The senior citizen population is large, growing, and by some estimates, hold two-thirds of the individual wealth in the United States. By the year 2050, the number of seniors is projected to be nearly twice as large as it was in 2012. Since many seniors have been able to save up a nest egg for their retirement years, they are often targeted with fraud in a way that younger people with no savings are not.
With billions of dollars in sales to be made, insurance companies may offer commissions as high as 10 percent to agents to sell products like long-term deferred annuities to senior citizens. In this environment, consumers should arm themselves with information to protect their interests. The Attorney General provides the following tips to consider before purchasing an annuity:
Have you been thinking about purchasing an annuity for your retirement plan? Hold up just a minute! While annuities can provide steady income streams for some retirees, they’re definitely not for everyone. Before you sign that contract, let’s take a real look at who should steer clear of these complex financial products.
As a financial advisor for more than 15 years, I’ve seen too many people buy annuities without fully understanding if they’re a good fit for them. Today, I’m going to explain in clear, simple terms who SHOULD NOT buy an annuity.
What Exactly Is an Annuity Anyway?
Before diving into who should avoid annuities, let’s quickly cover what they actually are.
An annuity is essentially an insurance contract that allows you to pay a premium (usually a lump sum) in exchange for regular payments later on. Insurance companies offer these products as a way to provide guaranteed income during retirement.
There are three main types:
- Fixed annuities: Provide guaranteed interest rates
- Variable annuities: Returns based on investment performance
- Indexed annuities: Returns tied to market index performance
Annuities can be immediate (payments start within a year) or deferred (payments start later), They transfer the risk of outliving your money or market volatility from you to the insurance company
7 Types of People Who Should NOT Buy an Annuity
1. People Under Age 50
“Generally, we don’t recommend annuities to people under age 50 [because] there are tax penalties for withdrawals before age 59 ½,” says Jonathan Viscounte, a financial expert.
If you’re younger than 50, you simply have too much time before retirement to lock your money away in an annuity. The IRS imposes a 10% penalty on early withdrawals, plus you’ll pay ordinary income tax on any gains. That’s a double whammy you don’t need!
Young investors typically have better alternatives like:
- 401(k) plans with employer matching
- Roth IRAs with tax-free growth
- Traditional brokerage accounts with greater liquidity
2. People with Adequate Income Sources Already
You probably don’t need an annuity if you have a good pension and enough Social Security benefits to cover your basic needs in retirement.
Check to see if your guaranteed income sources are enough to cover your basic living costs. If they are, you may not need an annuity and should put your money somewhere else where it has a better chance of growing.
3. People in Poor Health
Lifetime income annuities work best for people who will live a long time. It’s easy to see that the longer you live, the more payments you’ll get, which makes the initial premium worth it.
But if you’re in poor health or have a family history of shorter lifespans, an annuity might not be the best use of your funds. In these cases, other financial products might serve you better, such as:
- Life insurance (to leave money to heirs)
- Investments with higher growth potential
- More liquid assets that can be used for medical expenses
4. People Without Adequate Emergency Savings
One of the biggest drawbacks of annuities is their lack of liquidity. Once you’ve committed your money, it’s generally locked up unless you pay hefty surrender charges (which can be as high as 10% in the early years).
If buying an annuity would drain your emergency fund or leave you without adequate liquid savings, STOP! Financial experts typically recommend having 3-6 months of expenses in easily accessible accounts before considering less liquid options like annuities.
5. People Focused on Short-Term Savings Goals
Got big plans in the next few years? Maybe you’re saving for:
- A home purchase
- Your child’s college education
- Starting a business
- An upcoming wedding
If you’re working toward these kinds of short-term goals, an annuity is definitely not the right vehicle. The long-term nature and surrender charges make annuities poorly suited for money you’ll need access to in the near future.
6. People Who Haven’t Maximized Other Retirement Accounts
Before even thinking about an annuity, you should maximize contributions to tax-advantaged retirement accounts like:
- 401(k)s (especially if your employer matches)
- Traditional or Roth IRAs
- HSAs (if eligible)
These accounts typically offer better tax advantages, lower fees, and more flexibility than annuities. I always tell my clients: “Max out the simple stuff first before complicating your financial life.”
7. People Who Haven’t Done Their Research
Annuities are complex financial products with lots of moving parts, fees, and restrictions. If you don’t fully understand what you’re buying, you shouldn’t be buying it!
I’ve seen too many clients who were sold annuities by commission-hungry agents without really understanding the product. They were shocked to learn about:
- High surrender charges if they wanted to access their money
- Complex fee structures that eat into returns
- Limited growth potential compared to other investments
- Tax implications they weren’t prepared for
The Biggest Myths About Annuities
There are several misconceptions floating around about annuities that might lead people to purchase them when they shouldn’t:
Myth 1: Annuities have lower growth potential
Truth: Some annuities can grow competitively compared to managed portfolios, but often with higher fees.
Myth 2: Income annuities will run out of money
Truth: While annuities can deplete principal, investments carry the same risk – but without the insurance component.
Myth 3: Annuities are too expensive
Truth: Some annuities have high fees, but others have minimal costs. You need to read the fine print!
Myth 4: The stock market performs well enough to make annuities unnecessary
Truth: Sequence of return risk (getting poor returns early in retirement) can devastate a portfolio, which is something annuities can help protect against.
Better Alternatives to Annuities for Many People
If you fall into one of the “should not buy” categories, consider these alternatives:
Bonds and Bond Funds
Bonds can provide stable income with generally lower risk than stocks. They’re more liquid than annuities and don’t come with the same high fees.
