Annuities, Without the Sales Pitch: When They Fit and When They Don't

A guy walked into my office about a year ago, seventy-three years old, with a manila folder in his hand. He sat down, opened it up, and slid a stack of paperwork across the desk. "Matt," he said, "can you tell me what I have here?" Inside was a fixed-indexed annuity contract he had bought five years earlier from a different agent. Sixty thousand dollars. Fourteen-year surrender schedule, starting at twelve percent and dropping a percent a year. He had nine more years to go before he could touch the money without a penalty. He didn't know that when he signed it. He thought it was — quote — "like a CD but with stock market upside." It was not like a CD. And the stock market upside, when you actually ran the numbers on the cap rate and the participation, was not exactly the stock market either. He looked at me. "I think I made a mistake."

Here is the honest answer I gave him. Sometimes annuities are exactly the right tool. Sometimes they are exactly the wrong tool. The difference isn't whether annuities are "good" or "bad" — that argument is silly. The difference is whether the annuity matches what you're trying to do. They're tools. If I came to your house with a wrench to roof, I'd be hitting nails with the wrench, and the wrench is not the problem. The job-to-tool fit is the problem.

This article is the version of the annuity conversation I wish more pre-retirees got before they sat down with someone trying to sell them one. Plain English, current 2026 numbers, the four kinds you'll actually encounter, the fees nobody talks about, and the surrender schedules I'd walk away from. Let's get into it.

What an annuity actually is

Strip out the marketing. An annuity is a contract between you and an insurance company. You give them money. They give you something back — either a guaranteed interest rate, or a participation in some market index, or a stream of monthly income, or some combination of all three. The contract has rules about when you can take your money out, what happens if you die, and what happens if you live longer than expected. That is the whole product, in one paragraph.

There are four main kinds you'll run into. They are wildly different from each other, and the word "annuity" lumping them together is unfortunate. Let me walk you through each one.

The four kinds, in plain English

1. MYGA — Multi-Year Guaranteed Annuity

The boring one. The most CD-like. You give the insurance company a chunk of money — say, $100,000 — and they guarantee you a fixed interest rate for a fixed number of years. Three, five, seven years are the most common. At the end of the term you can roll into a new MYGA, take the money out, or annuitize.

In spring 2026, top MYGA rates from A-rated insurance companies are running roughly 5.40% to 5.85% on a five-year contract. Compare that to the best nationally-available five-year CDs at about 4.50% to 5.00%. The MYGA wins on rate, and it's tax-deferred so you don't pay taxes on the interest until you withdraw. The CD's interest is taxable every year. That is a real advantage for non-IRA money.

Catch one: MYGAs are backed by the insurance company's claims-paying ability and your state guaranty association — not by the FDIC. We'll come back to that. Catch two: surrender charges if you take the money out early. Catch three: there is no "stock market upside" — it is what it is, a fixed rate.

For the right job — a chunk of money you don't need for five years, that you want to grow at a guaranteed rate, with tax deferral — a MYGA is a fine tool. Boring. Useful.

2. SPIA — Single Premium Immediate Annuity

This is the original "annuity." You hand the insurance company a lump sum. They start sending you a check every month for the rest of your life. Or your life and your spouse's. Or for a fixed number of years. You pick the structure when you sign.

In spring 2026, a $100,000 SPIA on a single life, no period certain, will buy roughly:

• $670 to $700 per month for a 65-year-old male, for the rest of his life
• $640 to $670 per month for a 65-year-old female (women live longer on average — the payout reflects that)
• $575 to $605 per month for a 65-year-old couple, joint life with 100% to the survivor

Now look at that monthly number on the male single life — call it $685. Annualized, that's $8,220 a year on $100,000. Sounds like an 8.2% yield, right? It isn't. That payout includes return of your own principal plus what insurance people call mortality credits. The insurance company is pooling your money with a lot of other 65-year-olds. Some of you will die at 70. Some at 95. The pool pays you longer than you "deserve" if you live, and stops paying when you die. It is a longevity insurance contract dressed up as a paycheck.

