#119 - How to Decide If an Annuity Fits Your Retirement Plan

Eric Blake: Welcome to another episode of the Simply Retirement podcast. I am your host, Eric Blake. Joining me, as always, is Wendy McConnell. Wendy, how are you?

Wendy McConnell: I'm good. How are you?

Eric Blake: I'm doing very well. So my test in this episode is going to be how quickly I see your eyes start to glaze over. All right, so as you know, over the past three episodes, mixed in we had a great guest, but over these first three episodes that we did on annuities, we talked about what annuities are and kind of the nuts and bolts of what annuities are, and I think that's important. The different types, how they're taxed, all those fun things that I think are fun, but you don't think so much.

Wendy McConnell: Well, I don't know if fun's the right word, but okay.

Eric Blake: But we're going to shift our focus just a little bit. Instead of learning more about what annuities are, I want to talk about how to decide whether an annuity belongs in your retirement plan. Because if you've spent any time researching annuities, they come up in all different formats. They're on some of the social platforms, and they come up in different circumstances, and people want to know, what is this thing? Should I be thinking about it? Honestly, there are some strong opinions, not only in our industry, but across the board.

A lot of people have opinions about annuities, and a lot of times it's simply what they've heard rather than what they've actually seen. What's interesting is some people, even some big firms out there, would tell you that you should never have an annuity, you should never buy one. And then there are other people who seem to think everyone should have one. There's an old saying I like to use, when all you have is a hammer, everything looks like a nail, okay? Right?

Wendy McConnell: Yeah.

That's the only tool you've got, that's what you give 'em. I think that's a good reminder for retirement planning as well, because sometimes people become convinced that one strategy is always the answer, and other times they become just as convinced that it's never the answer.

I don't think either approach really leads to the best retirement decisions. Better retirement decisions begin with better questions, and that's a lot of what I want to focus on in this episode, and across the board. That's what we're going to focus on today. As we go through today's discussion, don't worry about remembering all the questions we're going to share with you today, because we put a lot of these in the guide, Does an Annuity Fit Within My Financial Plan? I'll remind you where to find that as we wrap up today.

All right, so let's start with the first question. Before deciding whether an annuity is a good fit, I want you to ask yourself this one simple question: what retirement problem am I trying to solve? An annuity is not a retirement plan. It's just one possible tool in the toolbox that may help solve a particular retirement need. So before thinking about the product, think about what your goal is, and ask yourself, "Am I looking for guaranteed lifetime income? Am I concerned about how market declines could affect my retirement savings? Or have I already contributed as much as I can to my other retirement accounts and I still need tax deferral?"

Wendy McConnell: Yep.

Or maybe you're trying to solve a completely different retirement need altogether. Different goals often lead to different solutions.

If an annuity has already been recommended to you, that's when I'd also think about asking the question, what retirement problem is that annuity intended to solve? Because if the answer isn't clear, if you can't answer that yourself, it's probably too early to decide whether it's the right choice for you or not. So don't begin with the product, begin with what your retirement goal is, and then ask, "Does this annuity fit within my retirement plan?"

So, question two. Once you've identified the retirement problem you're trying to solve, the next question is, is an annuity the best way to solve it?

Wendy McConnell: Right.

Remember what we were talking about earlier, when all you have is a hammer, everything looks like a nail. The same retirement goal can often be accomplished in more than one way. An annuity may be one of those options, it may even be the best option, but it's rarely the only option. So it's important to understand why an annuity is being considered. Ask yourself, "Why might an annuity be a better fit than another strategy? What other options could help me accomplish this goal?"

Wendy McConnell: Right.

If you're discussing a recommendation that's come from a financial advisor, maybe an insurance professional, here's one of my favorite questions to ask. If you weren't recommending an annuity, what would be your second choice? That way you can get a feel for whether this is maybe the only thing they can offer you. That doesn't mean it's right or wrong, but it might allow you to ask more questions.

Wendy McConnell: Now let me ask, I think that maybe the annuity gives you a little more stability than other options.

Eric Blake: It's more like something you can count on more than you can count on stocks or bonds. It depends on the type. When we talked about the types of annuities, for example, if you said, "Well, I want a variable annuity," in that variable annuity you might be as aggressive as you can be with a stock portfolio, but the advantage might be the tax deferral.

Wendy McConnell: Gotcha, okay.

