Are Annuities Good or Bad?

“I hate annuities” is one of the loudest opinions in personal finance, and it’s usually missing one critical detail: which annuity, and what job is it supposed to do? We get specific about why annuities are so polarizing, what people are reacting to (fees, commissions, liquidity limits, and opportunity cost), and how those negatives often come from using the wrong product for the wrong objective. If you’ve ever wondered whether annuities are a scam or a smart retirement tool, this conversation gives you a clearer framework to judge them.

We zoom out to the real purpose of insurance products: transferring risk. Annuities are built by insurance companies to take on certain risks that can wreck a retirement plan, including market downturns and the fear of outliving your money. We talk through principal protection, guaranteed lifetime income, and why “paycheck forever” is so powerful when longevity risk is the number one worry for retirees. We also connect the dots to familiar systems you may already rely on, because pensions and Social Security behave a lot like annuities in the way they create ongoing income.

Then we break down the major annuity types in plain English: SPIAs for immediate income, fixed annuities for CD-like guaranteed rates, variable annuities that hold investments inside an insurance wrapper (and often carry the fee complaints), and fixed index annuities that can link gains to an index while protecting against negative index . Our main point stays simple: we don’t care what it’s called, we care what it solves inside a comprehensive plan. Subscribe, share this with someone planning for retirement, and leave a review with your biggest question about guaranteed retirement income.

Sources: https://www.massmutualascend.com/insights/history-of-annuities 

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Disclosure: Information contained in this podcast is for entertainment and informational purposes only, and should not be considered as financial advice. Financial Planning and Advisory Services are offered through Prosperity Capital Advisors (“PCA”), an SEC registered investment adviser.  Registration as an investment adviser does not imply a certain level of skill or training. Keystone Financial Group and PCA are separate, non- affiliated entities. PCA does not provide tax or legal advice. 

Transcript

Disclaimer And Ground Rules

Ryan Fleming 0:00

The financial huddle does not provide tax, legal, financial, or other professional advice. Listeners are encouraged to consult with their own advisors in these areas.

Brian Minier 0:06

Alright, everybody, huddle up. Play cuddle. This is the Financial Huddle. Ready?

Why Annuities Feel So Polarizing

Ryan Fleming 0:14

Well, welcome back, Huddlers, to another episode of the Financial Huddle. Uh to my right, Brian Manier. How you doing, brother? How you doing, buddy? I'm doing fantastic. Weather's good. Eddie, how about you, bud? Hello, hello, brother. There it is. Hello. Ed B. Miller. What the heck? Hello, hello. Hello. Huddlers, we hope you guys are doing fantastic. Uh, that you and your loved ones are healthy and well. Again, thank you for tuning back in, watching us on YouTube, wherever it may be. Uh, we have a polarizing topic today that you probably have seen. I'd call it uh a dirty word um in the financial world sometimes.

Ed Beemiller 0:51

Dirty bird.

Ryan Fleming 0:52

Dirty bird. Very misunderstood uh topic today.

Ed Beemiller 0:57

And I think we've used the term polarizing. That's why I said very polarizing up there with some of our uh previous podcasts in which we talked about uh permanent uh life insurance and cash values and all that stuff.

Ryan Fleming 1:13

Yeah, so Huddlers, we're talking about annuities today. Uh I I'm pretty confident that uh Ken Fisher said uh I hate annuities and so should you. I think he said I would rather die and go to hell than sell somebody an annuity. So we got to get to the bottom of this a little bit. So in the spirit of financial literacy, are annuities good or bad? Well, I teach an adult financial literacy class, as you guys know, six-hour-long class through a uh a nonprofit. And one of the sections of that class is specifically about annuities. And I asked a class, um, I do warn them we're gonna talk about a dirty word, and then I asked them, you know, what are the negative connotations that come to your

The Common Annuity Objections

Ryan Fleming 1:55

mind immediately when you hear the word annuity? What do you think some of the things that they say are? What do you think? High cost. High cost. What else? You get commissions. You get commissions, uh, lack of liquidity. Um tie my money up. I got I need my money. Uh lack of return, you know, opportunity costs, you know, all those things that we hear about annuities. When I die, the insurance company keeps all my money. Okay. So I write all those things down on the board, and then we have a discussion about those. Okay. So um are there trade-offs? There's trade-off with every financial product uh that's out there, fellas. We know that. Huddlers, there's no perfect financial product, there's no panacea of products out there. Everything has cost, benefits, pros, cons. Um, but there are some potential um risks and rewards with where we put our money.