For the right job — building an income floor for essential expenses, replacing a pension you don't have, taking longevity risk off the table — a SPIA can be a powerful tool. For the wrong job — money you might need for a roof, a car, a grandchild's college — it is awful. Once you annuitize, the lump sum is gone. You bought a paycheck. You can't undo it.

3. FIA — Fixed-Indexed Annuity

This is the one you'll see advertised the most. The pitch is some version of "market upside with no downside." Your principal is protected. If the S&P 500 has a great year, you get to participate up to a cap. If the S&P 500 has a terrible year, your account is credited zero — never negative. Sounds great. Right?

Here is what the marketing leaves out. The "S&P 500" your FIA tracks is usually the price-only index — meaning, no dividends. Historically dividends have been about 1.8% per year of the S&P 500's total return. Strip those out and the index your FIA is tracking is, quietly, a worse index than the one you see on the news. Then the contract caps your participation. Common caps in 2026 are 6% to 9% annually. Or it uses a participation rate — say, 50% of the index move. Or it uses both, plus a "spread" the carrier takes off the top. By the time you stack price-only-index plus cap plus participation plus spread, the long-run return on most FIAs lands somewhere between a CD and a balanced bond portfolio. Wade Pfau's research has consistently shown FIAs delivering 1% to 3% per year less than a comparable stock-and-bond mix once you account for all of it.

That doesn't make FIAs bad. It makes them not what they're sold as. They are bond-like products with downside protection — not stock-like products with downside protection. If you wanted bond-like returns with principal protection, an FIA can be a reasonable tool. If you wanted "stock market upside, no downside," you were sold a slogan. The product can't deliver it. The math doesn't allow it.

The other warning on FIAs is the surrender schedule. We'll come back to that.

4. VA — Variable Annuity

The most expensive of the bunch. A VA is essentially a tax-deferred wrapper around mutual fund subaccounts, plus a layer of optional guarantees the insurance company sells you on top. Your principal is not protected the way it is in an FIA — your account value goes up and down with the markets. The "guarantees" are typically minimum income riders that cost extra.

Variable annuity sales have collapsed in the last fifteen years. They peaked at around $145 billion in 2007. By 2024 they were down to roughly $61 billion — and most of that is being absorbed by a newer cousin called a RILA, registered index-linked annuity, that occupies the middle ground between FIAs and VAs. The reason VAs have lost ground is fees. We'll get to those.

For the right job — a person in a high tax bracket who has maxed out every other tax-advantaged account and wants additional tax-deferred growth, with the right rider structure — a VA can occasionally make sense. For most retirees, in most cases, a VA is more product than they need.

The fee reality (the "3 to 4 percent" myth)

One of the loudest arguments against annuities is "they have 3 to 4 percent in fees." That is true for some annuities. It is not true for all of them. Painting the whole category with the worst version of the product is the same kind of dishonest as painting the whole category with the slickest brochure. Here is the honest fee picture, by type:

Translation: when someone tells you "annuities are too expensive," ask which kind. If they can't answer, they're working from a slogan, not a contract.

Surrender charges — the part that traps people

This is where the gentleman with the manila folder got hurt. Surrender charges are penalties the insurance company assesses if you withdraw money before the surrender period ends. They're how the carrier protects itself from people who might pull money out early after the carrier has already paid the agent a big commission and locked in a long-term investment.

A reasonable surrender schedule on an FIA today is 7 to 10 years, starting at 7% to 10% in year one and dropping by about 1% a year until it hits zero. That's the standard product. The worst products in the industry run 14 to 16 year surrender schedules, starting at 12% or more, often paired with high agent commissions of 7% to 9% of the deposit. Those are the contracts I'd walk a client away from. Anything north of a 10-year surrender period for someone who is already 70+ is a structural problem; their life expectancy is shorter than the contract's surrender period.