Eric Blake: So, again, it always comes back to what problem am I trying to solve. There are just too many choices. You ask the right questions, you get the right answers. If somebody's recommended an annuity to you, which is often the case, and it's kind of the thing right now, I'm trying to remember if I talked about this in the last episode or not, but with annuities, oftentimes they're sold rather than bought. Because you've been sold on something that an annuity can do, but you don't necessarily have all the answers as to how it does it. So maybe it says, "Well, it's going to give me a guaranteed income," but you didn't realize you couldn't touch the money, you couldn't get the income until ten years from now.

Wendy McConnell: Mm.

Things like that, where you buy the feature without really figuring out and understanding all the other variables that might come along with that annuity contract. So if someone can explain why they chose an annuity over other options, you'll have a much better understanding of whether it fits your situation.

Understanding why a recommendation was made is often just as important as understanding what was recommended. So let's move to our next question, and that is, what am I giving up in return? You kind of touched on this with your question earlier about whether it gives you more stability. It might, but there are also going to be some trade-offs. Every financial decision involves trade-offs in some way. There isn't a retirement strategy out there that's all upside. So, for example, if I invest more aggressively, I may have greater opportunity for growth, but I'm also accepting more market risk.

Wendy McConnell: Right.

Eric Blake: And annuities work the same way. Depending on the type of annuity, I might be giving up some flexibility or access to my money in exchange for benefits that are important to me. One example is something called a surrender charge. A surrender charge isn't a tax, it's part of an annuity contract. In general, annuities are designed to be long-term financial tools. One way insurance companies encourage people to keep their money invested for the long term is by charging a surrender fee if too much money is withdrawn during those early years of the contract. Depending on the annuity, that might be three years, it might be seven years, it might even be longer.

Again, that doesn't make the annuity good or bad, it simply means I should ask, does this fit into my plan? So if I purchased it for guaranteed income, but I need guaranteed income a year from now, I might not want to buy an annuity that has a seven-year surrender charge. So, again, does it fit into my financial plan? Does it fit into my income plan? Because they are not all the same, not at all. That's one of the reasons I think this episode is going to be more valuable than the others. We opened up the hood, looked inside at how annuities work, but now this is the most important part, asking the right questions if you're considering an annuity or if one has been recommended to you.

So, if I think I might need the money in the next few years, that's obviously an important consideration. If it's money I'm setting aside for income later in retirement, that might be less of an issue. But every retirement plan involves some trade-offs. The key is understanding them before deciding whether an annuity fits into your plan.

The next question we want to build on that is, what is actually guaranteed? Most annuities have something that is guaranteed, and what is actually guaranteed is important to understand, because that's almost always going to be a word you'll hear when discussing annuities. If an annuity is recommended, you're going to hear that word, guaranteed, somewhere along the way. So that next question is very simple: what is actually guaranteed?

Wendy McConnell: Mm-hmm.

Right? Because, as you said a second ago, not every annuity offers the same guarantees. So if you're considering an annuity for guaranteed lifetime income, ask yourself exactly what income is guaranteed. If you're considering an annuity because you want to protect part of your retirement savings, ask exactly what is protected.

And that's where it can get a little tricky, because, again, am I protecting my principal, or am I protecting against some amount of market loss? There are these interesting annuities out there, basically the easiest way to describe it is a buffer annuity. So, if I buy a fixed index annuity that protects my principal, and we talked about these in episode two, maybe if the market goes up 20%, I might get 7%. But if it goes down 20%, I wouldn't lose anything, because of the market I might get zero, but I wouldn't lose anything.

Wendy McConnell: Right. Yeah.

Well, there's something called a buffer, which says something along those lines, but it may protect me up to 10%. Meaning if the market goes down 20%, my principal might still go down, but it might only go down 10%, because I've got a 10% buffer.

So there's a level of protection, but it's not principal-guaranteed, right?

Wendy McConnell: Yep.

Whether it's the income that's guaranteed, or the principal that's guaranteed, again, the goal isn't to understand every single page of that annuity contract, it's to understand the parts that matter most to you, to your retirement. And if something isn't clear, ask, where can I find this in the contract?

Wendy McConnell: Okay. Yep.

Then ask the question, am I comfortable with that answer? Because you don't necessarily need to be an annuity expert, that's not what this is about, but you should understand what you're counting on before you have to count on it.

Know exactly what you're getting. When you buy a product like this, you bought an annuity contract for something, so understand how that thing works. Whether it's income protection, principal protection, tax deferral, whatever it is, make sure you understand how it works and how it's going to apply to you.

