All Annuities Are Not Created Equal

Annuities have such a bad reputation and it’s simply not their fault. The annuity is a great investment alternative if used properly. The problem is that many insurance agents and financial advisors alike have either lied to their clients so they can earn a commission, or they simply do not understand the product… maybe a little of both. This upsets me greatly because many of you need annuities in your retirement plan. That’s right. You need them. But, since you have heard all the horror stories coming from friends and family, or you’ve read a poorly written/misleading article on the internet, you avoid them like the plague. In this post, I am going to cover the most basic things about annuities so be sure to check out the Annuity tab at to learn more.

By definition, an annuity is an investment option designed to provide supplemental guaranteed income during Retirement. Don’t we all want more guaranteed income during Retirement? The number one fear of retirees today is running out of money. You should be begging for this product because when designed properly, annuities provide guaranteed income for life regardless if you live to be 142 years of age. Let’s dive in. There are 3 different types of annuities; some say 2 – fixed and variable. Let me explain.

Fixed Annuity

A fixed annuity is similar to a Certificate of Deposit (CD) from the bank. It is not FDIC insured but you do receive a fixed rate of interest for a specified term; 1,3 or 5 years. At the end of the term, you are guaranteed to receive your principal back or you may renew the contract for another term. The takeaway is that fixed annuities are safe. There is no risk of losing your money in the stock market. However, you want to be certain you work with an insurance company whose credit rating is A or better. Also, worth mentioning here is there are no fees associated with a traditional fixed annuity.

Variable Annuity

A variable annuity has a stock market component. This component is comprised of sub-accounts. Subaccounts are very similar to mutual funds. In fact, your favorite mutual fund is probably available within a variable annuity, but it would have a slightly different name. Why? The two funds are identical with one exception; the fee structure of an annuity is considerably different than that of a mutual fund. So, what do we know about the stock market? It goes up and down. Thus, the account value of your variable annuity will go up and down. Variable annuities also have riders available which we will cover separately. One final note here is that variable annuities are the most expensive of the three annuities discussed in this post. When combined, it is not uncommon for the various fees inside a variable annuity to exceed 4% annually. Note: these fees come out first and can leave you with little to no return in any given year and even invade your principal in years where your subaccounts underperform.

Equity Indexed Annuity (EIAs)

These annuities are also referred to as Fixed Indexed Annuities (FIAs). Many consider them a version of a fixed annuity thus the comment earlier that some argue there are only 2 types of annuities: fixed and variable. I consider it a 3rd type of annuity; a hybrid of the first two. An indexed annuity allows you to have your cake and eat it too. Although your money is never directly invested in the stock market, you receive interest credits that are based upon the performance of a stock market index. When the index loses money, your account is credited with 0% for that term (often one year). Think about that. While your neighbor is losing money and then waiting for the stock market to recover, you never lose money, and when the market recovers you gain even more. Index annuities also have various riders available which we will cover separately. Fees inside indexed annuities start at 0% (no fees) and go up depending on whether you choose to add an income rider to the contract.

In my opinion, the Fixed Indexed Annuity is your best value. Think about it. A fixed-indexed annuity protects your money from stock market losses, grows your money when the market index has a positive return and provides lifetime guaranteed income for a fraction of the cost of a variable annuity. Again, when properly designed an annuity boldly answers the question what if I run out of money during retirement? Simply put. You won’t.