Annuities: Control for a Price

Control Feels Good, But It’s Not Free

When markets feel shaky or retirement looms large, a guaranteed check sounds like peace of mind. That’s why annuities sell. They promise stability in a world that rarely offers it – income you won’t outlive, protection from market drops, a smoother ride through uncertainty.

But that control has a price. Always. Sometimes it’s lower returns. Sometimes it’s loss of access. Sometimes it’s simply misunderstanding what you actually bought.

The truth is, annuities are tools. And like any tool, they work best when used with purpose, not as a catch-all solution to ease anxiety. This article lays out what annuities are, how they work, where they fit, and why the real cost isn’t always printed in bold.

We’ll cover the most common types, clarify what you’re actually buying, and point out the most common misconceptions especially around growth, liquidity, and inflation. We’ll also touch briefly on optional riders, which can dramatically change how a contract behaves, and we’ll cover those more fully in the next article.

What a Fixed Indexed Annuity Actually Does

Let’s start with one of the most popular (and most misunderstood) types: the fixed indexed annuity (FIA).

Here’s the sales pitch: “You participate in market upside, but with no risk of loss. If the S&P goes up, you earn a percentage. If it goes down, you get zero, not negative.” That pitch is technically true but misses some big pieces.

You’re not “in the market.” You’re tracking the price of an index, not its total return. That means you don’t get dividends, which historically make up a big chunk of long-term growth.

And your upside is limited either by a cap (e.g., 6% max gain) or a participation rate (e.g., 30% of whatever the index earns). So if the market returns 12%, you might get 3% to 4%, depending on the terms that year.

But the core value isn’t growth, it’s volatility dampening. If you’re the kind of person who panics in down markets, an FIA creates a psychological barrier. You won’t see your balance drop during a crash. That emotional safety net can be valuable, especially in the five years before or after retirement when one bad decision can permanently damage a financial plan.

The tradeoff? Growth is limited. Access is limited. Flexibility is limited.

For someone nearing retirement who wants to “take the edge off” but stay out of cash, this might be the right middle ground. But for someone 45 years old with decades of investing ahead, it’s almost certainly the wrong fit. Over long periods, giving up upside adds up big.

We’ll get to the numbers and comparisons in a moment. First, let’s define the broader landscape. Not all annuities are indexed, and not all are designed for the same goal.

The Most Common Tradeoffs

If annuities feel like safety, it’s because they are  –in the same way guardrails on a mountain road are safe. But those guardrails also mean you can’t veer, accelerate, or take a different path. That’s the deal.

Here’s what you’re giving up when you buy that safety:

• Growth – Most annuities aren’t built to grow your wealth. They’re built to protect a baseline. If you’re in a fixed indexed annuity, you’re not getting full market returns – just a slice, and not on the full version of the market. Dividends are excluded, and your return is either capped or limited by a participation rate. Over time, that means the gap between your account and a simple index fund can grow wide.
• Liquidity – Most contracts have surrender periods, typically 5 to 10 years, during which you can’t touch your money without a penalty. Some allow “10% free withdrawals” each year, but that comes with strings. And once you trigger certain features like income riders access can shrink further. For people who value control or expect their plans to change, this is a big deal.
• Transparency – Good luck trying to explain your performance after year three. Annuity crediting methods can include terms like point-to-point, spread margins, monthly averaging, and volatility control indexes. Most people don’t understand what’s happening to their money and that’s never a good sign.
• Inflation Drag – A $30,000 annual income stream that feels fine today can feel tight ten years from now. Most annuities don’t offer built-in inflation protection. Some riders do but at a steep cost. And even if your account grows slowly over time, it may not keep up with real-world purchasing power.

Annuities aren’t designed to outpace inflation. They’re designed to stay steady while everything else moves. That’s not useless, but it’s not growth either.

When It Might Make Sense

So why do people buy annuities? And when does it actually work?

