Should You Buy an Annuity? The Truth Behind America's Most Controversial Retirement Product

🎯 The Big Question Everyone's Asking

You've heard the heated debates. Financial advisors are split down the middle. Some call annuities the "worst financial product ever created," while others swear they're retirement game-changers. Meanwhile, Americans just bought over $434 billion worth of annuities in 2024 alone – that's nearly 50% more than a decade ago.

So what's the real story? Are annuities brilliant retirement tools or expensive mistakes waiting to happen?

💡 What You'll Discover in This Episode

The Fee Controversy Decoded

• Variable annuities can charge 3-5% annually – but here's why that might not matter
• The hidden truth about "fee-free" indexed annuities (spoiler: nothing's really free)
• When high fees actually make financial sense (this will surprise you)

Real-World Insider Perspective

As someone who's both sold and managed annuities, Brandon shares:

• The specific situations where annuities are absolute game-changers
• When you definitely DON'T need an annuity (even if agents say you do)
• How annuities can protect against elder financial abuse
• The optimization strategies most people never consider

🔥 The Bottom Line You Can't Ignore

Here's what the data reveals: Americans hate living off their savings. We're wired to want guaranteed income streams, not to withdraw from investment accounts. This psychological reality is reshaping retirement planning, whether we acknowledge it or not.

The question isn't whether annuities are "good" or "bad" – it's whether they fit your specific retirement income strategy.

🎧 Perfect For You If:

• You're within 10 years of retirement and worried about income reliability
• You're already retired but struggling with market volatility stress
• You've been told annuities are "terrible" but want the real story
• You're curious about guaranteed income but confused by conflicting advice
• You want to understand why teacher retirement plans work so much better than everyone else's

📊 Eye-Opening Stats That Will Change How You Think About Retirement:

• Education sector workers have 90% participation in retirement plans vs. 59% general population
• Retirees with annuity income report "significant reductions" in financial worry
• Upper-middle-class retirees increase spending by over 40% when annuities provide 60-80% of income

Ready to cut through the noise and get the straight truth about annuities? This episode delivers the unbiased analysis you've been searching for, backed by real data and real-world experience.

⚡ Quick Listen Stats:

• Episode Length: ~30 minutes
• Complexity Level: Beginner to Intermediate
• Takeaway Factor: High – You'll have clear action steps by the end

🔗 Resources Mentioned:

• American Council of Life Insurers research
• JP Morgan retirement income studies
• Blackrock annuity confidence research
• TIAA-CREF education sector data

Transcript

00;00;00;00 - 00;00;44;22
Brandon
You are listening to the Yield to Reason podcast, where we strive to help you build the most important part of your retirement strategy. Because a retirement plan built with robust income sources is a retirement plan built for success. I am Brandon Roberts. This is episode number eight. And today we're addressing what many believe to be a very controversial topic.

00;00;44;25 - 00;01;15;01
Brandon
Should you buy an annuity? It's time to get serious about guaranteed income sources and fees. As we set off on a journey to help you build the retirement you deserve and the one you actually want. So annuities tend to be a rather controversial subject for what seems to be some very strange reasons. There are a group of people who believe they are probably the single worst financial decision you could ever make.

00;01;15;04 - 00;01;40;25
Brandon
And then there's a crowd of people who think they are probably the best retirement asset ever created. So there's there is a wide divergence here. And despite all of the arguing and the bickering annuities, they have existed for a long time. They continue to exist. And they're they're certainly not going to go away. So we're going to try and figure out what's good, what's bad, and whether or not annuities make any sense for you.

00;01;40;27 - 00;02;12;27
Brandon
Now, just looking at the numbers when it comes to annuities, what we find is data that supports the narrative that Americans are quite positive on the subject of annuities. In fact, 2024 annual sales of annuities were a little over $434 billion compared to ten years prior. That's up from 229 billion. That's a 47% plus gain in annuity sales over that ten year period.

00;02;12;29 - 00;02;46;26
Brandon
That's that's a lot. And comparatively, in 2024, total net inflows for long term US ETFs was 741 billion. So annuities comprise more than half of the net inflows going to ETFs. And and ETFs enjoy a much broader availability in terms of platforms. You can buy them in a number of retirement plans very easily. And there is certainly a significantly higher ease with which individuals can buy in and sell out of ETFs on an array of different platforms.

