Annuities: Safe, Simple(?), and Often the Wrong Move

Jose Alvarez, CFP®, MBA
Dec 30, 2025
8 min read

Updated: Jan 5

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Alright, here's a question someone brought up:

"Why not just buy an annuity?"

On the surface, it sounds reasonable. Maybe even smart. This person who asked assumed a couple of things that you've probably heard before:

You retire with $1 million
If you're invested in "the market," the so-called 4% rule says you can safely pull $40,000 a year
Meanwhile, an annuity shows up promising $60,000 a year
- For life
- Guaranteed
- No market risk
- No stress about running out of money

That feels like a no-brainer. Add a life insurance policy to protect your heirs if you die early, and suddenly it sounds like you’ve cracked the retirement code.

So why isn’t everyone doing this?

Short answer: because the assumptions underneath that logic don’t hold up nearly as well as they sound, and the costs, both financial and personal, are way higher than most people realize.

I’ll say this upfront, and I won’t dance around it.

I hate annuities for most people.

Not because they’re always evil, not because annuities themselves are bad. I can compare them to poison ivy. The plant sitting there by itself isn't doing anything wrong but if you're allergic to it, simply touching it can cause major irritation. In fact, poison ivy can sometimes be used for medicinal purposes to help heal joint pain or certain skin conditions

This is how I view annuities. Because they’re usually sold for a nice paycheck to the advisor, not chosen by the client. And they’re sold in ways that prey on fear, complexity, and misunderstanding.

The Guarantee Feels Good, but Guarantees Aren’t Free

Nobody likes uncertainty, especially when retirement income is on the line. Markets go up, markets go down, headlines scream recession, inflation, crashes, bubbles, and chaos. Then someone shows up with a glowing white aura like they descended from the heavens with an annuity in their pocket and says,

"I guarantee you'll never have to worry about this again."

As a financial planner that doesn't sell annuities, it's an uphill battle with these people because I don't provide guarantees.

Annuities feel safe because they replace uncertainty with certainty. You give the insurance company a pile of money, and they promise to send you a check every month for the rest of your life. No volatility. No decisions. No stress.

But what's more lightly covered? How f****ng expensive these things can be, surrender charges, and the impact of an early death on your family.

The Compensation Problem These Advisors Avoid

Because the folks who sell these things usually don't, let's address the elephant in the room. Annuities are heavily commissioned products. From what I’ve seen over the years, commissions commonly run anywhere from about 5% to 7% of the amount invested.

So, if someone rolls $1 million into an annuity, the gross commission might be $55,000 (assuming a 5.5% commission which is not uncommon). Now, the advisor or insurance agent may not personally keep all of that. Their firm takes a cut. A broker-dealer may take a cut.

Let’s say they net 40%.

That’s $22,000 paid to the person who sold the product, on a single transaction.

Do that repeatedly, and annuities become a very lucrative business.

What sells the best? Fear and sex. Annuity salesmen might not be able to sell sex, but they'll sell the hell out of market fear which coincidentally lands that annuity they had in their pocket right on the desk.

So... this raises an uncomfortable question:

Are annuities recommended because they’re the best solution, or because they’re the most profitable solution?

In my experience, it’s usually the latter.

“Just Buy Life Insurance to Fix the Downside”

This sounds good but breaks down fast.

The question made a clever point. If the major downside of an annuity is that you die early and the insurance company keeps the remaining value, why not buy life insurance to replace that lost money for your heirs?

Sure... on paper.

First, the benefit of life insurance doesn’t go to the person funding it. It goes to heirs. That doesn’t help the retiree who might need liquidity, flexibility, or access to their money while they’re alive... because they're alive and absolutely anything can happen.

Murphy's Law: anything that can go wrong will go wrong

Second, once you annuitize an annuity, you give up control. You can’t unwind it. You can’t change your mind. You can’t tap extra funds if life throws a curveball. You’ve traded autonomy for a paycheck.

Third, this strategy assumes people are comfortable planning simultaneously for dying early and living a very long life. That’s one of the hardest psychological hurdles in financial planning. Even with professional guidance, it’s tough.

Expecting a DIY investor to nail that balance decades in advance is a fantasy.

The 4% Rule is Wildly Misunderstood

This is where a lot of the logic behind “annuities pay more” falls apart.

Most people hear “4% rule” and assume it means you take exactly 4% forever, end of story. So, $1 million equals $40,000, and that’s all you get... that’s not what the rule was designed to do.

The 4% rule was stress-tested against some of the worst financial periods in modern history. It was built to survive disasters, not average markets. By design, it’s more conservative than people actually need in most years.

Using historical data, a simple 60% U.S. stock (ticker: SPY) and 40% U.S. bond portfolio (ticker: AGG), rebalanced semi-annually, tells a very different story.

Over a 25-year retirement:

In a median outcome, the portfolio averaged about 7.75% nominal, roughly 5% real after inflation. Taking 4% annually, the ending balance was about $2.3 million.
In a poor outcome, around the 10th percentile, the ending balance was still about $1.14 million.
In a strong outcome, the portfolio ended north of $4 million.

