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Sound Advice: September 9, 2026

Fixed annuities are usually among the worst investments.

Fixed annuities are not inherently bad, but they are often poor investments when compared with low-cost alternatives, especially for someone who already has adequate retirement income and doesn't need an insurance guarantee.

Here are the main reasons:

1. Low expected returns

A fixed annuity typically provides a guaranteed interest rate, but that rate may be substantially below what you could reasonably expect from a diversified portfolio of stocks and bonds over a long retirement.

The trade-off is intentional: You surrender some upside in exchange for guarantees.

2. Inflation can quietly eat away at your money

Suppose an annuity earns 4% while inflation averages 3%. Your nominal balance is growing, but your purchasing power is increasing by only about 1% before taxes.

For a retirement that could last 25–30 years, inflation risk matters enormously.

3. Your money can be difficult to access

Fixed annuities commonly have surrender periods lasting three to 10 years, during which early withdrawals beyond a free allowance incur declining surrender charges.

What Is a Surrender Period? The surrender period is the timeframe after purchasing a fixed annuity during which withdrawing more than the allowed free amount triggers a surrender charge, a percentage-based fee deducted from your withdrawal. This period protects the insurer’s long-term investment strategy and allows them to offer higher guaranteed rates and benefits.

4. Tax deferral isn't as valuable as it sounds

Annuities are tax-deferred, which sounds attractive. But if you are investing through a taxable account, there are often more flexible ways to manage taxes.

And when you eventually withdraw earnings from a nonqualified annuity, they are generally taxed as ordinary income, rather than potentially receiving the lower long-term capital-gains rate available for many investments.

5. You can lose a valuable tax benefit at death

Nonqualified annuities generally don't receive the same step-up in cost basis that appreciated stocks and many other capital assets can receive at death.

That can make annuities particularly unattractive as a legacy asset.

6. Complexity can obscure the economics

Annuity contracts can contain provisions concerning:

  • surrender charges
  • renewal rates
  • minimum guarantees
  • withdrawal provisions
  • riders
  • mortality/expense charges
  • commissions
  • insurer crediting methods

The product can look simple—"guaranteed 5%"—while the actual economics are considerably more complicated.

7. The insurance company is the guarantor

The guarantee isn't the same thing as a government guarantee. Your payments ultimately depend on the financial strength of the issuing insurance company, subject to the applicable state guarantee association protections and limits.

8. The salesperson's incentive can be substantial

This is one of the biggest issues.

Fixed annuities are frequently sold through commissioned insurance agents. The commission is embedded in the economics of the product rather than appearing as an obvious annual investment management fee. That doesn't automatically make the recommendation inappropriate—but it creates a potential conflict of interest.

9. You're locking in today's rates

If you buy a multi-year fixed annuity and interest rates subsequently rise, you may be stuck earning the lower contractual rate unless you pay a surrender charge to get out.

Conversely, if rates fall, the guarantee becomes more valuable.

10. A bond/CD portfolio can provide more flexibility

For someone primarily seeking safety, it's worth comparing a fixed annuity with:

Treasuries + CDs + high-quality bonds

You can construct a ladder with different maturities, retain substantially more liquidity, and generally have much greater transparency about what you own.

But here's the important distinction

The argument against fixed annuities is not that guarantees have no value.

They can make sense for someone who says:

"I don't care about maximizing my expected return. I want a predictable amount of money and I am willing to sacrifice liquidity and some potential return to get it."

That's a legitimate objective.

The problem arises when someone is sold an annuity as an investment when what they really need is a simple, diversified portfolio.

Rule of thumb:

If the objective is long-term growth and retirement flexibility, favor a low-cost diversified portfolio.

If the objective is guaranteed income for life, an annuity deserves consideration—but compare the specific annuity against alternatives and look very carefully at the fees, guarantees, surrender provisions, inflation protection, insurer, and salesperson compensation.

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