Why I’m Skeptical of Annuities: A Real-World $278,000 Opportunity Cost

When prospective clients call me about annuities, the question is usually posed very simply: “What should I do with this annuity?” On the surface, that sounds like a product question. But in reality, it is almost always a planning question.

By the time someone comes to me for a second opinion, the issue is rarely just if the annuity has a good rate or even if it still fits their goals. The deeper issue is usually how they ended up there in the first place. Too often, I find that annuities are not recommended as part of a thoughtful, integrated retirement plan. They were sold as a solution before the real planning work was ever done.

That is one of the main reasons I am skeptical of annuities, especially fixed-indexed annuities held in Traditional IRAs. I am not saying every annuity is inherently wrong, nor am I arguing that no investor should ever own one. There are limited circumstances where an annuity can serve a specific purpose. I have seen too many cases where the product was positioned as safe, simple, and “cost-free,” while the actual price paid by the client showed up somewhere less visible: in reduced flexibility, capped upside, new surrender schedules, and years of lost compounding.

That last point matters the most.

The sales pitch around these products is often designed to sound reassuring. Clients are told there are no direct management fees, no explicit advisory fee, and no market losses if the index declines. That framing can be extremely effective because it invites the client to compare the annuity to an investment account and conclude that they are getting market-linked growth without paying the price normally associated with market risk. But that is not really what is happening.

The absence of an invoice is not the absence of a cost.

A man carefully examines a large check, preparing to pay an important bill.

In many fixed-indexed annuities, the client does not pay through a line item labeled “annual fee.” Instead, they pay through the structure of the contract itself. They pay through a cap that limits how much of the market’s return they are allowed to keep. They pay through participation formulas that credit only part of the index return. They pay through spreads, restrictive crediting methods, and a surrender schedule that limits their ability to reposition when a better opportunity arises. In other words, they pay not with a visible bill, but with forgone wealth.

That is why I believe opportunity cost needs to be at the center of the annuity conversation.

Recently, I reviewed a case involving a married couple who came in asking for help in understanding what they should do with their annuities. At first, the question seemed straightforward, but the more I uncovered, the more concerning the situation became. One of the first things that stood out was that 100% of this couple’s Traditional IRA balances had been placed into annuities. That immediately raised an important planning question: why would all of their tax-deferred retirement assets be locked into insurance products with long surrender periods and limited upside participation?

The structure raised even more questions. The annuities were at two different insurance companies, and they had been put in place after prior annuities had just expired. That naturally leads to a deeper inquiry. Was there a legitimate planning reason for using multiple carriers, or was this simply a way to distribute the business in a manner that appeared diversified while preserving the same basic sales outcome? And when expiring annuities are replaced with new annuities, clients deserve to ask whether they are seeing a genuine improvement in their financial position or if they are simply beginning a fresh cycle of commissions, restrictions, and surrender periods.

Those are uncomfortable questions, but they are necessary ones. Clients should not be afraid to ask whether a replacement strategy genuinely benefited the client or primarily benefited the person recommending it (selling it).

The most revealing part of this case, however, was not the contract language. It was the math.

Starting with $632,000 in April 2021, the comparison between a simple investment in the SPDR S&P 500 ETF Trust (SPY) and the fixed indexed annuity was striking. By April 2026, the SPY investment would have grown to roughly $1,116,933, while the annuity would have grown to approximately $838,368. That is a difference of about $278,565 over a five-year period.

An individual examines financial data with an emphasis on security, represented by a shield token on a growth chart.

This is the growth comparison:

Year (Approx.)	SPY Total Value	FIA Value (4% Floor / 10.5% Cap)
April 2021	$632,000	$632,000
April 2022	$665,650 (+5.3%)	$665,650 (+5.3% capture)
April 2023	$627,040 (-5.8%)	$692,276 (+4% floor applied)
April 2024	$767,110 (+22.3%)	$764,965 (+10.5% cap applied)
April 2025	$817,850 (+6.6%)	$815,550 (+6.6% capture)
April 2026	$1,116,933 (+36.5% est.)	$838,368 (+2.8% est. YTD)

*-This is an estimate and does not include all calculations.

At first glance, some investors might look at that chart and say the annuity didn't seem so bad at the beginning. In fact, that is part of what makes these products so marketable. In a negative year, the floor can make the owner feel insulated. In a modestly positive year, the annuity may track the index closely enough that the difference appears minimal. That creates the illusion that the investor is getting the upside of the market while being protected on the downside.

But that illusion tends to break down over time, especially during periods of strong market appreciation.

The problem is that long-term wealth accumulation is driven not just by avoiding bad years, but by fully participating in good years. When a product limits your ability to capture outsized market gains, the damage is not just temporary. It compounds. Missing part of a 20%+ year does not simply reduce that year’s return. It reduces the base on which every future year compounds. Once that growth is lost, it is gone.