00;02;46;27 - 00;03;17;22
Brandon
The process of purchasing an annuity is far, far more complicated, shall we say. So the fact that that annuities still are bringing in annual sales numbers that are, again, a little more than half of what is net flowing into ETFs is a bit impressive. Quite honestly, I expected the the annuity sales to be less than that comparatively to to ETFs, which have essentially become the retirement saving asset.

00;03;17;24 - 00;03;43;09
Brandon
Mutual funds are still around and they're doing just fine. Don't don't get me wrong. But ETFs have become a much more favored platform given their wide availability and their constant trade ability throughout the day. Now, I'm going to start this discussion right at the beginning by noting what some might think is a potential bias and or possibly conflict of interest of of my own to note that I have an insurance license.

00;03;43;14 - 00;04;12;27
Brandon
I've had one for a long time. I have sold annuities before. I've used my insurance license to to put in place a lot more life insurance policies than annuity policies, but I have actively been in the retirement planning world for a long time and have absolutely sold annuities and have absolutely made money selling annuities. And I'm going to tell you right now that I think probably the biggest source of problem for annuities really comes from how broad a subject it is.

00;04;13;00 - 00;04;42;26
Brandon
When we say annuity, we like to pretend like it's one singular thing. But annuities encompass a couple of different possible situations or scenarios and are individually designed to tackle certain needs. So generally when we bring up annuities, income comes to mind. But not every single annuity out there is necessarily engineered to address the issue of income. It is no argument here.

00;04;43;01 - 00;05;16;24
Brandon
The majority of applications for annuities, which is to say that most people out looking at annuities, most people out talking about annuities, are definitely deeply grounded in the income discussion. But there are some duties out there that really aren't all that intended as income sources. And I'm going to set those aside, but I'm just going to note that because of that broadness in terms of what annuity means in totality, I think there's a large degree of confusion, not just among the general consuming public.

00;05;16;29 - 00;05;41;05
Brandon
I actually think there's a decent amount of confusion housed within the supposed professionals that are out selling these products, be they just individual insurance licensed agents or financial advisors who also get an insurance license because they want to incorporate annuities into their practice. There is a bit of a knowledge gap that exists even among the professionals that leads to some problems.

00;05;41;10 - 00;06;20;19
Brandon
So the threat of buying the wrong annuity, it's it's certainly not zero, but I know that most of the opponents on the subject of annuities aren't so much focused on that idea. Their focus on something else, and I'm sure a number of you are expecting this to be the conversation. They're focused on the fees and admittedly, there are a number of fees we can look at and tally up when it comes to certain styles of annuities that certainly seem extremely high.

00;06;20;21 - 00;06;45;23
Brandon
This is especially true when it comes to variable annuities. So these are annuities that take the cash value and they invest it in the market. And these annuities have a full disclosure of of the fees that they charge. And in some cases they are a bit eye widening when when you look at them. So generally speaking they break down into three categories.

00;06;45;24 - 00;07;15;00
Brandon
We have what's called the mortality and expense fee. This essentially covers an insurance company's ability to guarantee that if you buy an annuity and the value of the annuity goes down because of the market and you die, the insurance company will pay whomever your beneficiary is at least the initial investment you made into the annuity. So, for example, if you buy one of these annuities, start out with $100,000.

00;07;15;00 - 00;07;39;00
Brandon
There's a market correction. The cash value of the new annuity is 80,000 bucks. You pass away, the insurance company will pay your beneficiary $100,000, because that was the initial amount that you gave them. That is what is generally covered inside that that mortality and expense, oftentimes called M&A, expense on an annuity. And across the industry, that's usually something close to 1%.

00;07;39;01 - 00;07;55;20
Brandon
So 1% of the cash value deducted each and every single year covers this feature. And I know some of you might think, well, wait a minute, what happens if my underlying investments get to a point where now I've got like $200,000 inside the annuity? There's no risk to the insurance company that they're going to have to make up that difference anymore.

