4 Common Myths About Annuities, and What’s Actually True

Few financial products get talked about as much as annuities, and few get misunderstood as often. Some people swear by them as a steady source of retirement income. Others hear the word and immediately think “expensive” or “complicated.”

The truth sits in the middle. An annuity is neither a magic solution nor a trap. It’s a tool, and like any tool, it works well in some situations and poorly in others.

Before we get to the myths, it helps to know what an annuity actually is. In plain terms, it’s a contract with an insurance company. You hand over a lump sum or a series of payments, and in return, the insurer agrees to pay you income, either right away or at some point down the road. That income can run for a set number of years or for the rest of your life. Annuities were built to solve one worry that shows up for almost every retiree: the fear of outliving your savings.

Annuities were built to solve one worry: the fear of outliving your savings.

With that in mind, here are four myths worth clearing up.

Myth 1: All annuities are expensive

Some annuities do carry fees, especially the ones with investment management or extra features layered on top. But that isn’t the whole picture. Many fixed annuities have no ongoing management fees at all. What you pay depends on the type of annuity you choose and the options you add, not on the product category as a whole. Lumping them all together as “expensive” misses that range.

Myth 2: Once you buy an annuity, your money is locked up forever

This one has a kernel of truth, which is probably why it sticks. Many annuities do include surrender periods. But locked up forever is a stretch. A lot of contracts let you withdraw a limited amount each year without any penalty, and some include income features or liquidity options specifically designed to give you access to your money when you need it.

Myth 3: Annuities replace investing

For most retirees, that isn’t how it works. Annuities usually sit next to your investment accounts, not in place of them. One side can focus on steady income while the other keeps chasing growth. Thinking of it as an either-or choice sets up a false trade-off that most people never actually have to make.

Myth 4: Annuities are only for people who hate market risk

Different annuities are built for different goals. Yes, some are designed for stability and predictability. But others offer growth tied to how the market performs. If you assumed annuities were only for the risk-averse, there’s more variety here than you’d expect.

The takeaway

None of this means an annuity is right for you. It just means the decision deserves better than a myth. Annuities work best when you look at them as part of your whole retirement picture rather than in isolation, and once you understand the tradeoffs, you can decide whether one has a place in your plan.

If you want to talk through how annuities work and whether one fits your situation, we’re happy to help. Consider scheduling a complimentary, no-obligation call. We can review your goals, walk through your income options, and figure out whether an annuity makes sense for you.