Annuities: Things to Know Before You Buy
Thinking About Buying an Annuity?
Tempted by a compelling annuity pitch? Before you sign the dotted line, let’s walk through the essentials—so you feel confident about your retirement choices and avoid buyer’s remorse.
1. Start With Realistic Expectations
Annuities can provide valuable benefits—predictable income, tax-deferred growth, optional guarantees—when they fit your goals and are structured properly. But like any insurance-based product, the details (and costs) deserve a close look.
2. How Sales Incentives Work
Insurance companies may pay the professional who sells an annuity a commission, often a meaningful percentage of the premium. While this is disclosed in the contract and perfectly legal, it can create conflicts if recommendations are driven more by payouts than your priorities.
3. Liquidity & Surrender Periods
Many deferred annuities include a surrender schedule: a declining charge if you withdraw more than the free-withdrawal allowance (often 10% of the account) in the first several years.
- Charges might start in the mid-single digits and typically fall to zero over time.
- Some contracts waive penalties for specific events (e.g., nursing-home confinement).
- Immediate annuities have no surrender period since payments begin right away.
4. Ongoing Costs
Annuity expenses vary widely. Mortality & expense fees, rider charges, and investment sub-account costs can add up quickly. Always request a full fee illustration and compare it with simpler alternatives.
Example (hypothetical): A $500,000 variable annuity with a 2.75% all-in annual cost could pay roughly $13,750 in fees during a flat market year.
Note: Actual costs differ by contract, and market performance can offset—or magnify—the impact.
5. “Suitable” vs. Fiduciary Advice
Tax implications, non-qualified annuity verses brokerage account
Some insurance agents are held only to a suitability standard (the product must generally fit your situation).
Others—such as fee-only advisers and certain dual-registered professionals—act as fiduciaries and must place your interests first.
Before buying, confirm in writing whether your adviser is acting as a fiduciary, and ask if they earn a commission on the sale.
6. Tax Considerations
- Qualified dollars (IRA, 403(b), etc.): Annuity wrappers add no new tax benefits; every withdrawal is ordinary income.
- Non-qualified dollars: Earnings are taxed first at ordinary rates unless you annuitize. Unlike stocks, there’s no step-up in basis for heirs.
7. Common Contract Types—At a Glance
Annuities come in many forms (fixed, variable, indexed, immediate). Each has trade-offs in guarantees, growth potential, and complexity. A fiduciary adviser can help you evaluate which, if any, may fit your plan.
Annuity Contract Types at a Glance
8. Exploring Alternatives
Alternatives may accomplish similar goals with lower costs or more flexibility, such as:
- Delaying Social Security
- Building a low-cost bond ladder
- Using immediate annuities only for essential expenses
A fee-only fiduciary can model the trade-offs for your situation.
9. Need a Second Opinion?
Fortress does not sell annuities. We are happy to review an existing or proposed contract, translate the fine print, and show how it fits within a comprehensive retirement plan—so you can decide with confidence.
Plan Your Retirement with Confidence
Schedule your free, no-obligation conversation with a Fortress Financial advisor today.
Book a CallThe Bottom Line
Annuities can provide stability and lifetime income, but they are not one-size-fits-all. Scrutinize costs, liquidity, tax impact, and adviser incentives—and weigh them against simpler, transparent solutions—before you sign.
About Fortress
Fortress Financial Group is an independent, fee-only fiduciary wealth-management firm in Rochester, MN. Our team includes CERTIFIED FINANCIAL PLANNER™ (CFP®) professionals and other specialists who deliver objective, commission-free advice.
We pair proactive, lifetime tax planning with technology-powered clarity and personal care to help pre-retirees and retirees keep more of their wealth and make confident choices about when—and how—they transition into, and live in, retirement.
Schedule a conversation to learn why more than 300 families in Southeast Minnesota and across the country trust Fortress with their financial future.
Disclosures
Fortress Financial Group LLC (“FFG") is a registered investment advisor. Advisory services are only offered to clients or prospective clients where FFG and its representatives are properly licensed or exempt from licensure. For current FFG information, please visit the Investment Adviser Public Disclosure website and search with FFG’s CRD# 315329.
This content is provided for informational purposes only and should not be construed as legal, tax, or investment advice. No investment strategy can guarantee success or prevent loss.
Any example provided is hypothetical and for illustrative purposes only. It does not represent any specific product or investment.
Information provided is not intended as tax advice. Please consult with a qualified tax advisor for personalized guidance.