00;07;55;21 - 00;08;27;08
Brandon
Will the fee reduce or go away? No. No. Won't. So the next, common fee is attached to various riders. That would be, part of the annuity. And the most common rider that gets added to a variable annuity is an income style rider. So this this gives the annuity the ability to provide income without out what we refer to as annuities, which is the process of of handing all of your money over to the insurance company and and forfeiting it basically for a guaranteed income stream in return.

00;08;27;08 - 00;08;49;13
Brandon
So you don't have to do that when you have one of these riders. Instead, what you can do is start withdrawing a certain percentage from the the value of the annuity and guarantee that withdrawal amount every single year for as long as you're alive, regardless of what happens to the cash in the annuity. So that could that could actually go to zero.

00;08;49;16 - 00;09;14;18
Brandon
But your ability to continue to withdraw this, this income benefit from the annuity that remains in place. That rider is very common when it comes to a number of of annuities, variable annuities. And it's also very common in types of indexed annuities. But the fee for for that on variable annuities it ranges a bit. But typical range is somewhere between like one and 3%.

00;09;14;25 - 00;09;37;18
Brandon
So that's on top of the mortality and expense fee that we already covered. Then the last expense that you'll find in a variable annuity is the the investment account expense. So just like a mutual fund or an index fund that has an ongoing expense to the investment, the the investment accounts inside a variable annuity, they have expenses too.

00;09;37;21 - 00;10;06;00
Brandon
So they are going to range depending on the investment style or investment choice. But again, ranges probably between a half a percentage to 1.5%. So if we add that all up we're talking about like 3 to 5% on average being deducted from your cash value of the annuity each and every single year for the benefit of having this variable annuity contract.

00;10;06;02 - 00;10;32;05
Brandon
That's a lot. It's it's just a lot. There is there is no attempt I'm going to make to to save face on on the sake of annuities here. That's expensive. It seems expensive, especially in the face of going out and buying, for example, an index fund or an index ETF where the expense ratio is probably something closer to like 0.25%, maybe 0.1% in some cases, even less than that.

00;10;32;08 - 00;11;03;17
Brandon
It's obvious that in comparison, the the fee aspect here appears astronomical. Now, not all annuities that function in this way necessarily have fees to this degree. And there are certain styles of variable annuity that are lower cost. They're also indexed annuities that provide some of these same benefits, but they don't have a fee that is deducted from cash value of each and every single year.

00;11;03;23 - 00;11;38;12
Brandon
So there are cheaper ways to accomplish a similar goal here, which means it's a little unfair to paint the entire marketplace of annuities into this narrow corner of look at these fees that certain variable annuities have. This is damning to the entire, annuity concept and why you shouldn't own one. But perhaps the whole fee thing is just a silly conversation from the outset, because if we keep something important in mind about annuities, for the most part the purchase is about income.

00;11;38;12 - 00;12;21;05
Brandon
Yes, I know I mentioned that there are some annuities that really aren't about income. We're not we're not so much focused on those today. We're really, really wanting to talk about income in the sense of we're trying to build different sources of income, especially in retirement. This is why annuities come up. And if we look at this in the context of how much money am I committing to the cause of being able to guarantee a level of income that certainly turns the conversation a little bit, and the the fees side of it potentially becomes a little bit less significant now when it comes to some of the other annuity products that don't have fees per

00;12;21;05 - 00;12;56;17
Brandon
se, they do most of the time have provisions that make the growth of the cash in the annuity relatively slow. They do this at the sacrifice of accumulating a certain income benefit, which does in many respects kind of back you into a corner of if I purchase this annuity with the intention that I'm probably not going to take income from it or use it as an income source for maybe the next ten years, the income benefit will grow.

00;12;56;23 - 00;13;34;22
Brandon
Many of them will guarantee that. Some will give you a guarantee plus some potential higher benefit, others less of a guarantee with a much more higher potential income benefit that there's a lot of variation here. But if after ten years I decide not to use this annuity for its intended sake as as income, it's going to be really difficult to back away from this option, given the fact that I'll forfeit the income feature in what I'll walk away with cash wise is not very good.