The next question we want to talk about is, what am I paying for? This is one of those things almost everyone asks. It's always one of the first questions that comes out: "What am I paying for if I buy this annuity? What's it going to cost me?" That's a very fair question, but I actually think there's a better question to ask. It's, what am I paying for?

Hey, everyone, it's Eric. Hope you're enjoying today's episode. I want to take just a quick moment to share a resource I think you'll find valuable. Have you ever found yourself asking, "How much can I put into an IRA this year?" Or, "How much can I earn before my Social Security gets reduced?" Those are the kinds of questions that come up all the time, and the answers change, often more than you'd think. That's why we created a free two-page tax and retirement planning cheat sheet, updated for 2026, with the key tax, Social Security, and retirement numbers all in one place. You can download it right now at thesimplyretirementpodcast.com/retirementcheatsheet. It's a simple reference you can keep handy whenever questions come up.

Now, back to the episode. Here's something I think is important to remember, nothing is free. So whether you're buying an annuity or you're working with a financial professional, someone is being paid for the work that they're doing.

Wendy McConnell: Sounds like you're about to justify a high cost, Eric.

Eric Blake: I'm not justifying anything, it's important to understand. It's not just about whether someone is being paid, it's understanding how they're getting paid and what you're paying for, and whether it helps solve the retirement goal you're trying to accomplish. Because the cost can vary depending on the annuity and the features you choose. Some annuities include optional features, often called riders. You might have heard that term, an income rider, for example, or a death benefit rider, and that has an additional cost. Depending on how you're working with your financial professional, there may also be commissions paid by the insurance company, or even an advisory fee, depending on how that advisor works, much like you might pay for professional investment management, where you might pay advisory fees to own that annuity.

So, for example, I might decide a guaranteed lifetime income rider is worth the additional cost because it's an important part of my retirement plan, it protects my income during volatile periods, things like that. Again, neither decision is automatically right or wrong. When we talk about those surrender charges, as we mentioned a little bit ago, part of the reason those surrender charges are there is because often, when that annuity gets purchased, there's a commission paid to the advisor or agent who sold that contract to you. Well, we know that insurance companies aren't in the business of losing money, right?

Wendy McConnell: Oh, well, yeah.

Eric Blake: So not only do they charge potential surrender charges to keep your money in there long term, because that's typically the way annuities work, but they also want to make sure they don't lose out. If they paid a commission to an agent or advisor, they don't want you immediately taking that money out after they've paid a thousand, a few thousand bucks, or whatever it might be, to the agent who sold you the contract. Does that make sense?

Wendy McConnell: It does, yeah.

Eric Blake: So we talked a little about those surrender charges. For many commission-based annuities, surrender charges are, again, one way insurance companies recover the upfront commission they paid when the annuity was purchased. Again, that doesn't make surrender charges good or bad, it simply helps explain why they exist. But if someone describes an annuity as free or no cost, that's probably a good time to ask a few more questions. There's no such thing as a free lunch,

Wendy McConnell: Absolutely,

Eric Blake: or a free annuity. These are some of the questions to think about. How is everyone involved being paid? How's the agent, how's the advisor getting paid? How's the investment firm, whoever it is you're working with? Are there optional rider fees? So if I'm paying for a guaranteed income rider, what is the fee? Make sure you know exactly what that is. Are there surrender charges? Again, paying for something isn't necessarily a problem, it's paying for something you don't understand, that's the problem. So before making your decision, make sure you understand what you're paying for and why.

So the last question I'd encourage everyone to ask is, what happens if life doesn't go as planned?

Wendy McConnell: And it never does.

Eric Blake: And it never does, that's absolutely right. It rarely unfolds exactly the way we expected it to. Your plans change, your health changes, families change, priorities change. That's why...

Wendy McConnell: Goals change.

Eric Blake: Yes, that's why it's important to understand how an annuity fits into your retirement plan, not just today, but many years from now. So I want you to ask yourself, what happens if I need access to more of my money than I expected? We'll touch on those surrender charges again, because this is a good example of how these work. In many cases, let's say you've got a seven-year surrender charge schedule, meaning for the first seven years it's going to cost you something if you take all your money out. But frequently you have access to some portion, usually about 10%. So I could take 10% of my money out if I needed to, and avoid the surrender charges. Back to our tax episode, if it's an IRA and I take the money out, it still might be taxable, but I wouldn't pay surrender charges for that. So if I needed more than that, what would it cost me to access it?

Wendy McConnell: Mm-hmm.

So if I took more than the 10% out, now I'm charged surrender charges. Again, you just want to be aware of it. It doesn't mean you wouldn't choose to do it, but you want to know what's going on.