Market risk isn't a casino, like many people like to think or relate. It's a necessary evil (maybe not evil, but a necessary reality) to growing and preserving wealth over time. Looking at any particular day or particular year, you'll never know what's going to happen. You won't have any guarantees. But, over time, forgoing that necessary evil can actually harm you when you need it most.

Even Higher Withdrawals Can Work

Let’s push it further. What if instead of 4%, you took 8% annually over the same 25-year period?

In median outcomes, the retiree still ended with around $800,000. In poor outcomes, about $394,000. In strong outcomes, over $4.5 million.

And the income? It started higher than the annuity payout and stayed competitive throughout the entire 25-year retirement analysis.

Which brings us to an uncomfortable truth for annuities:

Many portfolios can sustainably generate comparable or higher income without surrendering control, liquidity, or upside.

Fees are Where Annuities Quietly Bleed Value

Now let’s talk about costs, because this is where shit gets real ugly, real fast.

A fee-only advisor charging 1% on a $1 million portfolio costs $10,000 in year one. Over ten years, assuming growth, total fees might land around $120,000.

For this fee, you often get services like:

Income & Retirement Planning
Investment Management
Tax Planning
Estate Planning
Insurance Planning

These are some of the most common services provided by RIAs like Harvest Horizon Wealth (shameless plug, I know).

A variable annuity, on the other hand, often layers multiple fees that aren't so easy to find or understand:

Mortality and expense fees
Administrative fees
Living rider fees
Death benefit rider fees
Sub-account investment fees

It’s not uncommon to see total annual costs of 3% to 4%.

At 3.8% annual fees (a fee level I recently came across) on a $1 million annuity, that’s $38,000 in year one alone. Over a decade, even accounting for reduced balances resulting from fees, total costs can approach $400,000.

What do you get for this fee? Generally:

The annuity

Complexity is a Feature, not a Bug

Despite how desperately annuity salesmen try to sell these things as simple solutions to a major problem, there’s a reason annuity contracts come with 50-plus pages of descriptions and disclosures. Disclosures that investors usually don't read, the advisor typically doesn't, explain completely, and probably doesn't even understand themselves.

There’s a reason you initial and sign over and over again. There’s a reason surrender charges, from my experience, can run as high as 9% if you want out early.

These are complex products by design. Complexity discourages scrutiny. Complexity makes comparisons harder. Complexity makes people defer to the salesperson.

And once you’re locked in or it's time for your heirs to settle the estate, good luck getting a hold of the person who sold it to you.

Are Annuities Ever Appropriate?

Sure. Sometimes.

It depends on how the rest of the portfolio is structured and individual circumstances.

I guess someone could make an argument in some cases, but I find it to be a very seldomly beneficial tool. Most of the annuities I see in the wild aren’t solving nuanced problems. They get sold because it's easy, the people who sell these things are typically under the "suitability" standard instead of the "fiduciary" standard and then financial planners are tasked with unwinding these things over time... good for advisors like me, I guess... job security isn't exactly a bad thing...

Why I Don’t Use Annuities Anymore

Earlier in my career, I used annuities. I’ve seen them work. I’ve also seen them abused, oversold, and misunderstood. Most commonly, I seen them oversold and sold to people who truly didn't need them and then weren't contacted again for years because it's a "suitability" transaction that doesn't require the advisor to continuously service the client.

As a fee-only advisor today, I don’t use them, and I don’t plan to. I believe they’re often the easy way out. A way to outsource critical thinking, reduce advisor liability and service requirements, and get a big paycheck at the same time.

I probably will never stop shit talking annuities. And I don't have to. People think that because I'm a fiduciary that I have to provide anything the client wants or ride the pine on my opinions of certain products, topics, or services. That couldn't be further from the truth.

I owe a duty to my clients to provide them the products and services that are in their best interest with honesty and integrity. No more, no less.

If you can get past the emotional pull of guarantees, if you can accept that uncertainty is the price of growth, and if you build a disciplined, well-structured portfolio, the math overwhelmingly favors maintaining control over your money.

Whether you’ve already been pitched an annuity or are currently holding annuities, if you want a second set of eyes on it, that’s a conversation worth having. Reach out, and let’s walk through your situation together so you can make a decision you actually understand and feel confident about.

Jose Alvarez, CFP^®, MBA

Financial Advisor

Founder

Harvest Horizon Wealth Strategies

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The information presented in this blog is the opinion of the author and does not reflect the views of any other person or entity unless specified. The author may hold positions in any securities discussed in this blog. The information provided is believed to be reliable and obtained from reliable sources, but no liability is accepted for inaccuracies. Data provided by Portfolio Visualizer. Assumptions: $1,000,000 portfolio, 4% withdrawal rate of portfolio balance at start of each year, 25-year retirement window, past 25-year performance blended by weight, returns and withdrawals gross of fees and taxes. Fees calculated based on gross portfolio balances from assumed rates of return. Data provided by Portfolio Visualizer is believed to be accurate, but HHWS accepts no liability for any inaccuracies. Past performance is not indicative of future performance. Investing carries risk including total loss of value. Images included in this blog may be created by artificial intelligence. Any resemblance to any existing persons, past or present, is purely coincidental. The information provided is for informational, entertainment, and educational purposes and should not be construed as advice. Advisory services are offered through Harvest Horizon Wealth Strategies LLC, an investment adviser registered with the state of Wisconsin.