00;13;34;25 - 00;13;57;18
Brandon
So the important thing to keep in mind is that buying an annuity means that you are trying to establish an income stream. That could be now, but it may also be in the future. And if you decide that that's not what you really wanted to do with that money, sometime later, that's going to put you in a not so optimal situation.

00;13;57;20 - 00;14;31;16
Brandon
So backing out really needs to be quite a substantial circumstance in order to justify forfeiting what the the income from the annuity was supposed to bring to the table. And that is frequently an area of contention for for people who don't like annuities. But I do think that it's worth taking some time to think about how you are going to go about building different income sources, and what degree of guarantee you're going to have within those income sources.

00;14;31;19 - 00;15;09;24
Brandon
And that's when annuities start to make a little more sense. That's not to say that annuities are a 100% solution. It it more appropriately thought in terms of what sort of income to I need to guarantee and what sort of income is okay if it's flexible. And the last thing I do want to point out, just to be sure about fees and annuities, be they variable annuities, be they indexed annuities with these income style riders on them, the fees that are assessed when they are generally do not impact the income benefit of the annuity.

00;15;09;28 - 00;15;41;06
Brandon
They only have an impact on the cash value that accumulates in the annuity. But despite the fees and even the idea that you really got to commit to the cause of generating income if you're going to buy an annuity, there are certainly reasons that many Americans should take an at least a good hard look at annuities. Doesn't mean they have to buy them, just means that they really should be thinking about annuities, or at the very least, what annuities do, and trying to replicate that.

00;15;41;06 - 00;16;08;17
Brandon
If they're not going to buy an annuity. Let me let me give you some statistics about retirement income. Average retirement income in the United States. Not surprisingly, 45% roughly of the average retirement income created in America is comprised from Social Security. So if we look at the average American and how they're going about creating income, 45% of that income is coming from Social Security.

00;16;08;20 - 00;16;37;16
Brandon
Now, stunningly, the next largest category of income generation for retirees is earned wages. It's about 21% of the income that they have in retirement. 15% of all retirees work at least part time to generate income for their retirement. That doesn't mean they're saving money for retirement. It means they are basically at a point where they have retired from whatever their career was, but they are continuing to work.

00;16;37;20 - 00;17;07;26
Brandon
In order to have money, they need to live and meet their income needs. Now here's another stunner. 16.5% of that income is supported by pension plans. So even still today, with pensions appearing long since dead, the average income for retirees in the United States still has a fairly large percentage coming from pension plans. Then it scales down considerably from there.

00;17;07;26 - 00;17;32;16
Brandon
When we get to investment brokerage, passive income, representing under 10% and, and the smallest, smallest percentage of them all, less than 5% of the income generated on average from Americans comes from their defined contribution retirement plan. Therefore, when k their IRA that that sort of soars. I've said it before, I'll say it again. I'll probably say it next week and the week after that.

00;17;32;20 - 00;18;07;19
Brandon
Americans hate living off their savings. If there is one data point that is consistent among all the retirement research that is done about the United States and retired Americans, it is simply that they do not have a comfort, nor a very strong willingness to create income from their savings when it is comprised of investments that they hold. They don't like selling those things to create income, to live.

00;18;07;19 - 00;18;46;02
Brandon
It's just not something they're all that comfortable with. Furthermore, research from JPMorgan and the American Council of Life Insurers both show us that retirees with more guaranteed income sources spend more money in retirement, and they feel more confident about their retirement. Research from JP Morgan shows us that individuals who have income that is supported by an annuity will spend typically 20 to 40% more in retirement if they're middle class and upper middle class, 40 plus percent more when they have income that is supported by an annuity.

00;18;46;04 - 00;19;32;02
Brandon
Research from Blackrock shows us that retirees who own an annuity that is currently providing them income state significant reductions in worry about outliving their assets, and worry when it comes to day to day expenses. That reduction is something like 70% across the board, both for outliving assets and worrying about day to day expenses. But one of the most, I would argue, the most interesting data point on the subject of researching retirement and looking at how annuities play a role in the task of creating income is how retirees from the education sector specifically compare to other employment sectors in the United States.