Wendy McConnell: Doesn't this also mean, like, why you should have different options, why you should have a couple of balls in the air, so to speak?

Eric Blake: Potentially, absolutely. Again, I think it comes back to where we're at in the process, whether we're trying to make the decision about buying an annuity, or if the annuity is already in place.

Wendy McConnell: True.

And that's where I think asking these questions, as many as you can in advance, and then fully understanding as best you can before getting into the annuity in the first place, is going to help you address some of these issues that might come up in the future. So, what happens if I need access to more of my money than I expected? What happens if my health or my family situation changes? And if an annuity has been recommended, another helpful question is, "Can you walk me through a few what-if situations?"

Wendy McConnell: Mm-hmm. Good.

Sometimes that's the easiest way to understand how a strategy would work if life doesn't go exactly as you planned.

One thing I think is really important to know, every state requires what's called a free look period. Now, the length of that time may vary, but this is basically an opportunity to make sure the contract matches what you expected before that decision becomes final.

Wendy McConnell: Oh, how long is that?

Eric Blake: It varies by state. Sometimes it might be 10 days, sometimes it might be 30 days.

Wendy McConnell: I gotcha.

Eric Blake: Again, based on your state, and if you're working with an agent or advisor, you want to know for sure, what is my free look period? How much time do I have to look at this contract, or more importantly, understand this contract, before I could say, "Nope, I don't want to do it." That also speaks to the complexity of annuities. If there's a free look period, regulators know that these things are complex. They want to give you time to say, "Nope, I'm done, I don't want this, this doesn't fit my needs anymore," or, "I didn't understand this," so you're not stuck. If you're stuck in something that's going to charge you a percentage in penalties to get your money out, that's a problem.

Annuities are constantly exposed to litigation because of some of these issues we've talked about. Some of it is just not understanding what you were getting into. Some of it is sales practices that may not be fully above board. There are different reasons why that might be, but again, back to the free look period. It gives you the opportunity to say, "Hey, I need to review and understand this contract before I sign on that dotted line."

Wendy McConnell: Mm-hmm.

All right. So just think of this as the opportunity to make sure your contract matches what you expected before that decision becomes final, and take advantage of that time. Review the contract, ask questions, make sure it matches your understanding of how the annuity is supposed to work. Because, again, ultimately it comes down to making an informed retirement decision. That doesn't mean understanding every single page of the contract, it simply means understanding the parts that matter to your retirement, and asking questions until you feel comfortable with those answers.

Wendy McConnell: May I vent for a second since we're...

Eric Blake: Of course.

Wendy McConnell: Why do they have to have these fifteen-page contracts that nobody understands, except for a lawyer, or you, or... It's just, I'm encouraged to just sign stuff without actually understanding it, and there's something wrong with that system.

Eric Blake: I'm just going to let you vent and let it float out there, because I don't have a great answer for that. I mean, any time attorneys get involved, you know what happens, right?

Wendy McConnell: Yes.

Eric Blake: But I think that's part of it, they're complex vehicles. There's been a lot of litigation around these things, whether it's because of how they were sold, or just a misunderstanding of what they were supposed to do. But that's why the best thing I can communicate as part of this final episode in the series is asking the right questions.

Wendy McConnell: Mm-hmm.

Again, it relies on the person responding to those questions to answer appropriately and truthfully, all those good things. But I think even asking certain questions we've talked about in this episode can uncover potential red flags. Even if it's as simple as, "Well, if you couldn't recommend this, what else might you recommend?" And if they say, "Well, I don't really have anything else," maybe that means you need to ask more questions, like we said earlier.

Wendy McConnell: Okay. Right. Yep.

So, as we wrap up this four-part series, I hope one thing has become clear. Annuities aren't inherently good or bad, they're simply one of many financial tools that may help solve certain retirement planning needs. Again, the key is understanding whether they fit within your financial plan, and that's exactly what the guide we're sharing as part of this episode series, Does an Annuity Fit Within My Financial Plan?, is designed to help with. Whether you're considering an annuity, one has already been recommended to you, or you're simply trying to be more informed, the guide is designed to help you ask the right questions before making an important retirement decision.

You can find that guide and the other episodes in this series in the show notes, or at thesimplyretirementpodcast.com. Well, that's it for today's episode. Hopefully this four-part series was helpful. Please be sure to follow the show so you're alerted to future episodes. And until next time, please remember, retirement is not the end of the road, it's the start of a new journey.