Audiobook
Listen to Chapter 10
"If I had asked people what they wanted, they would have said faster horses."
— Henry Ford
No financial strategy is more polarizing than annuities. Some financial professionals love them. Some hate them. And some claim to hate them—but only certain kinds. This is all extremely confusing for the average investor.
What the Experts Say
Wade Pfau, PhD, CFA
Professor of Retirement Income, American College of Financial Services
"A fixed-indexed annuity serves as a tool to enhance retirement asset protection by managing market volatility and the sequence of returns risk in the pivotal years leading to retirement."
Roger Ibbotson, PhD
Professor Emeritus of Finance, Yale School of Management
"I'm not necessarily advocating you go all in on fixed indexed annuities. I think combinations of stocks and bonds and fixed indexed annuities are good."
Suze Orman
Personal Finance Expert
"If you don't want to take risk but still want to play the stock market, a good index annuity might be right for you."
What changed? Partly the products, partly the rate environment, partly evolving perspectives. Today's retirees are increasingly recognizing that there is an important place for an annuity when creating a retirement plan.
Our belief:Annuities can be a wonderful tool if used properly. They can also be a real headache if used improperly—or if you're sold one as a standalone solution rather than as part of an overall financial plan.
Two Main Use Cases for Annuities
#1: Guaranteed Lifetime Income
For those in need of additional guaranteed income, an annuity protects against longevity risk—living too long. It provides an uncorrelated income stream that isn't dependent on stock or bond markets. When a market downturn arrives, your annuity income just keeps coming.
#2: Safe Growth
If you're expecting equity market returns, you'll be disappointed. But a balanced portfolio needs stable fixed income. The 2022 bond crash(Bloomberg Aggregate down 13%+) exposed traditional fixed income's rate risk. An annuity may provide safe, stable growth without that vulnerability.
The Rate Environment Has Changed Everything
When this book was originally published in 2019, annuities were a tougher sell. Interest rates were near historic lows—fixed annuity rates were 2-3%, payout rates were modest, and FIA caps were tight. That world is gone.
The dramatic Fed rate-hiking cycle of 2022-2024 reshaped fixed-rate insurance products:
MYGAs
Even after 2025-2026 easing, rates remain meaningfully higher
Immediate Annuity Payouts
A 65-year-old today receives substantially more monthly income
FIA Caps & Participation
Insurers' general accounts earn more on underlying bonds
The same lesson from Chapter 2 applies: don't try to perfectly time the rate environment. Rates today are higher than 2019. Whether they'll be higher or lower in six months is unknowable. If a fixed annuity makes sense in your plan, lock it in.
Connection to Pension Risk Transfers
Remember the pension risk transfers from Chapter 2—GM offloading pension liabilities to Prudential? The products powering those mega-deals are the same products in this chapter. When retirees buy an MYGA or FIA, they're participating in the same balance sheet now responsible for billions in former corporate pension obligations.
Annuities are not exotic instruments. They are the standard mechanism by which insurance companies have been providing guaranteed lifetime income for over a century—for individuals, corporations, and entire pension plans.
Annuities Are Not Suitable for Everyone
Your circumstances, income, financial resources, objectives, tolerance for market risk, and investment timeline are all unique to you. There is no one-size-fits-all solution.
An annuity is a contract you purchase from an insurance company. For the premium you pay, you receive certain fixed and/or variable growth options that compound tax-deferred until withdrawn. Most annuities allow you to withdraw 5-10% annually without penalty, but excess withdrawals may incur surrender charges.
Important: Withdrawals before age 59½ are subject to a 10% IRS penalty, and all withdrawals may be subject to ordinary income taxes.
The Four Types of Annuities
The Deluxe Model — Variable Annuity
Think: Mutual fund inside an insurance wrapper
Comprised of professionally managed subaccounts (like your 401(k) options). You can allocate across investment objectives based on your risk tolerance. Earnings grow tax-deferred, and you can transfer between subaccounts without triggering taxes.