00;19;32;04 - 00;20;04;15
Brandon
Education is an interesting one because for whatever reason, this employment sector has long concentrated a big percentage of retirement assets in annuities, thanks primarily to TIAA-Cref. The data there shows us that those enrolled in an annuity focused plan have a significantly higher savings rate. Nearly 90% of all eligible participants participate in their retirement plan versus the general population.

00;20;04;15 - 00;20;31;17
Brandon
We're only 59% of eligible participants actually participate in the plan. And I can also tell you from experience that the yield you can achieve if you're thinking about this as yield cost on annuities and a lot of cases is extremely high relative to a number of other investment choices one could select in the pursuit of creating retirement income.

00;20;31;19 - 00;21;03;18
Brandon
So there is absolutely a case to be made for annuities. But as I mentioned earlier, I think that there is a problem that comes up with mismatching the right annuity to the right situation. And we find people often are dissatisfied with an annuity purchase, or at least the presentation of an annuity purchase, because they're simply being shown the wrong thing or being recommend did the wrong thing.

00;21;03;20 - 00;21;32;22
Brandon
The complexity in terms of the broadness of the annuity marketplace is intimidating. There's no way around it. If you're a layperson trying to look at annuities and figure out what's available and what makes sense, there's a lot of of unique nomenclature to the insurance industry that is not common vernacular inside the investment world. So you got to learn a whole new set of jargon that is going to take some time to get through.

00;21;32;22 - 00;22;00;20
Brandon
For those who really like to get deep into the details, and there are for sure a number of insurance agents out there who believe there has never been a better financial product ever created than annuities. And everybody should own one and ideally should put all of their money in one. And that is simply not the case. Annuities are not the 100% solution.

00;22;00;20 - 00;22;26;03
Brandon
They're not even a good idea for some people. They are best, best thought of as a way of creating guaranteed income to cover non discretionary income sources. So think of it like this. When you are planning income in retirement, you're going to have a certain amount of fixed income needs that I would dub non-discretionary. These are things that are never going to go away.

00;22;26;06 - 00;22;50;04
Brandon
These are things that you are always going to have to meet each and every single month. These would look like maybe your utility bill or your property tax bill if you if you own your own home, these are things that you will have to be able to cover month after month. And there is no paying them off. Then you have a certain amount of discretionary expenses.

00;22;50;10 - 00;23;21;03
Brandon
These are things that you kind of do for fun. These are things that maybe you can make adjustments to. So for example, you might say, hey, look, every Friday night I like to go out to dinner with my wife and we go to a movie. Well, if times really got tough, if there was a bad economic crash and your account balances went down and your assets weren't able to support the same sort of income lifestyle you were accustomed to, there's a chance you could probably just stay in and watch Netflix.

00;23;21;06 - 00;23;50;06
Brandon
So that's that's how we differentiate this discretionary versus non-discretionary income. Now when it comes to the non-discretionary income, there is certainly Social Security. And that is going to cover a big portion of non-discretionary income. But for a very large percentage of Americans, social Security alone won't meet the entire need. When it comes to non-discretionary income. This is where annuities shine extremely bright.

00;23;50;08 - 00;24;21;26
Brandon
You can fill in that difference with annuities and guarantee a level of income. And what you find in this case is you probably don't need to put nearly as much money into an annuity as as some people might suggest you do, but you do it because you have some additional income to meet. These fixed have to pay them expenses and not worry about income that's coming from sources that could potentially fluctuate more in more volatile economic conditions.

00;24;21;28 - 00;24;49;28
Brandon
Now, there are always going to be some people who are very risk averse, and they want much more than just their non discretionary income sources to be supported by guaranteed income. And they may choose to purchase much more annuity income, even for the things that they have some flexibility over, because they just like the solid guarantee of of income.

00;24;50;00 - 00;25;36;11
Brandon
That's that's fine. Those people are probably not in the majority, but they they exist. And then on the flip side of all this, there are absolutely a group of people who are very comfortable managing their own assets. They like the DIY nature of of investment management for themselves. They find various yielding assets and they choose those, and they produce substantial enough income in excess of what they need to not have to worry about changing economic conditions that might mean their net income, month over month might change a little bit because there's enough margin in their income need versus their income capacity to cover their need regardless of fluctuation.

