By Brent Matthew
Whether you’re planning for retirement or have already retired, annuities have the potential to be a great investment. But before you buy, it’s important to do your research.
Many retirees are drawn to annuities for the promise of guaranteed income, only to later realize they didn’t fully understand the details, costs, or limitations. That confusion can lead to frustration or even costly missteps.
Whether you’re planning for retirement or have already retired, annuities have the potential to be a great investment—but only if you know what to look for. Here are some key insights many retirees wish they had understood before investing in an annuity.
Not All Annuities Are the Same
This is easily the biggest misconception about annuities I see. There are many types of annuities, and each has a distinct risk profile. Here’s a quick overview of the three main types:
- Fixed Annuities: These offer guaranteed interest rates.
- Fixed Index Annuities: Growth is linked to the market.
- Variable Annuities: Rates fluctuate and create more risk.
When working with a client, I take the time to discuss their situation and help them compare annuity contracts to find a good fit.
Details Matter
Plenty of people buy annuities because they want to get a paycheck for life. However, sometimes they don’t understand when annuity income starts and how payout rates are calculated.
These details matter in determining how much the annuity pays out. They can also lead to confusion if a retiree ever wants to surrender their annuity.
Fees Can Get Complicated
Annuities may offer guaranteed income, but they often come with fees such as:
- Rider fees (fees for add-on benefits)
- Mortality and expense risk charges
- Surrender charges
- Administrative fees
Some riders are valuable and worth their cost. Others might be unnecessary, depending on your goals.
Annuities Shouldn’t Replace Your Whole Portfolio
Annuities should work with your other investments, not replace them. A diversified portfolio is critical for stability in retirement.
Be Wary of Limited Liquidity
When you buy an annuity, your funds may be more locked up than you’d prefer. For example, if you need to withdraw money early, you could be hit with a sizable penalty.
Most annuities have surrender periods of six to ten years; if you withdraw funds during that time, you may owe a surrender charge.
Taxes Aren’t Always What You’d Expect
If you invest in annuities, careful tax planning is essential. Many people don’t realize these key points about taxes and annuities:
- Withdrawals are usually taxed as income.
- Non-qualified annuities enjoy tax-deferred growth.
Since IRAs are already tax-advantaged, you cannot benefit from additional tax deferral by putting an IRA into an annuity.
Not All Annuities Are Handled the Same After Death
What happens to your annuity after your death? Many of my clients assume the investment passes directly to heirs. This isn’t always the case. Depending on your annuity’s payout structure, payments might stop at your death. In other cases, your beneficiaries may receive the remaining funds.
If you have a joint annuity, your spouse should continue to receive payments after you pass away.
Your Advisor Matters More Than You Think
I’ve helped countless clients choose annuities for themselves and their families. Unfortunately, some clients have purchased the wrong types of annuities before they began working with our firm. Without sound financial advice, retirees may run into these problems:
- Putting too much of their portfolio toward annuities
- Unnecessarily moving into new contracts
- Buying unneeded riders
Scottsdale Wealth Advisory is a fiduciary firm. This means we exclusively prioritize your best interests. If you’re considering investing in annuities, consider scheduling a complimentary annuity coaching session with us.
Ready to Talk About Annuities?
For many retirees, annuities are smart investments. But if you aren’t careful in your choice of annuity, that investment could prove disappointing. The right annuity could offer lifetime income, shield you from market volatility, and help stabilize your portfolio.
Scottsdale Wealth Advisory is dedicated to helping people from all backgrounds build fulfilling retirements. If you’re interested in learning more, contact us today.
To schedule your complimentary financial coaching session, call (480) 247-9090, email info@SWAFirm.com, or book directly at calendly.com/BrentMatthew.
Frequently Asked Questions
What are annuities, and how do they work?
Annuities are financial products designed to provide a stream of income, often used in retirement planning. They typically involve exchanging a lump sum for periodic payments, either immediately or in the future. Because there are multiple types of annuities (each with different features, risks, and benefits), it’s important to understand how a specific contract works before investing.
What should I consider before buying annuities?
Before purchasing annuities, it’s important to review key factors such as fees, payout structure, liquidity, and how income is generated. You’ll also want to understand surrender periods, optional riders, and how the annuity aligns with your broader financial goals. Taking time to evaluate these details can help you avoid unexpected limitations or costs.
Are annuities a good investment for retirement?
Annuities can play a valuable role in retirement by providing guaranteed income and helping reduce market risk. However, they are not a one-size-fits-all solution and are typically most effective when used as part of a diversified portfolio. The right fit depends on your income needs, risk tolerance, and overall financial plan. Reach out to us at Scottsdale Wealth Advisory if you’d like help determining whether annuities are appropriate for your specific retirement goals.
About Brent
Brent Matthew is the founder and CEO of Scottsdale Wealth Advisory, a full-service fiduciary retirement planning firm serving pre-retirees and retirees across Arizona and multiple states. With a strong commitment to always putting clients first, Brent leads the firm in developing comprehensive, tax-efficient financial plans tailored to each family’s unique goals. He is responsible for researching investment, annuity, and life insurance strategies and building smart asset allocations that reflect both long-term growth and risk management.
Brent is driven by a core belief: “The success of this firm will be measured by the success of the families it represents.” That client-first approach has guided his work since the beginning. He is currently enrolled at the College for Financial Planning and is on track to earn his CERTIFIED FINANCIAL PLANNER® designation. He also holds his Series 65 license and Arizona Life and Health Insurance Producers License.
Outside the office, Brent embraces the Arizona outdoors with “lil B” and their two pomskies, Heimo and Kota. Whether he’s hiking, fishing, dirt biking, skiing, golfing, kayaking, or skeet shooting, Brent finds balance and joy in staying active. He’s also a fan of CrossFit, brunching, and cruising the Phoenix canal system on his beach cruiser—usually with classic tunes from the Marshall Tucker Band, Gordon Lightfoot, or Crosby, Stills & Nash playing in the background. To learn more about Brent, connect with him on LinkedIn.
Advisory services are offered by Scottsdale Wealth Advisory, LLC, an Investment Advisor in the State of Arizona. Insurance products and services are offered through Scottsdale Wealth Advisory, LLC. Scottsdale Wealth Advisory, LLC is not affiliated with or endorsed by the Social Security Administration or any government agency, and is not engaged in the practice of law. Be sure to consult with a licensed financial professional to confirm the accuracy of the insurance product you are considering.