Risk Transfer And Lifetime Income

Ryan Fleming 2:45

Okay. So we get those kind of things, but there's also some very positive things uh that we're gonna learn about here. But some of the positive things with annuities is that this is a way for us to offload some risk to a financial institution. And that's where we when we offload risk to a financial institution, we call that in our world insurance. Okay. And so annuities are created by insurance companies. And in return for us giving a portion of our wealth to them, um, they in return give us some good benefits, like things like protection of our principal from market downturns, guarantees, right? So if the market goes down by 25%, we are guaranteed to never participate in that. Okay, that's very comforting for people at certain stages in life. Maybe when you're not 25. Yeah, but if you're 65, okay. Yeah, depending on the annuity product, you've got to get the retype, which we'll get into a little bit later here. Yes, absolutely. I mean, you you gotta get the right tool to do the job. And and really, probably one of the biggest issues is that many advisors have sold the wrong annuity to do the wrong job. That's really that's one of the biggest things. You get the wrong tool to do the wrong job, it's just not gonna work.

Ed Beemiller 3:52

I mean, you pull out the Phillips and you need a flathead.

Ryan Fleming 3:54

That's bad, man. It's not good. It's not good. It doesn't matter what you do. Um, but you know, conversely, like I said, the other another really beneficial thing of the annuities, and probably, in my opinion, one of the most valuable things for sure is the ability to uh create lifetime income, uh a guaranteed lifetime income stream to protect you and your spouse. Uh that's invaluable. And we we'll talk about that a little bit more too. But you know, another thing to think about real quick that you hear a lot about with the fee structure, right? Annuities typically are paid almost like realtors. So if you sell your house, they pay you three, four, five, six, seven percent realtor fee. That's kind of how some annuities are. So if I uh opened up an annuity for a client uh for $100,000, we might get six, six and a half, seven percent commission one time, and that's it. Okay. Um, but conversely, if I manage that IRA and I have it uh assets under management and you charge 1% and I'm with that client for 25, 30 years or so, I'm gonna make way more money money underneath the AUM chassis and that that side of the house than I am a one-time six percent. So again, this goes back into financial literacy 101, making sure that you understand and have complete transparency on what you're buying. Obviously, we believe in that uh wholeheartedly, uh, full transparency on fees and expenses. But huddlers, every financial tool that you buy has fees and expenses, cost, benefits. And so, you know, with this idea of annuities, what I think I what I think we should do is ground the conversation and go back to the beginning. So, Ed, you know, we know what time it is. Every single time it is that time. And Ed, you have a little bit of a different story thing today.

A Quick History Of Annuities

Ed Beemiller 5:38

This is this is kind of statslash history. Oh, you know, some history before you know, everything has history, right? We have history. Look at your family tree. I mean, everyone has history, right? Things didn't, you know, someone didn't snap their fingers and then all of a sudden an annuity appears.

Ryan Fleming 5:53

What do they say about history? History always has it repeats itself. Oh, okay. Yes.