00;25;36;13 - 00;25;57;03
Brandon
And those people do not need to buy an annuity. It's that simple. But a couple things to think about on the subject of whether or not you should buy an annuity, whether or not you need an annuity, there are some things that they systematize and automate and simplify for your retirement life. So managing your own assets is great.

00;25;57;05 - 00;26;14;23
Brandon
That's one of the reasons I have this podcast to help people in that process. But some of you may decide at some point that you don't want to do that anymore. One option is to find an advisor who will manage the account for you and continue to produce income as you were, so that you can continue to live your life in retirement.

00;26;14;28 - 00;26;36;23
Brandon
That's that is possible. It's a little bit trickier to do because not a ton of financial advisors are necessarily focused intently on the task of managing a portfolio for the sake of income creation. It takes a little bit more hands on approach. And so it's it's not as widely available, but they are out there. They're certainly out there.

00;26;36;26 - 00;27;01;28
Brandon
So that's one option. The other one is annuities to hand off the task of managing the income distribution and just getting a guaranteed check, essentially from an insurance company each and every single month. There is no right answer. It really comes down to how you feel about the task of managing the money yourself, or if you're going to hand it off to someone else, how exactly you're going to do that.

00;27;02;00 - 00;27;35;19
Brandon
Ideally, I think the model that I would use, this is the one that I advocate for. When people ask my opinion, most of the time I would look at again the non-discretionary versus discretionary income. I would cover non-discretionary income with annuity income to the degree that Social Security doesn't totally meet the need. And beyond that, for the discretionary stuff, I would tend to favor things like closed end funds or REIT's or a covered call type strategy.

00;27;35;22 - 00;27;56;24
Brandon
Any other dividend producing, options. Fine. Some people like master limited partnerships. That's that's totally fine if you like to wrap your head around that. Real estate is something that is harder to do if you're trying to do it casually. But if, if if you have a passion, go ahead. Those that discretionary side is where I would tend to fill that in.

00;27;56;27 - 00;28;17;08
Brandon
Some of that may be managed by you. Some of that could be managed by an advisor, if that's the way you want to set it up. That's that's all fine, but annuities really slide into the area of that gap between what Social Security can cover on the non-discretionary side, and then they don't really have to bridge into the more optional income aspect unless you want them to.

00;28;17;11 - 00;28;38;10
Brandon
And if you do, you do. And there's nothing wrong with that. The fee side of it really doesn't matter when you're trying to establish an income, it just doesn't. So you have to look at annuities and value them by the income they can produce. And whether or not that meets the goal that you have in front of you.

00;28;38;12 - 00;29;01;18
Brandon
And if it's even conceivable with the money that you have set earmarked for the sake of buying an annuity. Now, if you're a very now, if you fall deep into the DIY camp and really hate the idea of having to work with some other person to transact any sort of of investment or savings plan, annuities are going to leave you frustrated because you really can't DIY annuities.

00;29;01;21 - 00;29;44;27
Brandon
So if you're going to go down that road, you're going to work with an agent somewhere, somehow, who's going to set you up with an annuity policy to then create income, and you're probably going to lean on that person even after the purchase for some administrative tasks. That's just the way they work. And if you really like sort of managing everything from a zoomed out view inside your brokerage account at whichever company you choose, again, annuities are going to potentially be a little problematic for you, but there is a large marketplace of annuities with a number of very unique, and I would even argue impressive income aspect that you probably don't want to write

00;29;44;27 - 00;30;14;20
Brandon
off until you've thoroughly investigated what's available to you. Because even if you really enjoy managing your own accounts and you're doing a good job at it, you might find there are some annuities that can add benefit to the overall cause of income yield for you. That's everything for me today. But of course, have no fear, I'll be back next week with more tips and tricks in my never ending pursuit of helping you establish a rock solid retire income.

00;30;14;22 - 00;30;30;28
Brandon
And of course, never, never forget real wealth doesn't just add up. It writes, checks.