Hi, Im Stan The Annuity Man, Americas Annuity Agent, licensed in all 50 states. Todays video is a little different. A client of mine sent me a Dave Ramsey video and asked for my commentary. I thought, “Why not?”.
I want to make one thing clear before we start: Dave Ramsey has done a great job of helping people get out of debt. Years ago, I attended one of his presentations in Orlando, Florida. He literally packed an arena, and it was an impressive event. He had people stand up and share their stories about becoming debt-free. Ive also listened to his radio show, so I certainly know who he isâeveryone does.
I think Dave Ramsey and his daughter have done great work, and Im a fan. That being said, I’m going to offer them my services as a Fixed Annuity expert because I think I can help their readers.
This is my first time doing something like thisâcommenting on another videoâbut I hope to do more in the future. I’m going to quote from this Dave Ramsey video, stop at key points, and give my thoughts in this blog.
I think youll find this valuable, and if Dave or his team reads this, I believe theyll appreciate the additional clarification I provide for their listeners. As the top independent annuity agent in the country, licensed in all 50 states, I bring expertise to the table.
The Short Answer: Absolutely Not!
If you’ve ever tuned into Dave Ramsey’s radio show or read his financial advice, you probably already know the answer to this question Dave Ramsey does NOT like annuities In fact, he’s quite vocal about his dislike for them.
But is his anti-annuity stance completely justified? That’s what we’re going to explore in this article We’ll look at Dave’s arguments against annuities, analyze some of his claims, and give you a balanced view so you can make your own informed decision.
Why Dave Ramsey Dislikes Annuities
Dave Ramsey has several reasons for advising against annuities. Let’s break down his main arguments:
1. High Fees and Commissions
One of Dave’s biggest complaints about annuities is that they have big fees that cut into your returns. He points to:
- Commission fees (which can be up to 10%)
- Surrender charges
- Insurance charges
- Investment management fees
- Rider charges
2. Limited Access to Your Money
Dave emphasizes that annuities typically lock up your money with surrender periods. If you need to withdraw more than the allowed amount (usually 10% annually), you’ll face hefty surrender charges.
3. Lower Returns Compared to Mutual Funds
Dave frequently compares annuities unfavorably to growth stock mutual funds. He argues that you could do much better with mutual funds that have historically returned 10-12% over time.
4. Complexity
Ramsey believes annuities are unnecessarily complex financial products that most people don’t fully understand before purchasing.
5. “Bad Savings Account” Comparison
Dave called fixed annuities “a poor savings account with an insurance company” on one radio show segment, implying that they have no value at all.
What Dave Gets Wrong About Annuities (According to Critics)
According to annuity experts and financial advisors who disagree with Ramsey, here are some misconceptions in his anti-annuity stance:
1. Treating All Annuities the Same
One of the biggest criticisms of Dave’s position is that he tends to lump all annuities together. In reality, there are several types:
- Fixed annuities
- Variable annuities
- Fixed index annuities
- Immediate annuities
- Deferred annuities
Each type has different features, fee structures, and potential benefits.
2. Misrepresenting Fee Structures
Many variable annuities have high fees, but many fixed and fixed index annuities have low or no annual fees unless you add extra riders.
3. Ignoring Lifetime Income Guarantees
Dave often overlooks one of the primary benefits of certain annuities: guaranteed lifetime income. This is something no mutual fund can provide, regardless of market performance.
As one critic notes: “An annuity with a Guaranteed Lifetime Withdrawal Benefit provides income for as long as you live—even if your account runs out.”
4. Unfair Market Comparisons
Critics argue that comparing annuities to stock market returns is like comparing apples to oranges. Annuities aren’t designed to compete with stocks but rather with bonds and CDs, offering principal protection and guaranteed income.
5. Overlooking Tax Benefits
Annuities provide tax-deferred growth, and non-qualified annuities don’t have Required Minimum Distributions (RMDs), giving retirees more control over when they pay taxes.
What Actually IS an Annuity?
Before forming an opinion, it’s important to understand what an annuity actually is.
A promise made between you and an insurance company is called an annuity. There are payments you make to the insurance company. In exchange, they promise to grow your money and send you payments when you retire.
The goal of an annuity is to provide a steady stream of income throughout your retirement years. There are several ways to customize an annuity:
Payment Options:
- Single premium (one large payment)
- Multiple premiums (series of payments over time)
When Payments Begin:
- Immediate annuities (start paying right away)
- Deferred annuities (payments begin at a future date)
Duration of Payments:
- Lifetime (continues until death)
- Fixed period (set number of years)
Types of Annuities:
- Fixed annuities: Provide a guaranteed interest rate
- Variable annuities: Money is invested in mutual funds, so returns vary
- Fixed index annuities: Returns are tied to a market index with principal protection
When Might an Annuity Actually Make Sense?
According to Ramsey Solutions, an annuity might make sense in very limited circumstances:
“The only time you should even think about adding a variable annuity to your investment strategy is when you’ve already paid off your house completely AND maxed out all your other tax-favored retirement plans. That means you’re contributing up to the limit on your 401(k) and Roth IRA.”
Even then, they suggest exploring other options first, such as:
- Health savings accounts
- Taxable investment accounts
- Real estate
My Take: Are Annuities Really That Bad?
I think the truth about annuities lies somewhere in the middle. Dave Ramsey provides solid advice on getting out of debt and building wealth, but his one-size-fits-all approach to annuities might not work for everyone.