Ed Beemiller 5:59

So this was a little bit this was this was interesting for me because I didn't necessarily know what the history, you know, of annuities. I'm familiar with how we use it with our with our clients and things, but this actually goes back to the Roman Empire. So we're talking 27 BC to 476 AD. This concept, the Latin term is anua. A-N-N-U-A, that stands for annual stipends. And what Roman citizens had the ability to do is basically make a lump sum contribution and then they would be guaranteed a certain level of income which was negotiated for as long as they were alive. So that concept still exists today, except it's gotten better, you know, because you know, back then they passed, the money was gone. So whatever bucket they put it into, whoever owned that bucket got it. It's it's different nowadays, you know, to to the better. But then we go into the Middle Ages, so we're going a little historical progression here. Um so 476 AD to uh 1750. Oh, actually 1450, excuse me. Wow. Um annuities were used to fund wars. Now this is something I'd never I was not familiar with, but basically the the kings and local lords would raise money to fund to fund their wars, um, and they would do it by other lords and the yeah, probably not the the the f the peasants, you know, but the the uh those those with money would basically contribute into this pool. That pool would then be used to fund skirmishes, you know, different conflicts and things. And at the same time, a portion of that fund would come back to the lords and the investors per se that raised that capital. And then bringing it up, we're not going to go to current times because we're gonna talk more about that, but this is uh in 1812, the war of 1812, soldiers were actually given the option to receive compensation like a normal salary or earnings, or they could take it in the form of a guaranteed income stream over so many years. See, there you go. So, this concept, this strategy, whatever you want to call it, you know, has been around a long, long, long time.

Ryan Fleming 8:37

Super long time. And and that just kind of accentuates what I said. This idea of an annuity is people of likeness and kind pooling the resources together to take care of each other, to mitigate risk, and to create even things like lifetime income all the way back then. That's that's insane. And so, you know, why is that a bad thing? That's the question I'd pose out. Well, why is that bad? And I think it just comes down to miscommunication and again getting sold the wrong product to do the job.

Longevity And Sequence Risk In Retirement

Ryan Fleming 9:05

But, you know, in modern times, as we are here in 2026, um, here's a couple other things to think about as far as annuities and what they can address. One is the offloading of risk. Okay, so Ernst and Young put out a couple white page articles, but sometimes if you reach into your portfolio, you take a portion of that and you offload that risk, you give it to an insurance company and buy an annuity, that can lower the overall standard deviation of your entire portfolio, which allows you to take more risk with what you have otherwise, but carry overall less risk with the totality of what you have uh with with your estate. And that's kind of a cool thing. The other thing is that it addresses uh probably the number one fear of people in retirement, which we talked about in the past, which is outliving your money, longevity risk. Uh guaranteed lifetime uh pension annuity will guarantee that you will never run out of income no matter how long that you live. And that is uh very comforting.

Ed Beemiller 10:00

Paycheck for paycheck forever. Paycheck forever. And as far as I know, what there is no other financial strategy that can provide that same guarantee.

Ryan Fleming 10:11

That's correct. And you know, whether Huddlers, you know this or not, every single buddy, every single one that you know, or you in particular is listening or watching, you're gonna have a type of an annuity, right? If you have a pension plan from a company, that is an annuity. And and also if you collect Social Security, it acts very, very similar to an annuity because you have that paycheck forever. Yeah, people are paying into it through their FICA taxes. Paycheck through your lifetime. So whether you like it or not, you're going to have an annuity. Right. That's that's what's crazy about this. Uh, and then the other thing, as we know, and we've talked about this, a very, very potentially damaging risk to our retirement is sequence of return risk. And the sequence of return risk is just this notion that early on, maybe in the first 10 years or so of your retirement, if you are relegated to pull money out of your other accounts to live on, and the market is down in the early years of retirement, mathematically, that can set a potential death spiral to your account, which is insurmountable mathematically. So we want to avoid that at all costs because nobody on God's green earth knows the sequence of when the markets are going to be up or down. And so by taking a portion and putting it into one of these types of annuities or guaranteed lifetime pension annuity, it eliminates that risk.

Brian Minier 11:25

And we've talked about this on prior episodes, and there are a number of ways to mitigate sequence of returns. But to Ed's point, this is the only one of those multiple ways to do it that guarantees you an income forever.

Ryan Fleming 11:36

That's exactly what you're doing. You can do other ways. And it's really hard to plan for your retirement when you don't know how much of your money is yours through taxes, which we talked about, and when you should take money if you're ever going to run out of money.

Ed Beemiller 11:49

And and one more point to add on when we talked about the guaranteed income for your lifetime, whether your account balance goes to zero or not, you keep getting that income stream, is the ability to design these accounts and plans for a joint life where it's you and your spouse. We talked about Social Security being, you know, annuity-like in terms of that guaranteed income stream. But what happens when you die with Social Security?

