The biggest lie people believe about annuities is that they are designed to produce huge growth.
That is not how I believe annuities should be viewed.
Yes, some annuity illustrations may show impressive-looking numbers. You might see hypothetical returns that look like 20%, 30%, or even more in a single year. I have even seen people come to me after being shown an annuity illustration suggesting massive growth that looks almost too good to be true.
And in many cases, that is exactly the problem.
Annuities can be powerful tools for retirement income, but they need to be understood correctly. The purpose of an annuity is not to beat the stock market. The purpose is often to create contractual guarantees, protect against certain risks, and help provide reliable retirement income.
That difference matters.
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The Biggest Lie: “This Annuity Will Give You Huge Growth”
One of the most misleading things I see is when people are shown annuities as if they are high-growth investments.
They are shown big hypothetical numbers.
They are shown backtested returns.
They are shown illustrations that make it look like the annuity could grow dramatically over the next 10 years.
But here is the problem: if it is not guaranteed in the contract, you should not build your retirement plan around it.
That is one of the most important rules when comparing annuities.
A lot of these illustrations are based on indexes, participation rates, and assumptions that may not hold up in the real world. Some indexes are brand new. Some have very limited live history. Some may look amazing in a backtest but have not proven themselves over time.
💡 Pro Tip: If an annuity illustration looks like it is promising stock-market-level growth without market risk, slow down and ask what is actually guaranteed.
👉 Want help comparing realistic annuity options instead of confusing sales illustrations? Click here to schedule a call.
Why High-Growth Annuity Illustrations Can Be Dangerous
The danger is not just that the numbers may be unrealistic.
The bigger danger is that someone may buy the wrong annuity because they believe those numbers.
…then later, they realize the annuity is not performing the way they expected. But by that point, they may already be locked into the contract. If they want to get out, they could face surrender charges.
That is where the damage happens.
I have seen people who bought an annuity because they thought it was going to grow a lot. Then later they discover it may only produce a fraction of what they were shown.
At that point, the options are not always great.
They may have to stay in the contract. They may need to replace it with another product. Or they may need a bonus product just to help offset surrender charges.
None of that is ideal.
The better move is to understand what you are buying before you sign the contract.
Annuities Should Be Compared by Guarantees
When I help people compare annuities, I focus heavily on guarantees.
That means looking at the contract.
Not just the illustration.
Not just the sales pitch.
Not just the hypothetical projection.
If you are buying an annuity for income, then the key question is:
What income is contractually guaranteed?
For example, some annuities use an income rider. The income rider may grow a benefit base at a stated roll-up rate. That benefit base is then used to calculate guaranteed lifetime income.
That is different from the account value.
The account value may not grow nearly as much as the income benefit base. In some cases, the account value may even decline over time once income starts. But that does not necessarily mean the annuity is failing.
It depends on what the annuity was designed to do.
If the purpose was guaranteed lifetime income, then the income guarantee is the main feature.
💡 Pro Tip: Do not confuse the income benefit base with the walk-away account value. They are not the same thing.
👉 Want help understanding what an annuity actually guarantees? Click here to schedule a call.
Growth Annuities vs. Income Annuities
Not every annuity is built for the same purpose.
Some people want income.
Some people want principal protection.
Some people want tax deferral.
Some people want a chance at moderate growth without direct market losses.
The problem comes when someone buys one type of annuity thinking it will do something else.
If you want lifetime income, then you should compare annuities based on income.
That may include:
- Income riders
- SPIAs, or single premium immediate annuities
- DIAs, or deferred income annuities
- Joint-life income options
- Guaranteed payout percentages
If you want growth, then you need to be more careful.
Fixed index annuities can offer growth potential, but they are not the same as investing directly in the stock market. You may have caps, participation rates, spreads, crediting methods, and renewal rate changes.
That means the future results may look very different from the illustration.
Be Careful With Brand-New Indexes
One thing I watch closely is whether the index inside the annuity has a real track record.
Sometimes an illustration may show a high hypothetical return based on an index that has only been live for a short time.
That should raise a red flag.
If the index has only been around for a few months or a year, then you are relying heavily on backtesting. Backtesting can look great on paper, but it does not always translate into real-world results.
I would rather look at something more realistic.
For example, an S&P 500-based strategy may not look as flashy, but at least it is easier to understand. Then I want to look at the participation rate, renewal history, and the insurance company behind the contract.
The goal is not to find the prettiest illustration.
The goal is to find the most reliable, suitable contract for your retirement goal.
Renewal Rates Matter More Than People Realize
Another important detail is renewal rate history.
With many fixed index annuities, the insurance company can change caps, spreads, or participation rates after the first term.
That means the rate you see today may not be the rate you get forever.
This is why I care about the insurance company’s reputation and renewal rate history. If a company has a strong history of keeping renewal rates competitive, that gives me more confidence.
It is not a guarantee that they will always do that.
…but it is still an important factor when comparing products.
💡 Pro Tip: A lower but more realistic illustration from a strong company may be better than a massive hypothetical projection from a product with little history.
👉 Want help comparing annuity companies and renewal histories? Schedule a call with me here.
The Right Way to Think About Annuities
Here is how I believe people should think about annuities:
Annuities are not magic.
They are contracts.
That means you need to understand what the contract does, what it does not do, what is guaranteed, and what is only hypothetical.
For many retirees, the real value of an annuity is not huge growth.
The real value may be:
- Guaranteed lifetime income
- Protection from market losses
- A predictable retirement paycheck
- Reduced fear of running out of money
- The ability to let other assets stay invested for growth
That last point is important.
Some retirees use annuities to cover their essential income needs. Then they can allow the rest of their portfolio to stay invested for growth.
That can be a much more realistic way to use annuities.
Instead of expecting one product to do everything, you separate the jobs.
The annuity handles guaranteed income.
The investment portfolio handles long-term growth.
Conclusion
The biggest lie people believe about annuities is that they are supposed to create huge growth.
That belief can lead people into the wrong contract.
A good annuity decision should start with this question:
What do I need this money to do?
If you need guaranteed income, compare guaranteed income.
If you want growth, understand the limits of the product.
If the illustration looks too good to be true, ask what is guaranteed and what is not.
At the end of the day, you are not buying a sales presentation. You are buying a contract.
And the contract is what matters.
Need help with finding the best annuity for your retirement?
Click here to schedule a call with me.
On the call, I can help you:
- Determine what type of annuity is best for you
- Find the highest paying annuities for your unique situation
- Answer any other questions you may have