7 Common Annuity Mistakes Retirees Make (and How to Avoid Them)

One of the most common mistakes is committing too much of your savings to a single annuity contract. While annuities offer valuable guarantees, they also have surrender periods that limit your access to funds.

The rule of thumb: Never put more than 40%–60% of your total liquid savings into annuities. Keep the remainder in liquid, accessible accounts (savings, CDs, brokerage) for emergencies, large purchases, and flexibility.

Why this matters: Life is unpredictable. Medical expenses, home repairs, family emergencies, and opportunities all require accessible funds. If 90% of your money is locked in an annuity with a 7-year surrender period, you may face significant penalties to access it when you need it most.

A licensed professional should always ask about your total financial picture — not just the amount you want to invest — before recommending an annuity.

There are fundamentally different types of annuities designed for different purposes:

- MYGAs are for safe, guaranteed growth (like a CD alternative) - FIAs are for market-linked growth with downside protection - FIAs with income riders are for guaranteed lifetime income - SPIAs are for immediate income needs - Variable annuities are for market participation with tax deferral (higher risk)

The mistake is choosing a product that does not match your primary goal. For example, buying an FIA with an income rider when your goal is simply to earn a higher rate than a CD — a MYGA would be simpler, cheaper (no rider fees), and more appropriate.

Or buying a MYGA when your primary concern is lifetime income — you would be better served by an FIA with an income rider or a SPIA.

How to avoid it: Start with your goal, not the product. Define what you need (growth, income, protection, legacy) and then find the product that best serves that goal.

Surrender charges are clearly disclosed in every annuity contract, but many buyers do not fully appreciate their impact until they need to access their money.

The fix: Before purchasing, ask yourself: "Can I leave this money alone for the entire surrender period?" If the answer is "probably" or "I think so," that is not good enough. The answer should be a confident "yes" for the full amount.

Also, understand the free withdrawal provision (typically 10% per year) and any waivers for nursing home confinement, terminal illness, or RMDs. These provisions provide meaningful flexibility within the surrender period.

Annuity rates, features, and fees vary significantly between carriers. A 5-year MYGA rate can differ by 0.50%–0.75% between carriers, and income rider payout rates can vary by 0.5%–1.0% — which translates to hundreds of dollars per month in lifetime income.

The fix: Always compare at least 3–5 carriers before purchasing. A licensed independent agent (as opposed to a captive agent who represents only one company) can run multi-carrier comparisons and show you the best options available in your state for your specific situation.

Do not assume that the first product presented to you is the best one available. It may be — but you will not know unless you compare.

This is perhaps the most dangerous misunderstanding in annuity sales. The benefit base (or income account value) of an income rider is not money you can withdraw as a lump sum. It is a calculation tool used to determine your guaranteed income payment.

Some illustrations show the benefit base growing at 7%–8% per year, which looks impressive. But that growth applies only to the income calculation — not to the actual cash you can access. The actual account value may be growing at a much lower rate (or not at all in flat market years).

The fix: When reviewing an annuity illustration, always look at both the benefit base AND the actual account value projections. Ask your advisor to explain the difference clearly. If they cannot or will not, find a different advisor.

Free dinner seminars are a common marketing channel in the annuity industry. There is nothing inherently wrong with attending one — they can be educational and informative. The mistake is making a purchasing decision at or immediately after the event.

The fix: Never sign an application at a seminar or during the first meeting with an advisor. Take the materials home, review them carefully, compare with other options, and sleep on it. A legitimate advisor will never pressure you to make an immediate decision.

Also, verify the advisor's credentials: check their state insurance license, look for any disciplinary history on your state's Department of Insurance website, and ask about their compensation structure (commission-based, fee-based, or both).

Many annuity owners purchase a contract and never look at it again. This can result in missed opportunities:

- MYGA maturity: When your MYGA term ends, the renewal rate may be significantly lower than current market rates. You may be able to transfer to a new MYGA at a higher rate via a 1035 exchange. - Income rider activation: If you have an income rider, there may be an optimal age to activate it. Waiting too long can mean missing years of income payments. - Beneficiary updates: Life changes (marriage, divorce, death of a spouse) may require updating your beneficiary designations. - Better products: The annuity market evolves. Products available today may offer better rates, lower fees, or more favorable terms than what was available when you purchased.

The fix: Review your annuity annually, or whenever a major life event occurs. A licensed professional can help you evaluate whether your current contract is still the best fit or whether a change would benefit you.