5 Annuity Myths Worth Revisiting with Your Clients 

A portfolio that successfully builds retirement assets may not answer every question a client faces when withdrawals begin. 

During retirement, clients may need to balance growth, liquidity and flexibility with concerns about market declines, changing expenses and how long their income may need to last. These considerations can require a different approach than the one used during the accumulation years. 

Annuity myths can influence how financial professionals and their clients evaluate retirement income strategies. Broad perceptions about cost, growth potential, liquidity or client interest may prevent an annuity from receiving a thorough evaluation alongside other strategies. 

Here are five common annuity myths worth revisiting as you help clients evaluate their retirement income options. 

Assumption 1: My investment strategies already address retirement income needs 

Financial professionals who rely primarily on investment portfolios and withdrawal strategies may believe their existing approach can address all a client’s retirement income needs. 

What to reconsider 

A successful investment strategy does not automatically address every retirement risk. 

During the accumulation years, clients may have employment income, time to recover from market downturns and the ability to continue contributing to their portfolios. Once withdrawals begin, those dynamics change. Clients may face an uncertain retirement timeline, changing expenses and continued market fluctuations while drawing income from their assets. 

Portfolio performance remains important, but retirement income planning involves more than generating returns. It may also require evaluating longevity, withdrawal timing, market uncertainty, liquidity and the client’s need for more predictable income. 

Investment portfolios can provide flexibility, liquidity and growth potential. An annuity does not have to replace that strategy. It may be evaluated alongside investments and other approaches to determine whether different assets could serve different retirement objectives. 

Questions to consider 

• How could the client’s accumulated assets translate into retirement income? 
• Which expenses should be covered regardless of market performance? 
• How could withdrawals during a market downturn affect the strategy? 
• How much income variability is the client willing and able to accept? 
• How much liquidity should remain available for expected and unexpected needs? 
• Could an annuity complement, rather than replace, the client’s investment portfolio? 

Put it into practice 

Consider a hypothetical client who is approaching retirement and has sufficient liquid reserves but is concerned about covering recurring essential expenses during a prolonged market decline. 

The financial professional could compare portfolio withdrawals, an annuity intended to provide retirement income and a combination of strategies. The comparison should address the income each approach may provide, the effect of market performance, access to assets, costs, tax considerations, risks, contract terms and flexibility if the client’s circumstances change. 

The client’s concern does not automatically make an annuity appropriate. It does provide a reason to compare available approaches rather than rely on a single withdrawal strategy without further evaluation. 

Learn more: How to Sell Annuities to Help Grow Your Business 

Assumption 2: Annuities require clients to give up too much growth potential 

Some financial professionals may be reluctant to consider annuities because they believe allocating assets to an annuity could unnecessarily limit a client’s growth potential. 

What to reconsider 

Annuities are not a single, uniform product category. Different types are designed to address different combinations of accumulation, protection and income objectives. Their features, risks, costs and intended uses can differ. Learn more about annuity options from Ameritas. 

Annuities can serve different purposes 

These distinctions matter because a statement about the cost, liquidity or growth potential of one type of annuity may not apply to another. Financial professionals should review the specific contract rather than draw conclusions about the entire category. 

Not every dollar in a retirement strategy needs to serve the same purpose. A portion of a client’s assets might remain invested for growth and liquidity while another portion is evaluated for an income or protection objective. The relevant question is what role each asset is intended to play within the client’s broader strategy. 

Questions to consider 

• How much of the client’s portfolio should remain positioned for long-term growth? 
• How much market risk is the client willing and able to accept? 
• What trade-offs exist among growth, liquidity, protection and income? 
• How does the specific annuity’s growth potential compare with the objective it is intended to address? 
• Could allocating a portion of assets to an annuity allow other assets to remain invested? 

Assumption 3: Annuities are too expensive to justify 

Costs can vary depending on the type of annuity, the contract features selected and the risks the contract is intended to address. 

What to reconsider 

Some annuities include explicit charges. Others may reflect product costs or limitations through participation rates, caps, spreads, surrender charges or other contract provisions. Optional benefits may add costs in exchange for additional contract features. 

Cost should not be considered in isolation, but it should not be justified solely by pointing to a product’s features. The appropriate comparison is among strategies intended to address the same client objective. 

Use a consistent comparison 

• Direct charges and indirect costs. 
• Optional feature charges. 
• Surrender provisions and other liquidity limitations. 
• Growth or interest-crediting potential. 
• Income provided under the applicable terms. 
• Risks retained by the client. 
• Contractually defined benefits. 
• Tax considerations. 
• Flexibility if the client’s circumstances change. 
• Other reasonably available strategies designed to address the same objective. 

A feature has value only when it addresses an identified client need and the client understands its cost, limitations and available alternatives. 

Questions to consider 

• What client need is the annuity intended to address? 
• Which features are necessary and which are optional? 
• What are the contract’s costs, risks, limitations and trade-offs? 
• How does the strategy compare with alternatives designed to address the same need? 
• What compensation or conflicts should be disclosed and considered? 
• Is there a more cost-effective way to pursue the same objective? 

Assumption 4: Annuities tie up assets and limit flexibility 

Some financial professionals may dismiss annuities because they believe a client’s money becomes inaccessible after purchase. 

What to reconsider 

Many annuities include surrender-charge periods, and full access to the contract value may be limited during that time. Depending on the product and contract terms, owners may be able to withdraw a portion of the contract value without a surrender charge. Some contracts may also provide access under certain qualifying circumstances. 

