Retirement Planning Guide

Who Should Not Buy an Annuity?

Annuities can provide contractual income in retirement, and for some people they serve a useful purpose. But they are not the right fit for every situation. Understanding the trade-offs, including fees, liquidity constraints, and how the product is sold, can help you determine whether an annuity aligns with your goals or whether a different approach may serve you better.

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The Short Answer

When an Annuity May Not Be the Right Fit

An annuity may not be the right fit if you need access to your money, are uncomfortable with long lock-up periods, already have sufficient income from pensions or Social Security. Annuities are complex contracts, and their costs, surrender charges, and restrictions deserve careful evaluation alongside their potential benefits.

That said, annuities are not inherently unsuitable products. For some retirees, a well-structured annuity can address longevity risk and provide a predictable income stream or provide protection from falling markets. The key is understanding your individual circumstances and building a plan first, then determining if an annuity makes sense.

Key Considerations

Important Factors to Weigh Before Buying an Annuity

Before committing a portion of your retirement savings to an annuity contract, consider these factors that may influence whether the product aligns with your needs and circumstances.

Fees and Surrender Charges

Many annuities carry multiple layers of fees, including mortality and expense charges, administrative fees, and investment management costs for variable annuities. Surrender charges, which can last several years or more, may apply if you need to withdraw funds early. These costs are important to understand and compare against the income benefits the annuity provides.

Liquidity and Flexibility

Once you purchase a deferred annuity, your money is typically locked into the contract for a surrender period that can span years. If your circumstances change, such as a medical emergency or a need for long-term care, accessing your funds may come with penalties. This lack of liquidity is an important consideration for retirees with limited cash reserves.

Opportunity Cost

Money allocated to an annuity is money that cannot be deployed elsewhere. Depending on your time horizon, risk tolerance, and financial goals, other retirement income strategies may offer greater flexibility and potentially lower overall costs. The opportunity cost of locking funds into an annuity contract should be weighed against alternative approaches to generating retirement income.

Complexity and Transparency

Annuity contracts can be difficult to understand, with layered features, optional riders, and contingent payout structures. This complexity makes it challenging to compare products or evaluate whether the contract delivers fair value relative to its cost. Investors should fully understand the terms before signing, including how payouts are calculated and what contractual provisions apply.

A Fiduciary Perspective

An independent fiduciary advisor can help you evaluate whether an annuity aligns with your goals. We provide an objective assessment, whether the answer points toward an annuity or toward an alternative strategy.

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A Balanced View

When an Annuity May Make Sense

Annuities are not universally inappropriate. For certain retirees, the contractual income feature may serve a legitimate purpose in a broader retirement plan. The decision depends on your individual circumstances, goals, and existing sources of income.

If you are concerned about outliving your savings, an annuity can provide a stream of payments that continues for life. However, this benefit comes with trade-offs, including reduced liquidity, ongoing fees, and the loss of access to your principal. A fiduciary advisor can help you weigh these factors in the context of your overall financial picture.

Situations Where an Annuity May Warrant Consideration

1
You are concerned about longevity risk and want a predictable income stream you cannot outlive
2
You have limited pension income and want to supplement Social Security with an additional predictable income source
3
You are highly risk-averse and prioritize income stability over growth potential
4
You have sufficient liquid reserves outside the annuity to cover emergencies and unexpected expenses

Even in these situations, annuities carry fees, surrender charges, and opportunity costs. A thorough analysis of your full financial picture is essential before making a decision.

Matthew A. Chlopek, Founder and Wealth Advisor at Paladin Wealth Services

About the Author

Your Guide to This Decision

Matthew A. Chlopek, CRPC®

Founder, Wealth Advisor, Paladin Wealth Services

Matthew A. Chlopek is the founder of Paladin Wealth Services, an independent, fiduciary advisory firm serving pre-retirees, retirees, and legacy-minded families in Naples, Florida, and Southwest Florida. As a Chartered Retirement Planning Counselor (CRPC®), he focuses on retirement planning, retirement income strategies, tax planning, investment management, and estate planning coordination. Paladin Wealth Services was founded to provide advice guided by allegiance to each family's best interest.

When it comes to annuities, Matthew helps clients evaluate whether a product aligns with their retirement income goals, or whether an alternative strategy may serve them better.

Frequently Asked Questions

Common Questions About Annuities

What are the main disadvantages of an annuity?

The most commonly cited drawbacks include layered fees and surrender charges that can last several years, reduced access to your money during the surrender period, opportunity cost compared to other retirement income strategies, and the complexity that makes it difficult to compare products or assess fair value. These factors do not make annuities inherently bad, but they do require careful evaluation in the context of your individual financial situation and goals.

Can you lose money in an annuity?

It depends on the type of annuity. Fixed annuities generally do not expose your principal to market risk, though the purchasing power of fixed payments may erode over time due to inflation. Variable annuities expose your account value to market fluctuations, which means the value can decline. Indexed annuities fall somewhere in between, with returns linked to a market index but subject to caps and participation rates set by the insurer. In all cases, surrender charges can reduce the amount you receive if you withdraw funds early. Additionally, all annuities carry the credit risk of the issuing insurance company, meaning the company's financial strength is a factor to consider.

What happens to an annuity when the owner dies?

The outcome depends on the contract terms and any payout options you selected. Some annuities include a death benefit or a period-certain payout that continues payments to a named beneficiary for a set number of years. Others, particularly single-life immediate annuities, may cease payments entirely upon the owner's death, with no remaining value passing to heirs. Because the terms vary significantly by product and contract, this is an important consideration for estate planning and legacy goals, and worth reviewing carefully before purchasing.

Do rich people invest in annuities?

Some high-net-worth individuals do use annuities for specific purposes, such as addressing longevity risk or creating a predictable income floor in retirement. Others prefer to manage retirement income through diversified investment portfolios without the constraints of annuity contracts. The decision depends on individual goals, risk tolerance, and income needs rather than wealth level alone.

How much will a $100,000 annuity pay monthly?

There is no single answer to this question. Monthly payouts from a $100,000 annuity depend on multiple factors, including your age, gender, the type of annuity, prevailing interest rates at the time of purchase, the payout term, and any optional features or riders selected. Annuity payout rates are typically set relative to prevailing long-term interest rates; for context, the 10-year U.S. Treasury yield was approximately 4.38% as of early August 2026 (source: Bloomberg, via Perplexity). When rates rise, annuity providers often increase payout rates; when rates fall, payouts tend to decline. If you are considering an annuity, request a personalized illustration from the insurance company and review it with an advisor who does not earn a commission on the sale.

Take the Next Step

Get an Independent Opinion on Your Annuity Decision

If you are considering an annuity, or if someone is recommending one to you, schedule a consultation with Paladin Wealth Services. We provide fiduciary, fee-based advice to help you evaluate whether an annuity aligns with your retirement goals, or whether an alternative strategy may serve you better.

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Call (239) 777-0652 or email Welcome@PaladinWS.com

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