That is exactly what happened here. In late 2023 and early 2024, the market produced substantial gains. The owner of SPY captured the full upside. The annuity owner did not. Because the annuity had a 10.5% cap, a large share of the market’s strongest returns never made it into the contract value. From a sales perspective, this is rarely the part that gets emphasized. What gets emphasized is the floor. What gets minimized is the cost of the cap.

And that cost can be enormous.

This is why I push back when annuities are described as having “no fees.” That statement is often technically incomplete at best and deeply misleading at worst. If a client is told they are not paying fees, they understandably assume they are keeping more of the return. But if the product limits upside during the market's best-performing periods, the client may, in fact, be paying far more than they would have in a transparent advisory relationship. The difference is simply hidden in the mechanics of the contract rather than disclosed in a straightforward percentage.

If a client avoids a 1% advisory fee but gives up hundreds of thousands of dollars in growth over time, did they really save money?

In my view, the answer is no.

They simply paid in a less visible form, which was therefore easier to sell.

That issue becomes even more important inside a Traditional IRA, because the tax-deferral benefit often used to market annuities is largely redundant there. A Traditional IRA is already tax-deferred by design. So when an annuity is placed in an IRA, the planner should ask what additional value the annuity truly provides. If the answer is some combination of principal protection, a floor, and a promise not to lose money in a down year, that may sound comforting, but it still has to be weighed against the very real cost of limiting upside, restricting liquidity, and restarting surrender charges.

For many clients, especially retirees or pre-retirees, flexibility has real economic value. Retirement planning is rarely static. Tax law changes. Income needs change. Healthcare needs emerge. Roth conversion opportunities appear. Required minimum distributions begin. Spousal situations shift. Estate plans evolve. A strategy that locks up a large share of retirement assets in a long-dated insurance contract may reduce the client’s ability to adapt when life changes. That loss of flexibility is another hidden cost, and one that often receives too little attention during the sale.

In situations like this, I keep coming back to a simple principle: a financial product should be evaluated not only by what it protects against, but by what it prevents the client from achieving.

Yes, the annuity offered a floor in a down year. But what did the client have to give up in exchange? In this case, the answer appears to be approximately $278,565 over five years. That is not a minor tradeoff and is meaningful retirement capital. That kind of gap can affect the sustainability of withdrawals, legacy goals, gifting capacity, tax planning options, and a household’s overall sense of security.

It is also why I believe many annuity discussions are framed incorrectly from the beginning. The client is often guided to focus on whether the product can prevent loss, rather than if it supports the most effective long-term plan. Those are not the same question. A product can feel safe and still be deeply inefficient. It can reduce visible volatility while quietly undermining the client’s long-term outcomes.

To be clear, I am not suggesting that every investor should have put every dollar into SPY, nor am I arguing that risk management is unimportant. A serious financial planner understands sequence risk, behavioral risk, income planning, and the importance of matching portfolio design to the client’s actual needs. Good planning starts with transparency about tradeoffs. It does not rely on the comforting phrase “no fees” while leaving the client to discover years later that the true cost was embedded in lost market participation.

That is the part of the annuity conversation that deserves much more scrutiny, not just what the contract promises, but what the client surrenders in exchange for those promises.

My skepticism grows whenever I see retirement assets heavily concentrated in annuities without a compelling planning rationale. It grows when married couples have all of their IRA money tied up in insurance products. Skepticism grows when the contracts are spread across different carriers without a clear economic reason. Skepticism grows even more when one annuity is replaced by another just as the old surrender period ends, because that pattern raises serious questions about whether the advice was designed for the client’s benefit or the salesperson’s compensation.

At some point, the issue shifts from whether the annuity is technically defensible to whether it was truly the best planning decision available.

That is a much harder question, and in my experience, often the more important one.

If you own an annuity, the next step should be not to panic. It should be an analysis. You need to know what kind of annuity you have, how the crediting method works, what the surrender schedule is, whether there are rider charges, how the contract interacts with your IRA or other retirement assets, and what alternatives exist. Most importantly, you should have that analysis done by someone whose compensation does not depend on selling you the next version of the same product.

For investors looking for fee-only fiduciary guidance, two helpful places to start are NAPFA and Flat Fee Advisors.

If you are unsure whether or not your annuity still fits your financial plan, get a second opinion before making your next move. Most importantly, you should have that review done by someone whose job is to evaluate the contract objectively, not someone whose compensation depends on selling the next one. A careful review can help you understand not only what you own, but also what it may be costing you in terms of flexibility, growth, and long-term opportunity. If you want an objective analysis of your annuity, IRA, or broader retirement strategy, reach out to schedule a conversation. The earlier you evaluate the tradeoffs, the more options you may still have.

Ask for a real analysis:

• What do you own?

• What are the costs and restrictions?

• What are you giving up?

• And what would a planning-first alternative look like?