One more wrinkle: most contracts also include a market value adjustment — an MVA — that can increase the surrender penalty if interest rates have risen since you bought the contract. So in a year like 2022 or 2023, when rates were climbing, the early-surrender hit was bigger than the surrender schedule alone suggested. Read the MVA section of the contract before you sign. Or have someone read it for you. I do this for free as part of a written plan review.

Annuity guarantees vs. FDIC — what's actually behind the promise

People treat "guaranteed" like a magic word. It isn't. Annuity guarantees are backed by the issuing insurance company's claims-paying ability — not by the FDIC. If the insurance company fails, your contract is covered by your state's life and health insurance guaranty association, up to a statutory limit. In Massachusetts, that limit is the present value of annuity benefits, capped at $250,000. New York is higher. California is partial. Different states, different limits.

What this means in practice: don't put more in any single insurance company than the state guaranty limit covers. If you have $400,000 going into annuities, split it across at least two A-rated carriers. Diversification across insurers matters above the guaranty limit, the same way diversification across banks matters above $250,000 of FDIC coverage.

The "how much of my money in annuities?" rule of thumb

This is the question I get most often, so let me answer it directly. The conventional advisor range is 25% to 40% of retirement assets in annuitized or guaranteed-income products — and that includes Social Security and any pension, valued at their present worth. So if your Social Security plus pension already covers a big chunk of your essential expenses, you may need less annuity than someone with no pension. The point is to cover essentials reliably, not to put everything in one contract.

The harder rule, in my experience: essential expenses should be covered by guaranteed income. Discretionary expenses can come from the growth side of the portfolio. If your essentials are $5,000 a month and your Social Security plus pension is $3,500 a month, you're $1,500 a month short on essentials. That's the gap an annuity can usefully fill. If your essentials are already covered? You probably don't need much annuity, if any. Tools-to-jobs.

What I'd walk away from

Here is the cheat sheet. If a contract has any of these, ask hard questions before you sign:

• Surrender schedule of 12 years or longer, especially for anyone over 65. The math rarely works in the buyer's favor.
• "Bonus" annuities with bonuses of 8% or more. The bonus almost always pays for itself with a longer surrender period and lower caps. There is no free 8%.
• Two-year crediting strategies on FIAs that look like high caps. They extend the no-credit risk window. Read the fine print.
• VA contracts where the all-in cost is north of 3%. The math has to work very hard against that drag.
• Any contract you don't fully understand after the agent explains it twice. If it can't be explained in plain English, it can't be evaluated. Walk away. There is no annuity that requires an immediate decision.

What this looks like in practice

Annuities are one tool among many in a retirement income plan. Sometimes the right one. Sometimes not. The way to know is to start with what you actually need — the income gap, the sequence-of-returns risk on the growth side, the longevity risk on the spending side, the tax bracket you'll be in — and then ask whether an annuity fits. Not the other way around. Most of the bad annuity sales I see start with someone walking in with a product and looking for a person to sell it to.

If you have already bought one and you're not sure whether you got a good deal — like the gentleman with the manila folder — bring it in. I read these contracts for free. We'll look at the surrender schedule, the MVA, the rider costs, and what you actually own versus what was sold to you. Sometimes the answer is "you're fine, hold it." Sometimes the answer is "let's think about exit strategies." It is what it is. The point is to know.

The bottom line

Annuities aren't good or bad. They're tools. The right tool for the right job — covering essential expenses with guaranteed income, taking longevity risk off the table, getting tax-deferred growth on non-IRA money — is a useful thing to have in the toolbox. The wrong tool — a 14-year-surrender FIA sold to a 73-year-old whose life expectancy is twelve, or a VA stacked with riders for someone who didn't need either — is what gives the whole category a bad name.

The way to know the difference is to start with the plan, not the product. Start with the income gap, the sequence risk, the tax picture, and what you actually need from this money. Then pick the tool that fits. Get that order right, and even a "boring" MYGA or a no-frills SPIA can do useful work. Get it wrong and the most expensive annuity in the world won't save you. The goal is the same as everything else we talk about in this office — to get a written plan that lets you sleep at night. Tools, not religions. Right?