Why avoid an annuity?

Financial advisors often dislike annuities because these products reduce advisory fee revenue, feature high costs, and lock up client funds.

Impact on Advisor Business Models

• Loss of AUM Fees: Many advisors charge an Assets Under Management (AUM) fee (typically around 1% annually). When money moves into an annuity, it leaves the advisor's managed portfolio, stopping those recurring advisory fees.
• Alignment with Growth Portfolios: Fee-only advisors focus on growth strategies using stocks, exchange-traded funds (ETFs), and mutual funds, whereas annuities function as insurance contracts for guaranteed income.

High Costs and Complex Structures

• High Fees: Total annual costs for complex options like variable annuities can reach up to 3% or more when combining administrative charges, fund management, and optional riders. Commissions on certain products can also climb as high as 8%.
• Liquidity Restrictions: Annuities often include strict surrender periods and early withdrawal penalties, making it difficult and expensive for clients to access their cash during an emergency.
• Contract Complexity: Multi-layered rules, complicated prospectuses, and hidden clauses make these products difficult for many investors and advisors to fully understand.

Read more about these structural criticisms on Trajan Wealth or review the fee breakdown discussed on Yahoo Finance. You can also explore perspectives on The Annuity Man regarding how these contracts handle risk transfer.

Yes, people can lose money in an annuity depending on the contract type, fees, and how it is managed.

While fixed and indexed options protect your principal from market drops, several common scenarios can lead to financial losses.

Ways People Lose Money in Annuities

• Market Downturns: With variable annuities, your money is tied directly to market investments like mutual funds, meaning a market drop reduces your account value.
• Fees and Charges: High annual fees, administrative costs, and optional riders (extra features) can slowly chip away at your total account value.
• Surrender Charges: Pulling your money out too early—usually within the first 5 to 10 years—can trigger steep early withdrawal penalties from the insurance company.
• Inflation: If you choose a fixed payout without a cost-of-living adjustment (COLA), inflation will quietly reduce your purchasing power over time.
• Early Death (Life-Only Payouts): If you pick a life-only payout option and pass away shortly after buying the annuity, payments stop, meaning you might collect less than you originally put in.
• Insurer Insolvency: If the insurance company goes bankrupt and your losses exceed state guaranty association limits, you could lose a portion of your funds.

Yes, many millionaires and high-net-worth individuals use annuities, but they buy them for risk management, tax strategy, and asset protection rather than basic income replacement.

While middle-class retirees often buy annuities purely to cover fundamental living expenses, wealthy investors utilize specific contracts to solve advanced financial challenges.

Why Millionaires Buy Annuities

• Bypassing Contribution Caps: Traditional retirement accounts like 401(k)s and IRAs limit annual savings. Once those are maxed out, high earners use non-qualified deferred annuities to store large sums of money with unlimited tax-deferred growth.
• Asset Protection from Creditors: In states like Florida and Texas, annuity products offer strong legal shields. They protect accumulated capital from lawsuits, court judgments, and creditor seizures during severe financial or business liability.
• Tax-Efficient Compounding: Instead of paying yearly taxes on standard certificates of deposit (CDs) or taxable brokerage interest, wealthy clients use Multi-Year Guarantee Annuities (MYGAs) to let interest compound tax-free until withdrawal.
• Estate and Legacy Planning: Millionaires can add specific riders to pass remaining contract values directly to beneficiaries. This avoids the slow, public probate process and simplifies asset distribution for heirs.
• Long-Term Care Management: Wealthy retirees often use hybrid policies tied to the Pension Protection Act. These combine annuities with long-term care riders to pay for potential medical or nursing home costs without liquidating core investment portfolios.

The Drawbacks for High-Net-Worth Buyers

• Illiquidity: Annuities lock up capital behind strict surrender periods and early withdrawal penalties.
• Fees: Certain variable or complex products carry heavy administrative and management charges.
• Tax Status: Withdrawals are taxed as ordinary income rather than lower capital gains rates.

What happens to an annuity during a market crash depends entirely on the specific type of annuity you own.

Fixed and Fixed Indexed Annuities

• Protected Principal: Fixed annuities and fixed indexed annuities (FIAs) do not lose value when the market crashes.
• No Direct Market Link: Your money is not directly invested in stocks. Instead, any linked index options simply expire with zero gain for that period, but your baseline balance stays safe.
• Locked-In Gains: Any interest you earned before the crash is locked in and protected.
• Stable Payouts: If you already receive guaranteed lifetime income from your contract, your regular payments continue without interruption.

Variable Annuities

• Direct Exposure: Variable annuities invest your money in sub-accounts that act like mutual funds tied directly to the stock market.
• Value Drops: When the market crashes, the cash value of a variable annuity drops right along with it.
• Income Riders: Some variable annuities feature special income riders that guarantee a minimum payout base even if the underlying investments lose value, though these usually come with extra fees.

Six core Warren Buffett quotes provide valuable guidance for managing money and mindset in retirement.

1. On Long-Term Horizon

"Our favorite holding period is forever."

• What it means: Retirement can last thirty years or more, meaning your money still needs growth.
• Retiree takeaway: Do not completely abandon growth assets just because you stopped working.

2. On Market Panic

"Be fearful when others are greedy and greedy when others are fearful."

• What it means: Market drops cause emotional selling, while market booms cause over-excitement.
• Retiree takeaway: Avoid panic-selling your portfolio during a market downturn.

3. On Price vs. Quality

"Price is what you pay. Value is what you get."

• What it means: Buying a weak asset just because it looks cheap is usually a mistake.
• Retiree takeaway: Focus on quality and true worth over chasing low-priced bargains.

4. On Simplicity and Risk

"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."

• What it means: Investments should be stable enough that you do not need to check them daily.
• Retiree takeaway: Keep your retirement portfolio simple and stress-free.

5. On Hidden Costs

"Investors should remember that excitement and expenses are their enemies."

• What it means: High fees and trendy trading eat away at your savings.
• Retiree takeaway: Minimize investment fees and avoid chasing complex, exciting trends.

6. On Personal Wealth

"Too often, a vast collection of possessions ends up possessing its owner. The asset I most value, aside from health, is interesting, diverse, and long-standing friends."

• What it means: True success in life is measured by relationships, not material items.
• Retiree takeaway: Invest your time into family, health, and community rather than accumulating more stuff.