Upside
Market growth potential, tax deferral, optional income riders
Downside
Fees of 2-4%+ annually, vulnerable to market losses
Drive Off the Lot — Immediate Annuity (SPIA)
Think: Similar to your pension
Use a lump sum to purchase guaranteed payouts that start immediately. Income is guaranteed for a specified period or for life—even your spouse's life—no matter how long you live.
Payout depends on: amount invested, interest rates at purchase, payout option, life expectancy, and any additional features.
2026 Advantage: A 65-year-old buying lifetime income today can lock in roughly 30%+ more monthly income than the same buyer could in 2020. For retirees who took the lump sum and want to reconstruct a "personal pension," this is the most direct way.
Caution:With the Life Only option, you forfeit access to assets. When you die, remaining value goes to the insurer unless you selected "period certain" or "joint and survivor" features.
Safety Rated — Fixed Annuity / MYGA
Think: Similar to a CD (but not FDIC-insured)
Provides a guaranteed interest rate for a specific number of years (typically 3, 5, 7, or 10), protecting you from market fluctuations.
Higher Rate
vs. comparable bank CDs
Tax-Deferred
No tax until withdrawn
Not FDIC
Backed by insurer strength
In 2019, MYGAs paid 2-3%. Today, even after rate easing, they compete favorably with bank products and Treasuries while offering tax-deferral. For Big Three retirees looking to park money safely for 3-10 years, MYGAs deserve a fresh look in 2026.
Hybrid — Fixed Indexed Annuity (FIA)
Think: Fixed income with upside potential
The insurer credits your account with a guaranteed minimum rate plus potential gains linked to a market index (usually S&P 500). At each contract anniversary, index growth is credited up to a cap or formula.
Three Crediting Methods:
i. Participation Rate
If set at 70% and index gains 10%, you receive 7%.
ii. Spread / Margin / Asset Fee
Index return minus a percentage. If index gains 10% with 2% spread, you receive 8%.
iii. Interest Rate Cap
Full participation up to a cap. If cap is 9% and index returns 12%, you receive 9%.
Key Benefit: Your principal is guaranteed against market loss from day one. Interest gains lock in each anniversary and cannot be taken away in a future downturn.
In Simple Terms
Variable: Like a mutual fund in an insurance wrapper—upside and downside exposure
Immediate: Like a pension—payments for life, typically no cash value to pass on
Fixed/MYGA: Like a CD—lump sum in, fixed rate for set period (not FDIC-insured)
FIA: Like fixed income with upside—linked to market index but principal protected
Annuity Riders
Riders are optional add-ons that enhance or tailor annuity features:
Lifetime Income Rider
Guaranteed income for life without surrendering principal access
Death Benefit Rider
Enhances amount passed to beneficiaries
Long-Term Care Rider
Accelerated income if a qualifying care event occurs
Cost-of-Living Rider
Annual increases to help offset inflation
Riders are not free. Each carries an annual cost, typically as a percentage of contract value. The right combination depends on your goals.
The Bottom Line
Annuities are tools. Like any tool, they're useful in some hands and dangerous in others.
The Right Annuity Can:
- Replace lifetime income you gave up with the lump sum
- Provide downside protection when markets fall
- Lock in meaningful guaranteed rates
- Offer tax-deferred growth
- Address specific risks with riders
The Wrong Annuity Can:
- Lock up too much money for too long
- Charge fees that erase the benefits
- Underperform simple alternatives
- Create complexity without value
- Serve the salesperson more than you
This is why the who of an annuity recommendation matters as much as the what. We covered how to find the right financial professional in Chapter 8. When evaluating any annuity recommendation, the same questions apply:
Before Buying Any Annuity, Ask:
- •Is this person a fiduciary?
- •Are they showing you alternatives?
- •Have they explained the surrender schedule, fees, and realistic upside in writing?
If any of those answers are unclear, slow down.
Used appropriately, annuities are one of the most powerful tools available for replacing the income guarantee you walked away from when you elected the lump sum—which is precisely what Big Three retirees are most often trying to solve for in retirement.