Ryan Fleming 12:13

You lose it.

Ed Beemiller 12:14

It's gone. Your Social Security is gone. Now, if you you know, once again, we can have the spouse can step into the higher of the two, but then they lose theirs, or even a pension. Pension, basically, you have to choose up front. Do you want any survivor benefits? Yes or no. And then they'll give you multiple options. Yeah, 25% you know, continues on for my wife or 50%, but that just means you receive much less up front. So once again, this vehicle, as long as either one of you are alive, yeah.

Ryan Fleming 12:43

If you set it up correctly.

Ed Beemiller 12:44

Yeah, once again, it's designed.

Ryan Fleming 12:46

A couple other things, and I want to pass it off to Brian, but a couple other things is that many of these types of uh products can help you address a long-term care issue. They have they can double your income for a period of time. Yep. Um, if you get can't perform two of those six ADLs that we have talked about. And we talked about long-term care, which is just crazy, you know. And so that is very compelling. Um, and you know, and then the other thing that it does is I I alluded to this on a few episodes back, is I showed you that if you have a gap to your income needs, this is this is necessarily the the cheapest way to solve your income needs versus trying to do the 4%, the 4.7% uh Bill Bangin rule, right? Or Susie Orman at 3%. Remember, I did the math on that a while ago. Go back and watch that episode, Huddlers, where I showed the difference between pulling 4%, 3%, 4.7%, or taking a portion and solving that income with much less money in the annuity. So all that to be said, um there's different types of annuities, Brian. Yeah, yeah, and you gotta get the right tool for the job. So educate

The Four Main Annuity Types

Ryan Fleming 13:50

us about that.

Brian Minier 13:50

Yeah, and before I get into that, I I just want to encourage everyone that you have to have the right tool or the right annuity for the right specific objectives. Otherwise, it's a bad thing. So all those things that you had mentioned before, whether it's commissions or liquidity or whatever it is, they're gonna have those trade-offs, but it's why we always talk about the full comprehensive plan. You have to have that comprehensive plan because this particular function of an annuity is not meant for liquidity. It's a software, and it's a portion. It's that's right. It's a portion. Right. So when so when somebody says, man, I just I hate annuities or they're just so awful. My first question is what annuity are you even talking about? Right. And a lot of them don't even know, like, oh, there's different kinds. Right. Yeah, there's there's typically four different kinds of annuities. First of all, you have what's called a SPIA, a single premium immediate annuity. And that's just you don't we don't see a lot of those, but that is just meant for right away, you put a certain amount of premium in, and 30 days later it starts kicking off income on a monthly basis. You have no liquidity of that. It is what it is, and typically the growth on that is is slow, especially up front. But it has a very specific purpose. So again, you're going back to what is it that I need, and in the rare situation where you need immediate uh income, that tool is appropriate for that specific objective. Then you have what's called a fixed annuity. These are CDs on steroids where you can get a four, five, six, maybe a seven-year product that's gonna guarantee you a certain interest rate, you're gonna get that for just like a CD. It's like a CD, but it's the interest rate's higher and the term is typically longer. So if that's appropriate for you where you have a specific objective in a handful of years and you want a guaranteed growth, you just solved it with that. Yeah. It's not meant for everybody, but for specific situations that we've come across, it might be the right fit. Right maybe. Another one is a variable annuity. A variable annuity is uh an insurance product. It's uh a bunch of investments or investments inside of that annuity wrapper. Like a fund. Like a and you can buy same mutual funds, ETFs, just like you would in a brokerage account or even an IRA or a Roth IRA. Now, when people talk about fees, a lot of times if you have that same investment in another, let's just say a taxable account, a lot of times you will have higher fees in a variable annuity than you would just putting it in a regular brokerage account.

Ryan Fleming 16:16

I have found that's the one that gets the most negative talk. They're talking about variable annuities.

Brian Minier 16:22

When they talk about fees, typically you're talking about variable annuities. Absolutely. Now the one advantage of variable annuities, we don't do a lot in that space, is you can guarantee an income like we're talking about, and if you want the upside of the market inside of that annuity, you can have that in that variable annuity. You can.

