Why do financial planners push annuities?

Suze Orman is generally skeptical of most annuities, but she acknowledges that simple, income-focused products can be useful if you lack a traditional pension and need guaranteed lifetime income.

Her detailed views break down into what she avoids, what she accepts, and her main warnings.

What Suze Orman Rejects

• Variable annuities: She strongly advises against variable annuities, calling them expensive and unnecessary.
• Annuities inside retirement accounts: She states it makes little sense to put an annuity inside an IRA or 401(k) because those accounts are already tax-advantaged, making the tax-deferral feature of an annuity redundant while adding high fees.
• High fees and complex contracts: She frequently criticizes products with steep broker commissions (often 5% to 6%), hidden caps, and long surrender periods (5 to 10 years) where you pay heavy penalties to access your money.
• Using insurance as an investment: She warns against using complex indexed or variable annuities as pure growth investments instead of safer or more direct market alternatives.

What Suze Orman Accepts

• Immediate and fixed income annuities: She is open to Single-Premium Immediate Annuities (SPIAs) or basic fixed income annuities if a retiree has insufficient guaranteed income to cover basic living expenses.
• Filling an income gap: If your reliable monthly income (like Social Security) doesn't cover your essential bills, she recognizes that converting a portion of savings into a predictable lifetime paycheck can prevent you from outliving your money.

Her Core Warnings

• Insurers' financial strength: Orman reminds investors that an annuity guarantee is only as strong as the balance sheet of the insurance company backing it. If the insurer fails, your payout is at risk.
• Liquidity loss: Locking your money away in a contract limits your flexibility for emergencies, especially if high surrender charges apply during the early years.

You can read more details directly on Suze Orman's Annuities Guide or explore independent context on Boldin's Retirement Analysis of Suze Orman.

A major red flag for a financial advisor is refusing to act as a fiduciary or hesitating to put their fiduciary duty in writing. A fiduciary is legally required to put your best financial interests ahead of their own.

Key Warning Signs to Watch For

• Vague or Hidden Fees: An advisor who cannot or will not give you a clear, total annual cost breakdown in the first meeting, or uses a confusing fee structure.
• Products Before Planning: Pushing specific insurance policies, annuities, or investments before taking the time to understand your personal goals and full financial picture.
• Guaranteeing Returns: Promising high investment returns or using the word "guaranteed" for non-guaranteed market products.
• High-Pressure Tactics: Urging you to sign paperwork or move your money immediately during an initial consultation.
• Blemishes on Their Record: Having past customer complaints, regulatory violations, or disciplinary actions that they did not proactively disclose. You can check an advisor's history using FINRA's BrokerCheck tool.
• Poor Communication: Being difficult to reach, slow to return calls, or defensive when asked basic questions about their background or compensation.

Financial experts and consumers often warn against buying annuities because of high fees, limited access to your money, and complex contract terms.

For a deeper dive into the common criticisms and underlying features, you can read more about why people hate annuities and their benefits.

High Fees and Costs

• Variable fees: Some variable annuities cost up to 2% to 4% annually in administrative and management fees.
• Commissions: Financial advisors often earn large, hidden upfront commissions for selling complex annuities, which can incentivize bad alignment with your actual needs.

Lack of Liquidity (Illiquidity)

• Locked-up cash: Many income annuities require you to hand over a lump sum permanently in exchange for regular payments, meaning you lose control of the principal.
• Surrender charges: Withdrawing your money early can trigger steep surrender charges that last for several years and sometimes reach up to 25%.

Inflation Risk

• Fixed payouts lose power: If you choose a fixed lifetime payout without an inflation rider, the rising cost of living will shrink the real purchasing power of your monthly check over time.
• Expensive riders: Adding inflation protection often cuts your initial payout size significantly (sometimes by 30% to 50%).

Complexity and Missed Market Gains

• Capped returns: Fixed index annuities protect your principal from market drops, but they also cap your maximum upside earnings during strong market years.
• Confusing rules: The contracts feature complex rules, fine print, and tax treatments that are taxed as ordinary income rather than lower capital gains rates.

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.

Dave Ramsey strongly advises against buying annuities, calling them expensive, low-yielding products that are inferior to mutual funds.

Core Arguments Against Annuities

• High Fees and Commissions: Ramsey highlights that many annuities carry steep hidden fees, surrender charges, and high commissions (sometimes up to 10%) that eat into your returns.
• Low Returns: He argues that fixed annuities offer poor growth (often comparing them to a low-paying Certificate of Deposit with extra fees), claiming you can make much higher long-term returns by investing in growth stock mutual funds.
• Illiquidity: He points out that locking your money into an annuity contract makes it difficult and expensive to access if you need cash before the surrender period ends.
• The "Rare Exception": Ramsey states he only sees a potential use for a variable annuity (a mutual fund inside an insurance contract) if you are completely out of debt, your home is paid off, and you have already maxed out all standard retirement accounts like 401(k)s and IRAs. Otherwise, his blanket advice is to avoid them entirely.

Common Industry Counterpoints

Many financial planners and insurance specialists argue that Ramsey’s blanket stance is overly dismissive:

• Guaranteed Income: Critics note that What Is an Annuity and How Does It Work? - Ramsey defines annuities as insurance contracts for guaranteed lifetime income, not pure growth investments.
• Principal Protection: Fixed and multi-year guarantee annuities protect your principal from market crashes, which can benefit risk-averse retirees who cannot afford sequence-of-returns risk.
• Fee Misconceptions: Many fixed or no-load annuities feature zero annual administrative fees if you do not add expensive optional riders.