Annuities: When They Make Sense (and When You're Being Sold)

No financial product generates more heat than annuities, and the confusion is structural: the word covers both the simplest risk-transfer contract in finance, hand an insurer a lump sum, receive a paycheck for life, and some of the most fee-laden, commission-driven products ever engineered. The resolution is to split the question. Income annuities, judged as longevity insurance, earn a place in many retirement plans. Complex accumulation annuities, judged as investments, rarely survive the arithmetic.

The Case for Simple Income Annuities

A single premium immediate annuity (SPIA) or its deferred cousin (DIA) does one thing: converts capital into guaranteed lifetime income, at payout rates a retiree cannot safely replicate from a portfolio, because insurers pool longevity risk. Used to cover the gap between essential expenses and Social Security, a floor, not the whole portfolio, it directly attacks the two risks that break retirements: sequence risk and living longer than the plan. Delaying Social Security is buying exactly this product from the government at better-than-market prices, which is why it comes first; a commercial SPIA extends the same logic with the next slice of capital, priced transparently and comparable across carriers in minutes.

The Case Against the Complex Ones

Fixed indexed annuities and variable annuities are pitched as market upside with downside protection, and the mechanics, caps, participation rates, spread fees, surrender schedules of 7-10 years, rider charges of 1-1.5% stacking on subaccount fees, systematically deliver less than the pitch. The commissions funding aggressive sales (frequently 5-8% of your premium) come from somewhere, and it is you. Insurers can and do reset caps and participation rates downward after purchase. None of this makes every contract toxic; it makes the burden of proof high, and the seller's compensation the first question, per the same skepticism framework as any pitched product.

The Middle Cases

Worth knowing: MYGAs (multi-year guaranteed annuities) are CD-like instruments from insurers, occasionally winning on after-tax yield for money already earmarked for safety, compare current rates honestly. QLACs let you move a capped amount of IRA money into a deferred annuity starting as late as 85, trimming RMDs while insuring the far tail of longevity. And existing bad annuities can often be rescued: a 1035 exchange moves value tax-free into a low-cost contract, though surrender charges may argue for waiting out the schedule first. Every one of these is a spreadsheet decision, not a lunch-seminar one.

How to Buy, If You Buy

Decide the job first (income floor of $X/month starting at age Y), then shop the simple product that does that job across carriers by payout quote, laddering purchases over a few years to diversify interest-rate timing and carrier exposure (state guaranty limits, generally $250,000-ish per carrier per person, set a natural cap). Check carrier ratings, prefer straightforward contracts you can explain in two sentences, and involve your fiduciary planner before signing anything with a surrender schedule. Attend's protection planning is fee-based, when annuities fit, we say so, size them, and disclose exactly what any implementation pays.

Tony Colunga · Founder, Attend Wealth

Tony leads Attend Wealth, a fee-based wealth management firm in Atlanta serving professionals, families, and business owners. Advisory services are held to a fiduciary standard. More about Attend