Understanding Annuities: Myths and Insights for Retirement Planning
Annuities are often perceived as complex and costly, leading many Americans to avoid them for retirement planning. However, despite these perceptions, U.S. annuity sales rose by 7% to $464.1 billion in 2025, marking a fourth consecutive year of record-breaking demand, according to research from LIMRA.
A report from Fidelity Investments sheds light on common misconceptions about annuities, potentially affecting retirement planning decisions. Fidelity identifies five prevalent myths that skew understanding about annuities, their costs, and benefits.
One myth is that annuities are exclusively for retirees. Fidelity emphasizes that deferred annuities can be valuable tax-deferred savings tools for those who have maximized contributions to retirement plans and IRAs.
Another misconception is the excessive cost of annuities. Fidelity notes that variable annuity fees vary widely, with some low-cost options under 50 basis points annually, though additional guarantees can increase these costs.
Fidelity also addresses the belief that annuities provide no pre-retirement income benefits. Certain annuity products can offer a future income stream, shielding retirement savings from market volatility.
Addressing Lifetime Income Myths
A common misunderstanding is that retirement accounts easily replace lifetime income. Fidelity clarifies that, beyond Social Security and pensions, annuities uniquely guarantee lifetime income, unmatched by other financial products.
The fear that insurers retain funds upon an annuity holder's death is another myth. Fidelity clarifies that most deferred annuities allow remaining values to pass to beneficiaries, and income annuities offer payout options extending to heirs.
Fidelity's Vice President Stefne Lynch advises checking an insurer’s financial strength via independent ratings before buying an annuity. This is crucial even though variable annuities often detail fees in contracts, while fixed annuities embed costs into interest or income rates.
Annuities for Market Downturn Protection
For those within a decade of retirement, Fidelity suggests annuities to guard against market downturns and ensure a steady income. Deferred income annuities offer guaranteed income, regardless of market conditions when payments start. Deferred annuities with lifetime withdrawal benefit riders provide income flexibility while preserving account value access.
Certified financial planner Lee Baker suggests single-premium immediate annuities or deferred income annuities for low-cost certainty to those worried about outliving their income.
Fidelity's findings point to a growing trend among Americans favoring annuities for retirement income. Fixed indexed annuity sales reached $127.9 billion, and registered index-linked annuities grew 20% to $79.5 billion in 2025. This growth reflects an increasing demand for secure guarantees alongside traditional investments.
Both Fidelity and LIMRA recommend consulting financial professionals to assess individual needs and explore annuity options before making commitments.