Annuities in Retirement: 5 Things the Salesperson Won’t Tell You

Many annuities offer guaranteed income, but retirees should carefully examine fees, surrender charges, commissions, and liquidity restrictions before signing a contract. Shutterstock

Annuities are often marketed as the answer to one of retirement’s biggest fears: running out of money. The pitch can be incredibly appealing, especially for retirees seeking a predictable income and protection from market volatility. Insurance agents and financial professionals frequently highlight guaranteed payments, tax-deferred growth, and financial security. While annuities can be valuable tools in certain situations, they are not perfect solutions for every retiree. Before signing a contract that could affect your finances for years, here are five things you need to know.

1. Your Money May Be Locked Up Longer Than You Expect

One of the biggest surprises for annuity buyers is how difficult it can be to access their money. Many annuities include surrender periods that can last six to ten years or even longer, during which withdrawals beyond certain limits trigger penalties. The Financial Industry Regulatory Authority (FINRA) warns that some annuities have surrender periods of eight years or more. If an emergency arises and you need a large portion of your funds, those penalties can significantly reduce your returns.

2. The Fees Are Often More Complicated Than They Appear

Many retirees assume that because annuities are insurance products, the costs are straightforward. In reality, certain annuities can include administrative fees, mortality and expense charges, investment management fees, rider costs, and surrender penalties. The Securities and Exchange Commission notes that some variable annuities charge mortality and expense fees that are used, in part, to compensate insurers and cover sales costs. These fees can quietly reduce long-term growth, especially when layered together over many years.

3. The Salesperson May Receive a Significant Commission

Not every financial professional who sells annuities is paid the same way. Some annuities generate upfront commissions that can be substantial compared to other financial products. According to investor guidance from NASAA and industry disclosures, commissions are often embedded within the product and are not always obvious to the buyer. That does not automatically mean the recommendation is bad, but it does create a potential conflict of interest that retirees should understand. A good question to ask is simple: “How are you being compensated if I purchase this annuity?”

4. Guarantees Often Come With Trade-Offs

The word “guaranteed” is one of the most powerful terms used in annuity marketing. However, guarantees typically involve trade-offs involving liquidity, growth potential, or both. Fixed annuities may provide predictable income, but inflation can gradually erode the purchasing power of those payments over time. Some annuities offer riders designed to address inflation or provide enhanced benefits, but those features often come with additional costs. Retirees should evaluate not only what is guaranteed, but also what they may be giving up in exchange for those guarantees.

5. Annuities Are Not Always the Best Fit for Every Retirement Plan

Perhaps the most important thing sales presentations sometimes overlook is that annuities are tools, not universal solutions. Financial experts increasingly emphasize that the right question is not whether annuities are good or bad, but whether a specific annuity fits a specific retiree’s goals. Some retirees may benefit more from diversified investment portfolios, bond ladders, systematic withdrawal strategies, or a combination of income sources. Others may genuinely value the guaranteed income stream an annuity can provide. The decision should be based on personal circumstances.

The Smartest Retirement Decisions Begin With Better Questions

Annuities in retirement can serve a legitimate purpose, particularly for people seeking a predictable income and reduced market risk. However, the best retirement decisions happen when buyers fully understand both the advantages and the limitations of the product they are considering. Before purchasing an annuity, review the contract carefully, ask detailed questions about fees and surrender charges, and make sure you understand how the salesperson is compensated.

You might also consider seeking a second opinion from a fee-only financial planner who does not earn commissions on annuity sales. At the end of the day, the more informed you are before signing the paperwork, the more likely you are to choose a retirement strategy that truly supports your long-term financial security.

Have you purchased an annuity in retirement, or are you considering one? What questions or concerns do you have about these often-misunderstood financial products? Share your thoughts in the comments below.