ADVERTORIAL
The web's best personal finance advice.
Choosing an investment strategy that will meet your retirement income needs is a major life decision.
Annuities are one potential source of retirement income. An annuity is a contract between you and an insurance company. You pay either a lump sum or periodically, and in return the company uses a strategy to increase your assets.
There are three main types of annuities. A variable annuity invests
After you choose your state and answer a few questions, you can compare up to three advisors that serve your area and decide which to work with.
Choosing the wrong type of annuity.
There are several different types of annuities and the differences between them can be confusing. Do you choose a fixed, variable, indexed, or immediate annuity? For example, if you’re years away from retirement, the higher potential returns of a variable annuity could be enticing. On the other hand, those closer to retirement may want to go with a shorter-term fixed annuity that safely grows based on a set interest rate.
Not understanding all of the fees involved.
Annuities can get expensive. There are often administrative and investment fees on variable annuities that will reduce your potential gains by 1% annually or more.
Not realizing annuity returns may not match investment returns.
Annuity contracts contain provisions that may limit your potential upside, including participation rates and rate caps. So you may be better off investing directly in an index fund rather than through an indexed annuity.
Not considering annuity tax consequences.
Contributions to a variable annuity are tax-deferred, but any withdrawals you make will be taxed at your regular income tax rate, not the long-term capital gains tax rate. The capital gains tax rates are lower than the income tax rates in many places. A financial advisor can help you better understand the taxes involved with annuities and how they could affect your annual tax burden.
Not understanding the financial risk (You can lose money).
Variable annuities or index-linked annuities are investments in stocks, bonds, mutual funds, etc. If the investment performance is negative, you will lose money. In contrast, you cannot lose money through an immediate annuity or fixed annuity. Given the potential low rate of return, however, the value of your money may be eroded by inflation.
Misunderstanding annuity exit clauses.
While other investments allow you to move your money in and out freely, annuities are more rigid. In the case of an immediate annuity, for example, you cannot get your money back or even pass it on to a beneficiary. It may be possible to move your money into another annuity plan, but doing so could subject you to fees.
Not consulting a fiduciary financial advisor before buying.
Annuities sales people are typically incentivized by commissions. They have an interest in selling you a product that makes them the most money, not the product that has the best long-term value to you. We recommend working with a fiduciary financial advisor, who is legally obligated to act in your best interest. They may have conflicts of interest, but they are obligated to disclose them.
Chances are, there are several highly qualified financial advisors in your town. However, it can seem daunting to choose one.
However, SmartAsset's no-cost tool makes it easy to find a vetted financial advisor so you can make an informed decision and choose the right one for you. All of the financial advisors on SmartAsset’s matching platform are registered fiduciaries, meaning they're obligated to act in your best financial interest. The whole process only takes a few minutes.
Now you can get matched with up to three fiduciary investment advisors who serve your area that have been rigorously screened through our proprietary due diligence process.
This is where it gets complicated. Annuities are often confusing and can have a range of conditions attached that ultimately limit their value to you.
It’s strongly recommended to speak with a financial advisor before taking out an annuity to ensure it aligns with your retirement plan, ultimate savings goals and risk tolerance. You can use this free tool to get matched with up to three financial advisors that serve your area right now with no obligation to work with any of them.
1
2
3
May 19, 2025
IN THE PRESS:
The web's best personal finance advice.
7 Annuity Mistakes
X
Above is the main headline and this is hero sub-copy in the event it is needed (see Annuity homepage). If there is no sub-copy then the pen gets moved up.
your money in certain types of investment funds, a fixed annuity grows via a set interest rate, and an indexed annuity earns returns based on the performance of an associated index.
This is where it gets complicated. Annuities are often confusing and can have a range of conditions attached that ultimately limit their value to you.
It’s strongly recommended to speak with a financial advisor before taking out an annuity to ensure it aligns with your retirement plan, ultimate savings goals and risk tolerance. You can use this free tool to get matched with up to three financial advisors that serve your area right now with no obligation to work with any of them.
1.
2.
3.
4.
5.
6.
7.
SmartAsset Advisors, LLC ("SmartAsset"), a wholly owned subsidiary of Financial Insight Technology, is registered with the U.S. Securities and Exchange Commission as an investment adviser. SmartAsset’s services are limited to referring users to third party registered investment advisers and/or investment adviser representatives (“RIA/IARs”) that have elected to participate in our matching platform based on information gathered from users through our online questionnaire. SmartAsset does not review the ongoing performance of any RIA/IAR, participate in the management of any user’s account by an RIA/IAR or provide advice regarding specific investments.
