Lifetime income annuities are often misunderstood, and many retirees have misconceptions about how they work and what they can offer. These misconceptions can prevent people from using annuities as a reliable part of their retirement income strategy.

Below are some of the biggest misconceptions retirees have about lifetime income annuities:

 

1. "Annuities Tie Up My Money Forever"
 

One of the most common misconceptions is that once you buy an annuity, you're locking up your money with no access to it.
 

The truth: While annuities are designed to provide a guaranteed income stream, they don’t necessarily tie up your money forever. Many annuity contracts allow partial withdrawals (typically up to 10% of the principal each year) and even offer the ability to surrender the contract early for a refund (though this may come with surrender charges).
 

The idea that annuities are a "one-way ticket" with no flexibility is outdated. There are now many modern annuity products with a variety of options, allowing for greater flexibility than retirees realize.

 

2. "Annuities Are Too Expensive"
 

Retirees often think that annuities come with high fees and commissions that eat into their returns. They may also confuse annuities with older, more complex products that were expensive and full of hidden costs.
 

The truth: Modern fixed annuities and income annuities are typically much more cost-effective than people think. Many annuities today have low fees, especially when compared to actively managed funds or the hidden fees of many mutual funds.
 

Additionally, commissions paid to the advisor who sells the annuity do not come out of the principal or income. They're paid by the insurance company, not by you. This is a major advantage over the misconceptions that annuities are "too costly."

 

3. "Annuities Don't Keep Up with Inflation"
 

Many retirees fear that an annuity will lose purchasing power over time, particularly if they purchase a fixed annuity with a set payout.
 

The truth: While fixed annuities don’t directly adjust with inflation, there are options for inflation-protected annuitiesthat offer cost-of-living adjustments (COLA) to increase payouts over time. These annuities are designed to help maintain purchasing power in the face of rising living costs.
 

Moreover, some annuity products allow for optional riders that can increase income payouts annually, partially protecting against inflation.

 

4. "Annuities Are Only for People Who Want to Give Up Control of Their Money"
 

Retirees often believe that buying an annuity means they will no longer have control over their finances and that they are "handing over" their money to an insurance company.
 

The truth: Annuities do not require you to give up all control of your money. You can choose how much you invest in an annuity and when you want to start receiving income. In addition, annuities offer a range of payout options, allowing for varying levels of control and flexibility, such as period certain annuities, which guarantee income for a set period, or annuity riders that give flexibility in accessing funds under certain circumstances.

 

5. "Annuities Aren’t Worth It Unless You Live a Long Time"
 

A common misconception is that you must live a long time for an annuity to pay off, and if you don’t, you’ve “lost” money.

The truth: Lifetime income annuities are designed to pay you for life, no matter how long you live. Even if you pass away earlier than expected, many annuities offer options such as death benefits, where the remaining balance of the annuity can go to your heirs. Some annuities even allow for refund provisions or guaranteed periods that ensure your family receives some of the money back.
 

The real value of an annuity is the peace of mind that you’ll never run out of income during retirement, which is particularly important for longevity risk.

 

6. "I Can Get a Higher Return by Investing in the Stock Market"
 

Some retirees mistakenly believe that stocks or bonds will provide a better return than an annuity, especially when they focus on potential market growth over time.
 

The truth: While the stock market has historically provided higher returns, it also comes with higher risk and volatility. Annuities provide guaranteed, predictable income, which removes the risk of market downturns. Depending on your needs, the certainty of an annuity might be worth the lower growth potential, especially as you move into retirement and can’t afford the risk of significant market losses.
 

Moreover, the interest income generated by stocks, bonds, or dividend-paying investments can be taxed at a higher rate, reducing the actual income you receive compared to the tax-deferred growth that annuities offer.

 

7. "I Don’t Need an Annuity if I Have a Big Enough Portfolio"
 

Some retirees believe that having a large investment portfolio is enough to provide for their retirement needs, so they don’t need an annuity. They think dividends, interest, and the 4% withdrawal rule will suffice.
 

The truth: While a large portfolio may seem sufficient, the reality is that sequence-of-returns risk (the risk of poor market returns early in retirement) can quickly deplete a portfolio. A well-structured annuity ladder can mitigate this risk by providing guaranteed income for a portion of your retirement. It also frees up more capital to be invested for growth in other parts of your portfolio.
 

Furthermore, longevity risk is something that many retirees underestimate. An annuity is a hedge against outliving your savings, something that even a large portfolio can’t guarantee without systematic withdrawals that could exhaust principal.

8. "I Can Always Just Withdraw Money from My Savings"
 

Some retirees may think that simply withdrawing from their savings will give them enough money to live comfortably.

The truth: The 4% rule, which suggests withdrawing 4% of your portfolio per year, may not always be sustainable, especially in volatile markets. In fact, depending on market performance, withdrawals can put your principal at risk, especially if you're forced to sell assets at a loss during a downturn.
 

An annuity removes this risk by providing predictable, reliable income for life, regardless of market conditions.

Conclusion
 

While lifetime income annuities are not for everyone, many of the misconceptions surrounding them can prevent retirees from understanding their full potential. These products can offer guaranteed lifetime income, protection from market risk, and peace of mind in retirement. Understanding the flexibility, cost-effectiveness, and guaranteed benefits of modern annuities can help retirees make a more informed decision about whether they should include them in their retirement strategy.
 

If you’re curious about how annuities could fit into your retirement plan or want to see a real-world example of how they can work for you, consider scheduling a free strategy session to discuss your options and get a better understanding of how annuities might help secure your retirement income.