These provisions do not create unlimited liquidity. They balance access to the contract value with the contract features the product is intended to provide. 

Liquidity is not an all-or-nothing decision. The central question is whether the level of access aligns with the client’s anticipated needs and the intended purpose of the assets. 

Questions to consider 

• How much accessible cash could the client need for routine and unexpected expenses? 
• Does the client have sufficient emergency savings and other liquid assets? 
• What withdrawal provisions does the contract offer? 
• What charges or adjustments may apply if the client withdraws more than the permitted amount? 
• How long does the surrender-charge period last? 
• What tax consequences could result from a withdrawal or surrender? 
• Is the annuity being funded with assets the client is unlikely to need for short-term expenses? 
• What happens if the client’s needs or objectives change? 

Clients should not place every available dollar into a strategy with liquidity limitations. The objective is to maintain appropriate flexibility across the broader strategy while allowing different assets to serve specific purposes. 

Learn more: Layering Annuities for Income 

Assumption 5: My clients do not want annuities 

Clients may be more likely to describe the outcomes they want than to request a particular financial product by name. 

What to reconsider 

A client may ask how long retirement assets could last, how much can be spent, what could happen after a market decline or whether income can become more predictable. These are retirement income questions, even when the client does not mention an annuity. 

When a client expresses concerns about income durability, spending or market declines, the conversation can provide a reason to compare several retirement income approaches. Waiting for a client to request an annuity by name could prevent a potentially relevant strategy from being considered. 

Questions to consider 

• Is the client concerned about outliving retirement assets? 
• Does market volatility affect the client’s confidence or behavior? 
• Is the client comfortable relying entirely on portfolio withdrawals? 
• Does the client want a portion of income to be more predictable? 
• How does the client prioritize growth, liquidity, flexibility and income? 
• Would comparing multiple income approaches help the client make a more informed decision? 
• The conversation should begin with the client’s circumstances and objectives, not with a product. Once the desired outcome is clear, the financial professional can compare available strategies and explain the potential benefits, risks, limitations, costs and trade-offs of each. 

A framework for comparing retirement income strategies 

Start with the client’s objective, then evaluate each available strategy using the same criteria. 

Client objective 

• What outcome is the client trying to make more predictable? 
• Which expenses must be covered? 
• How much income variability is the client willing and able to accept? 

Risk and time horizon 

• How could market declines or withdrawals early in retirement affect the strategy? 
• How long may the assets need to provide income? 
• Which risks would remain with the client? 

Growth and income 

• How much of the client’s assets should remain positioned for growth? 
• How is income calculated, and under what circumstances could it change? 
• Is an income feature optional, or is it part of the contract? 

Liquidity and flexibility 

• What assets could remain available for routine and unexpected expenses? 
• What withdrawal restrictions, surrender charges or adjustments may apply? 
• What happens if the client’s needs or objectives change? 

Cost and compensation 

• What direct charges, indirect costs or limitations apply? 
• Which optional features add cost? 
• What compensation or conflicts should be disclosed and considered? 

Alternatives 

• What other strategies may address the same client objective? 
• How do the alternatives compare in terms of cost, risk, income, liquidity and flexibility? 
• Could a combination of approaches better support the client’s objectives? 

Contract and tax considerations 

• What are the contract’s material terms, conditions and limitations? 
• What federal or state tax considerations may apply? 
• What happens upon withdrawal, surrender, income election or death? 

Evaluate the client and the contract 

An annuity should be evaluated within the client’s broader financial circumstances and retirement income strategy. Relevant considerations may include the client’s objectives, risk tolerance, time horizon, liquidity needs, other available assets and applicable tax considerations. Share this blog with your clients to start the conversation: Building Retirement Income with Annuities. 

Financial professionals should also review the specific contract’s costs, risks, withdrawal provisions, surrender period, income options and other material limitations. Product availability, features and requirements may vary. 

An annuity is not appropriate merely because a client wants more predictable income. The strategy must be evaluated against reasonably available alternatives and the client’s individual circumstances. 

Moving beyond assumptions 

Annuity assumptions can persist because the products are complex and the category includes contracts with different features, costs, risks and intended uses. 

The goal is not to conclude that an annuity is right for every client. It is to ensure that potentially relevant strategies are evaluated using the client’s circumstances, the specific contract and a consistent comparison of available alternatives.  

Financial professionals helping clients transition from accumulating assets to relying on them may need to ask a broader set of questions: 

• How could the client’s assets produce retirement income? 
• Which risks is the client willing and able to retain? 
• Which expenses should be covered regardless of market performance? 
• How much liquidity and flexibility should the client maintain? 
• What role could investments, annuities and other strategies play? 
• How do the costs, risks and limitations of the available approaches compare? 

Moving beyond broad assumptions can lead to more thorough retirement income discussions. It can also help financial professionals explain why a strategy was considered, how it compares with alternatives and whether it fits the client’s individual objectives. 

Disclosures 

Guarantees are based on the claims-paying ability of the issuing company.  

In approved states, annuities are issued by Ameritas Life Insurance Corp. In New York, annuities are issued by Ameritas Life Insurance of New York. Policies and riders may vary and may not be available in all states. Optional riders may have limitations, restrictions and additional charges. 

Withdrawals of policy earnings are taxable and, if taken prior to age 59 ½, a 10% penalty tax may also apply.