• You’re Nearing Retirement, and Markets Make You Nervous – If you’re five years out from retirement, or just stepped into it, and you’re afraid of a market crash wiping out your balance, an annuity can serve as a risk buffer. It removes the temptation to panic sell and gives you something predictable to lean on.
• You’re the Type to Pull Out When Markets Drop – Some people are wired to ride out volatility. Others are not. If you’re prone to selling at the bottom or watching the market like a hawk, a fixed indexed annuity can serve as a behavioral guardrail. You won’t get the full upside, but you also won’t derail your plan in a moment of fear.
• You Don’t Need All Your Assets Liquid – If you have plenty of flexibility elsewhere – cash, taxable accounts, Social Security, a pension – then tying up a portion of your money in an annuity may not hurt you. It might even help by simplifying the income puzzle and reducing your reliance on volatile assets in the early years of retirement.
• You Understand What It Is and What It Isn’t – If you know you’re giving up growth, access, and flexibility – and you’re fine with that – then great. That’s a conscious tradeoff. Problems only arise when people think they’re buying “a safe version of the market” or “guaranteed income” without reading the terms.

Annuities aren’t scams. But they’re not magic either. Used wisely, they’re a useful tool. Used blindly, they become a leash.

Know Your Type: A Quick Breakdown of Annuity Categories

SPIA – SINGLE PREMIUM IMMEDIATE ANNUITY
Think of it like buying your own pension. You give up the principal to get guaranteed cash flow.

• What it is: You hand over a lump sum (say $100,000), and the insurance company starts sending you income right away – monthly, quarterly, whatever you choose. Payments are usually fixed and guaranteed for life, or for a set number of years.
• Good for: People who want predictable income now, filling a gap alongside Social Security or a pension, or simplifying finances in retirement.
• Limitations: Irrevocable – once you buy it, that money’s gone. Usually no inflation protection. No upside or flexibility.

DIA – DEFERRED INCOME ANNUITY
Like a SPIA, but the income starts later – often much later.

• What it is: You invest now, but delay payouts for 5–20 years. The longer you wait, the higher the payout.
• Good for: Longevity insurance – especially useful for people who want income kicking in at age 80 or 85.
• Limitations: No access in the meantime. Useless if you die early. Not flexible.

FIXED ANNUITY
Simple, predictable, and similar to a CD, just issued by an insurance company.

• What it is: Pays a guaranteed interest rate for a set period (e.g., 3–5 years).
• Good for: Safe savers who want principal protection with better rates than banks.
• Limitations: No market upside. Still subject to surrender penalties if you need access early.

FIA – FIXED INDEXED ANNUITY
Lets you capture some market upside with no loss in down years.

• What it is: Returns are tied to a market index (like the S&P 500), but you only get a portion often capped or limited. No dividends.
• Good for: Pre-retirees or retirees who want stability, can’t stomach losses, and don’t want to stay in cash.
• Limitations: Lower long-term growth. Complex crediting methods. Limited access during surrender period.

VARIABLE ANNUITY
Market exposure with optional income or death benefit guarantees – at a price.

• What it is: You invest in subaccounts (similar to mutual funds); account value fluctuates with the market. Riders can add lifetime income or protection features.
• Good for: Investors who want market exposure but also want some insurance-based safety net.
• Limitations: High fees. Complexity. Performance can disappoint once fees are factored in.

RILA – REGISTERED INDEX-LINKED ANNUITY
Structured risk: partial market upside with a buffer against losses.

• What it is: You choose an index and a protection level. You absorb some losses (e.g., first 10%), and gains are capped.
• Good for: People who want a middle path between full equity risk and no market exposure.
• Limitations: Limited upside. No dividends. Can be hard to explain and compare across carriers.

It’s Not a Magic Answer

Annuities get marketed like they solve everything: income for life, protection from market drops, simplicity, peace of mind. But no product solves the problem of uncertainty. It just shifts the tradeoff.

You might gain predictability, but you give up growth. You might feel safer, but you lose access. You might avoid volatility, but you also miss out on compounding.

That doesn’t mean annuities are bad. It means they’re tools – and like any tool, they can be misused, overbuilt, or sold for the wrong job.

If you’re someone who needs structure, fears market swings, or wants to lock down a portion of your income, great. Just understand that what you’re really buying is stability on someone else’s terms.

And if you’re being pitched a guarantee that sounds too good to be true, look for the part where you hand over control because it’s in there somewhere.

We’ll cover annuity riders in the next article, including how they work, what they cost, and when they might make sense. Because that’s where things often get murkier, more expensive, and harder to unwind.