Common Annuity Mistakes to Avoid
Learn the most costly mistakes people make when buying, owning, or surrendering an annuity — and how to protect yourself.
Annuities can be powerful retirement tools, but they can also be expensive mistakes if you're not careful. Here are the most common pitfalls we see — and how to avoid every one of them.
1. Not Understanding What You're Buying
This is the single most common mistake. Annuity contracts can be 50-100+ pages long, filled with legal language and complex formulas. Many buyers sign without fully understanding the terms, fees, surrender schedule, or how their income benefit actually works.
How to Avoid It
Never sign an annuity contract you don't fully understand. Ask the agent to explain every fee, every restriction, and every scenario in plain English. If they can't or won't, walk away.
2. Ignoring the Total Fee Structure
Many buyers focus on the headline interest rate or income benefit while overlooking the total cost. A variable annuity might have M&E charges, administrative fees, investment management fees, and rider fees that together exceed 3% per year. Over decades, this erodes a significant portion of your returns.
How to Avoid It
Ask for the total annual cost as a single percentage. Compare this across at least 3-5 different products. A difference of 1% in annual fees can cost you tens of thousands of dollars over time.
3. Surrendering Too Early
Annuities have surrender periods — typically 5-10 years — during which withdrawing more than the allowed amount (usually 10% per year) triggers a penalty. Surrender charges can be as high as 8% in the first year and typically decrease by 1% each year.
People who need their money before the surrender period ends pay a steep price. This often happens because they didn't have adequate liquid savings outside the annuity.
How to Avoid It
Never put money into an annuity that you might need within the surrender period. Maintain 6-12 months of expenses in liquid savings. Before buying, review the full surrender schedule.
4. Choosing the Wrong Type for Your Goals
A conservative investor in a variable annuity. A retiree who needs income now in a deferred annuity. A young person with decades until retirement locked into a low-rate fixed annuity. These mismatches happen more often than you'd think, usually because the buyer relied entirely on the agent's recommendation.
How to Avoid It
Start with your goals and risk tolerance, then find the annuity that fits — not the other way around. Read our Types of Annuities guide to understand which type matches your situation.
5. Putting Too Much Money Into One Annuity
Some people put their entire retirement savings into a single annuity. This creates concentration risk — if the insurance company has financial trouble, your entire nest egg is at stake. It also eliminates flexibility and liquidity.
How to Avoid It
Limit annuity allocation to 25-50% of your retirement assets. Diversify across different product types and insurance companies. Keep adequate liquid reserves.
6. Not Checking the Insurance Company's Financial Strength
Your annuity's guarantees are only as good as the insurance company behind them. Unlike bank deposits, annuities are not FDIC-insured. While state guaranty associations provide some protection (typically up to $250,000), it's far better to choose a financially strong company in the first place.
How to Avoid It
Only buy from insurance companies rated A or higher by A.M. Best. Cross-reference with S&P and Moody's ratings. Avoid chasing higher rates from lower-rated companies.
7. Buying Based on a Sales Pitch, Not Research
High-pressure sales tactics are unfortunately common in the annuity industry. Free dinner seminars, urgency language ("this rate expires Friday"), and fear-based selling ("the market is going to crash") are red flags. These tactics exist because annuity commissions can be very lucrative for agents.
How to Avoid It
Never make an annuity decision under pressure. Take the contract home, sleep on it, and do your own research. Get a second opinion. If an agent won't let you take time to decide, that's a major red flag.
8. Forgetting About Inflation
A fixed payment of $2,000/month sounds great today. But in 20 years, with 3% average inflation, that same $2,000 will only buy about $1,100 worth of goods. Many annuity buyers fail to account for how inflation erodes the purchasing power of fixed payments over time.
How to Avoid It
Consider annuities with inflation-adjustment riders (though these reduce your initial payment). Or use the annuity to cover only a portion of your income needs, keeping other investments in growth assets.
The Bottom Line
Most annuity mistakes come down to one thing: making a decision without enough information. The annuity industry is complex, and the products are designed to be difficult to compare. Your best defense is education and patience.
If you already own an annuity and suspect you may have made one of these mistakes, our free Annuity MRI can help you understand exactly where you stand and what your options are.