Certificates of Deposit (CDs)
CDs offer guaranteed returns and are FDIC insured up to $250,000. While returns may be lower, they’re more flexible than annuities.
Dividend-Paying Stocks
Quality companies that pay dividends can provide growing income streams over time while maintaining liquidity.
Target-Date Funds
These automatically adjust their asset allocation as you approach retirement, becoming more conservative over time without locking up your money.
Permanent Life Insurance
Some permanent life insurance policies build cash value you can access and provide a death benefit to your beneficiaries.
The Bottom Line: Be Honest About Your Situation
The decision to buy an annuity should never be taken lightly. It’s a long-term commitment that works for some people but is completely wrong for others.
Before purchasing an annuity, ask yourself:
- Am I over age 50?
- Do I need additional guaranteed income beyond Social Security and pensions?
- Am I in good health and expect to live a long life?
- Do I have adequate emergency savings beyond what I’d put in the annuity?
- Have I already maxed out other retirement savings options?
- Do I fully understand the annuity product I’m considering?
If you answered “no” to any of these questions, you should probably avoid annuities or at least postpone the decision until your situation changes.
Remember, there’s no one-size-fits-all approach to retirement planning. What works for your neighbor might be completely wrong for you!
Final Thoughts
Annuities can be valuable tools for certain retirees looking for guaranteed income and protection from market volatility. But they’re not for everyone, and they’re definitely not a silver bullet for retirement planning.
If you’re considering an annuity, I strongly recommend working with a fiduciary financial advisor who isn’t just trying to sell you a product. They can help you evaluate whether an annuity makes sense for your specific situation or if your money would be better utilized elsewhere.
Have you had experiences with annuities – good or bad? I’d love to hear your thoughts in the comments below!
Until next time,
[Your Name]
Disclaimer: This article is for informational purposes only and should not be considered financial advice. Always consult with a qualified financial professional before making any investment decisions.
Immediate Annuities vs. Deferred Annuities
With an immediate annuity, the investor may start getting payments within the first year. With a deferred annuity, on the other hand, the investor may have to wait years before they can get payments. People who invest money and need to get their hands on it before the end of the deferral period usually have to pay big surrender fees, even if they need the money for urgent medical care or to move. A surrender penalty means that if the person needs access to their money during the surrender period, they lose part of their principal. Surrender penalties may be as much as 25 percent of the principal. The Attorney General has filed lawsuits against insurance companies that sold unsuitable deferred annuities with over 15 year deferral periods to investors not expected to live that long, or who need access to their money for health care or assisted living expenses. Investors should make sure they know the long-term consequences of any annuity purchase.
One type of deferred annuity is an “equity-indexed annuity. ” The returns of equity-indexed annuities fluctuate based in part on the stock market. When you buy an equity-indexed annuity, the rate of return is based on an index of the stock market, like the Standard P&I. This rate typically is capped at a certain percentage return.
Beware of Agents Urging You to Switch Annuities
The SEC warns consumers that some sellers of annuities products urge customers to switch to another annuity, a practice called “churning.” Unfortunately, agents may not adequately disclose fees associated with switching investments, such as new surrender fees (which typically start over from the date the product is switched), or significantly altered benefits. Consumers should scrutinize the investment to find out whether the benefits outweigh the costs of switching their investment.
Here’s Why Annuities Are SO Bad!
FAQ
What is better than an annuity for retirement?
A 401(k): This type of retirement account is often best suited for those who are comfortable managing investments and want flexibility in how and when they …Jul 16, 2025.
Should a 70 year old buy an annuity?
Financial advisors recommend starting annuity payments between the ages of 70 and 75.
Why do financial advisors push annuities?
Financial advisors may “push” annuities due to high commissions they can earn, as well as potential benefits for certain clients like guaranteed income in retirement, tax deferral, and protection from market risk.
Who would not be a good candidate for a fixed annuity?
Annuities may not be suitable for investors seeking high growth or those with short-term financial goals. Understanding personal financial goals is crucial before deciding on an annuity.
Should I buy an annuity?
Haven’t done your research: Annuities can be complex financial products, and they’re typically not something you want to buy if you don’t understand how they work. Talking to a financial advisor can give you a better idea of whether an annuity makes sense.
Are annuities right for You?
An annuity can provide a steady stream of income for retirement. This type of insurance contract allows you to pay a premium upfront, then receive payments from the annuity company at a later date. Annuities offer some financial advantages, but they’re not right for everyone.
Should everyone own annuities?
Many people don’t agree with that because people who sell annuities say that everyone should have one and people who sell investments say bad things about them. These are the fringe of opinions, and there rooted more in a business model than what is necessarily best for the client.
Should you buy an annuity this August?
Here’s who may want to steer clear of buying an annuity this August: One of the biggest downsides of annuities is that they tie up your money for long periods. If you think you’ll need access to those funds for a big expense, like a home purchase, medical costs or helping a family member, an annuity could do more harm than good.
What should I know before buying an annuity?
Understanding personal financial goals is crucial before deciding on an annuity. An annuity is a lifetime income plan. In exchange for premiums, people are promised a steady or changing stream of income, either now or in the future. Generally, there are two different ways to purchase annuities.
Should you invest your money in an annuity?
If you want to invest your money to reach a certain financial goal, like retiring in a few years or buying a big item like a new car, an annuity probably isn’t the best choice. Annuities are designed to provide consistent income during retirement, not significant financial gains in the near term.