Annuities: The Good, The Bad & The Ugly
- Marc Lowe
- Apr 10
- 3 min read
Updated: Apr 20
I recently met with a guy who loved annuities. We instantly got into a heated debate on one of the more polarizing topics in personal finance..... annuities.
Conversations around annuities tend to surface quickly in financial planning—often with strong opinions on both sides. The reality is more nuanced. Like any financial product, annuities come with strengths, limitations, and trade-offs. The key is understanding how—and if—they fit into your broader plan.
The Benefits
At their core, annuities are designed to provide income and stability in retirement. In the right context, they can offer several advantages:
Guaranteed Income: They can create a predictable, contractually guaranteed stream of income.
Market Protection: Certain types of annuities reduce exposure to market volatility.
Portfolio Stability: Allocating a portion of a portfolio may help establish a reliable income floor.
Longevity Protection: They can help address the risk of outliving your assets.
Behavioral Benefits: Consistent income may reduce the pressure to sell investments during market downturns.
For investors who prioritize predictability and downside protection, these features can be appealing.
The Considerations
That said, annuities are not without trade-offs. Some of the most important considerations include:
Inflation Risk: Fixed income streams may lose purchasing power over time.
Complexity and Fees: Contracts can be difficult to evaluate and may carry higher expenses.
Limited Liquidity: Access to funds is often restricted, particularly during surrender periods.
Tax Treatment: Earnings are typically taxed as ordinary income rather than at capital gains rates.
Flexibility: Adjusting or exiting a contract can be costly or limited.
These factors can make annuities less attractive for those who value flexibility, transparency, and tax efficiency.
Planning Implications
Where annuities require the most careful evaluation is within the context of a full financial plan—particularly when it comes to taxes and estate planning.
For example, annuities when held in taxable brokerage accounts (non-qualified annuities) do not receive a step-up in cost basis at death. This can create unintended tax consequences for beneficiaries compared to assets held in a taxable investment account. In some cases, well-intentioned decisions to “guarantee” an outcome can reduce overall tax efficiency for the next generation.
This doesn’t make annuities inherently flawed—but it does highlight the importance of evaluating them alongside other available strategies.
The Bottom Line
Annuities are not inherently good or bad—they are tools. And like any tool, their value depends on how they’re used.
For a narrow group of investors—particularly those who have maximized other tax-advantaged opportunities and want to prioritize income certainty—they may serve a purpose. For many others, simpler and more flexible strategies may be more aligned with their goals.
Every financial decision solves one problem while creating another. The goal is not to avoid trade-offs, but to understand them clearly and make intentional choices.
If you’re considering an annuity, or already own one, it’s worth stepping back and asking a simple question: How does this fit into the bigger picture of my financial life?
About the Author
Marc Lowe, CFP® is a fee-only fiduciary advisor based in Waterford, CT, helping families & small business owners make smarter financial decisions.
The information presented in this article is the opinion of the author and does not reflect the views of any other person or entity unless specified. The information provided is believed to be reliable and obtained from reliable sources, but no liability is accepted for inaccuracies. The information provided is for informational purposes and should not be construed as advice. Advisory services offered through In The Money Retirement, an investment adviser registered with the state of Connecticut. The information linked to on third-party sites is being provided strictly as a courtesy and convenience. We make no representation as to the completeness or accuracy of information provided at these websites. When you access these websites, you are leaving our website and assume any and all responsibility and risk for use of the web sites you are visiting.The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
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