Ryan Fleming 16:43

You could argue if you're going to have the market.

Brian Minier 16:45

Yeah, do it in your later bucket and just invest it outside of that. And then the last one that that we uh use quite a bit in our practice is the fixed index annuity. Now, with the fixed index annuity, the positive is you can never lose any money or cash accumulation value once you put your premium into the annuity. And then any growth that you have, if there's any losses with the indexes you you pick that dictate the growth of that annuity, you never go backwards. You can also have a guaranteed income stream with this particular product as well. So again, getting back to I hate annuities or I don't like annuities, well, what are you talking about specifically? And what's the right one of those options that fit your specific objective?

Ed Beemiller 17:30

Yeah.

Brian Minier 17:31

Yeah.

Ed Beemiller 17:31

And it all comes down to, and this is what I sit there and say, I say, I don't care what it's called, what's your financial objective? Okay. So our job as fiduciaries is to then recommend what we feel is the best option for you, not for me. So just because it's called an annuity doesn't mean it's bad.

Ryan Fleming 17:48

Yeah. Yeah.

Ed Beemiller 17:49

Does it perform, does it meet your specific objective that you're looking to accomplish? And then Brian, what you said previously, within an overall holistic plan, because we're not going to have someone put 100% of their assets into annuities.

Ryan Fleming 18:02

Well, you're not industry-wide, you're not allowed.

Ed Beemiller 18:04

Yeah, you're actually legally not allowed because of the suitability and and everything else with that, but it just doesn't make sense from a holistic planning standpoint. So, you know, as Brian said, when people say, Oh, I hate annuities, you you got to get to the bottom of it. Forget what it's called. Do you want a guaranteed uh payment? Do you want a guaranteed income that was going to last as long as you and your wife are alive? Yeah, that'd be great. Yeah. Okay. So even if the account value goes down to zero, as long as one is your one of you are alive, it will just keep going. Yeah. Oh, that sounds great. Yeah. Oh, and guess what? You can't it it won't lose any value. Yeah, that's perfect.

Brian Minier 18:39

And I'm gonna when I'm educating people on annuities, what I always say is you have to have a specific thing that you're solving for. Right. Make the advisor tell you why that premium is being put into that annuity. And uh let's just call it out. A lot of times what has happened in the past is advisors have just said, I'm gonna put X amount into this with no real rational thought process, other than you just need to have some safe.

Ed Beemiller 19:04

Yeah, what's the plan?

Brian Minier 19:05

Yeah, what are you gonna use? It's gotta solve something. What's the purpose of it? And if you can solve something and you can mitigate sequence of returns and guarantee an income stream, yeah, then that is what the objective of a lot of our clients want.

Ryan Fleming 19:16

Right. Yeah, there's more to there's more to planning Huddlers than just uh rate of return. And uh, you know, this makes me think of our mission statement. You know, we provide financial solutions that provide confidence and certainty throughout all phases of our clients' life. And this is one strategy that uh really hits home with that.

Choosing The Right Tool And Next Steps

Ryan Fleming 19:35

You know, and so what we wanted to do today, this is a two-part series, Huddlers. Um, we're gonna we're gonna ask you to tune back in. And next episode, we're gonna talk about how annuities actually work. We're gonna dig in and kind of pull the curtain back and look at the mechanics behind certain types of annuities, the one uh fixed index annuities that Brian talked about. We love how they track the upward trends of like the SP 500, for example, um, but no downside uh risk, things like that. But I mean, at the end of the day, um we hope that you got a better idea, a breadth of knowledge about the pros, the cons, the benefits, and the usage of this dirty word that we hear in our culture called annuities. So uh as always, thank you guys so much for tuning back in. If you have uh questions about this kind of stuff, you can always get a hold of us. Uh check out our social media platforms, like, subscribe, uh, click the bell, keep tuning back in. Share this with your loved ones and co workers. Let's keep getting as many people financially literate as possible. Guys, thanks for your thanks for your input today. All right, all right, Huddlers, take care. Stay classy, Huddlers. Take care. Bye now.