SmartAsset.com is not intended to provide legal advice, tax advice or financial advice (Other than referrals to Investment Advisers or Investment Adviser Representatives). SmartAsset is not a financial planner, broker or tax adviser. The Service is intended only to assist you in your understanding of financial organization and decision-making and is broad in scope. Your personal financial situation is unique, and any information and investing strategies obtained through SmartAsset.com may not be appropriate for your situation. Accordingly, before making any final decisions or implementing any financial strategy, you should consider obtaining additional information and advice from your accountant or other financial advisers who is fully aware of your individual circumstances.
This is not an offer to buy or sell any security or interest. All investing involves risk, including loss of principal. Working with an adviser may come with potential downsides such as payment of fees (which will reduce returns). There are no guarantees that working with an adviser will yield positive returns. The existence of a fiduciary duty does not prevent the rise of potential conflicts of interest.
We do not manage client funds or hold custody of assets, we help users connect with relevant financial advisors.
© 2022 SmartAsset
Above is the main
headline and this is hero sub-copy in the event it is needed (see Annuity homepage). If there is no sub-copy then the pen gets moved up.
Choosing an investment strategy that will meet your retirement income needs is a major life decision.
Annuities are one potential source of retirement income. An annuity is a contract between you and an insurance company. You pay either a lump sum or periodically, and in return the company uses a strategy to increase your assets.
There are three main types of annuities. A variable annuity invests your money in certain types of investment funds, a fixed annuity grows via a set interest rate, and an indexed annuity earns returns based on the performance of an associated index.
Choosing the wrong type of annuity.
There are several different types of annuities and the differences between them can be confusing. Do you choose a fixed, variable, indexed, or immediate annuity? For example, if you’re years away from retirement, the higher potential returns of a variable annuity could be enticing. On the other hand, those closer to retirement may want to go with a shorter-term fixed annuity that safely grows based on a set interest rate.
Not understanding all of the fees involved.
Annuities can get expensive. There are often administrative and investment fees on variable annuities that will reduce your potential gains by 1% annually or more.
Not realizing annuity returns may not achieve investment results.
Annuity contracts contain provisions that may limit your potential upside, including participation rates and rate caps. So you may be better off investing directly in an index fund rather than through an indexed annuity.
Not considering annuity tax consequences.
Contributions to a variable annuity are tax-deferred, but any withdrawals you make will be taxed at your regular income tax rate, not the long-term capital gains tax rate. The capital gains tax rates are lower than the income tax rates in many places. A financial advisor can help you better understand the taxes involved with annuities and how they could affect your annual tax burden.
Variable annuities or index-linked annuities are investments in stocks, bonds, mutual funds, etc. If the investment performance is negative, you will lose money. In contrast, you cannot lose money through an immediate annuity or fixed annuity. Given the potential low rate of return, however, the value of your money may be eroded by inflation.
Not understanding the financial risk (You can lose money).
While other investments allow you to move your money in and out freely, annuities are more rigid. In the case of an immediate annuity, for example, you cannot get your money back or even pass it on to a beneficiary. It may be possible to move your money into another annuity plan, but doing so could subject you to fees.
Misunderstanding annuity exit clauses.
Annuities sales people are typically incentivized by commissions. They have an interest in selling you a product that makes them the most money, not the product that has the best long-term value to you. We recommend working with a fiduciary financial advisor, who is legally obligated to act in your best interest. This way you can be assured they do not have a conflict of interest when they make investment recommendations to you.
Chances are, there are several highly qualified financial advisors in your town. However, it can seem daunting to choose one.
However, SmartAsset's no-cost tool makes it easy to find a reliable, reputable advisor so you can make an informed decision and choose the right one for you. All of the financial advisors on SmartAsset’s matching platform are registered fiduciaries, meaning they're obligated to act in your best financial interest. The whole process only takes a few minutes.
Now you can get matched with up to three fiduciary investment advisors who serve your area that have been rigorously screened through our proprietary due diligence process.
Trying to Hire an Advisor on Your Own
Click Your State to Get Matched With Financial Advisors Who Serve Your Area
Let's look at seven mistakes people make when assessing whether to buy an annuity.