certainty do you want on top of that? “Having a good retirement isn’t just about having money,” says Toland. “Look at your lifestyle gap, and then work backward from there. What kind of product fits? How much flexibility do you need? What’s your planning horizon?”
Then, to help answer those questions, bring in a professional. “Retirement planning is not easy; it’s always good to have someone in your corner who’s making recommendations on your investments and on the lifetime income component of your retirement plan,” says Finke. “It’s good to get different perspectives. It’s good to talk to people about what type of a plan they might put together. And go with whoever you feel understands and listens to you and understands your needs.”
Learn more: Most people want protected income for life. Few realize that’s what annuities provide. Here’s everything you need to know.
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