For some retirees, especially those worried about market volatility or outliving their savings, an annuity could provide peace of mind through guaranteed income. This is something that cannot be discounted, especially for risk-averse individuals.
However, Dave is right about the complexity and potential high fees of some annuity products. If you’re considering an annuity, you should:
- Understand exactly what you’re buying
- Know all the fees involved
- Consider how it fits into your overall retirement strategy
- Compare it with other retirement income options
- Consult with a financial advisor who doesn’t earn commissions from selling annuities
Pros and Cons of Annuities
Let’s summarize the potential benefits and drawbacks:
Potential Benefits:
- Guaranteed income stream
- Principal protection
- Tax-deferred growth
- Protection from market volatility
- Potential death benefits for beneficiaries
Potential Drawbacks:
- Potentially high fees and commissions
- Limited liquidity during surrender periods
- Lower returns compared to direct market investments
- Complexity making them hard to understand
- May not keep pace with inflation
Bottom Line: Should You Listen to Dave Ramsey About Annuities?
Dave Ramsey offers excellent advice on debt reduction, emergency funds, and building wealth. However, his blanket dismissal of all annuities overlooks potential benefits for certain individuals, particularly those in or near retirement who value guaranteed income over maximum growth potential.
The decision about whether an annuity is right for you should be based on your specific financial situation, goals, and risk tolerance—not just on Dave Ramsey’s opinion.
If you’re considering an annuity, do your homework. Research different types, understand the fees, and consider working with a fee-only financial advisor who can provide unbiased guidance based on your specific needs.
Remember, there’s no one-size-fits-all solution in retirement planning. What works for one person may not work for another. The key is to make an informed decision based on your unique circumstances and goals.
FAQs About Dave Ramsey and Annuities
Does Dave Ramsey recommend any type of annuity?
No, Dave Ramsey consistently advises against all types of annuities, though he acknowledges that variable annuities might be considered in very limited circumstances (after maxing out all other retirement accounts and paying off your home).
Why does Dave Ramsey specifically dislike fixed annuities?
Dave has stated that fixed annuities “don’t pay squat” and compares them to low-yield CDs with high fees. He believes they offer poor returns that won’t keep up with inflation.
What does Dave Ramsey recommend instead of annuities?
Dave typically recommends investing in good growth stock mutual funds through tax-advantaged accounts like 401(k)s and Roth IRAs. He suggests these can provide better returns over time.
Is Dave Ramsey biased against annuities?
Critics suggest that Dave has a bias toward mutual funds even in retirement. They argue that his expectation of 12% annual returns from mutual funds is unrealistic and that he fails to acknowledge the value of guaranteed income in retirement planning.
What’s the biggest misconception Dave Ramsey promotes about annuities?
According to critics, Dave’s biggest misconception is treating all annuities as the same, without acknowledging the significant differences between various types and their potential benefits in certain situations.
Surrender Charges and Returns
Dave:
The other thing you need to think about is that you’re probably going to make 2% on this thing instead of 2010 or 2012. “.
Tanya:
Dave:
And so, if your surrender charge is 10%, take it and move it.
Tanya:
Dave:
Put it into something that makes 10% more the first year you recoup.
Tanya:
Okay, gotcha. That makes sense.
Dave assumes Tanyaâs annuity is earning only 2%, but not all fixed annuities earn that little. For example, Multi-Year Guarantee Annuities (MYGAs)âthe annuity industryâs version of a CDâcurrently offer rates higher than 2%.
Daveâs advice to take the surrender charge hit and move to mutual funds assumes sheâll earn 10% annually. While mutual funds have historically performed well, there are no guarantees. Without knowing the specific annuity product, Iâd caution against rushing into that decision.
Dave:
They put you in a surrender charge product inside of a retirement account, which is absolutely screwed up. Thats ridiculous. You have two sets of fees on this money now if you need to get to it.
Dave dislikes the idea of tax-deferred annuities inside tax-deferred accounts, and I understand his concern. You donât get double tax deferral. But if Tanya wants contractual guarantees, like lifetime income or principal protection, then it might still make sense for her to use her IRA funds.
Dave:
“An annuity is a life insurance company product. Itâs a savings account with a life insurance company.”
Dave simplifies annuities as savings accounts, but thatâs only true for certain types, like MYGAs. Fixed Annuities also include Immediate Annuities, Deferred Income Annuities, and Qualified Longevity Annuity Contracts (QLACs). Each serves a specific purpose.
Addressing the Surrender Charge
Dave:
“Iâll contact them and see if they can reverse that and put it back into mutual funds.”
Tanya:
“Because they said it would be like a 10-year process of taking a tenth out each year.”
Dave:
“Oh, so they put you in something inside of a retirement account with a surrender charge.”
Tanyaâs Response:
Dave:
Oh, these guys are absolute screwballs.
Dave calls the people who sold her the annuity “screwballs.” They might be. From the description, Tanya purchased what sounds like a 10-year Deferred Index Annuity inside a retirement plan.
Dave suggests cashing it out and buying mutual funds. Tanya could cash it out if sheâs within the free-look period, which allows annuity buyers to get a full refund. However, if that period has passed, she might be stuck unless the company makes an exception.
While Dave dislikes annuities in retirement accounts, Iâd argue that you buy an annuity for its contractual guarantees, not what it might do. If Tanya needs those guarantees, then an annuity in her IRA could make sense. That said, I donât think she fully understands what she purchased, which is a problem.