What are the risks associated with annuities?

Introduction

An annuity is a financial product that provides regular payments to an individual over a set period. Annuities are commonly used by individuals who want a steady stream of income during retirement. However, there are risks associated with annuities that should be carefully considered before making a purchase decision.

Risks of Annuities

1. Market Risk: The value of the annuity can be affected by fluctuations in the financial markets. If the market experiences a downturn, the value of the annuity may decrease.
2. Interest Rate Risk: Annuities are sensitive to changes in interest rates. If interest rates rise, the value of the annuity may decrease.
3. Inflation Risk: Inflation can erode the value of the payments received from an annuity. If inflation outpaces the rate of return on the annuity, the individual may experience a decrease in purchasing power over time.
4. Liquidity Risk: Annuities are generally illiquid, which means that once the individual has purchased the annuity, it may be difficult or expensive to access the funds.
5. Credit Risk: An annuity is only as safe as the insurance company that provides it. If the insurance company goes bankrupt, the individual may lose some or all of their investment.

Conclusion

Annuities can provide a steady stream of income during retirement, but they come with risks that should be carefully considered before making a purchase decision. Individuals should consult with a financial advisor to determine if an annuity is right for their specific situation and to assess the potential risks involved.

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Understanding the Risks of Annuities Before You Buy

Annuities can be an effective retirement planning tool, but they are not without risk. Understanding what can go wrong — and how to protect against it — is essential before committing your savings to any annuity product. The risks vary significantly depending on the type of annuity you purchase and the insurer you choose.

Surrender Period Risk

Most annuities impose a surrender period — typically three to ten years — during which withdrawals above a permitted amount incur a surrender charge. These charges can range from 5% to 15% of the amount withdrawn in the first year and decline by one to two percentage points per year. If you need to access your money early, you could lose a significant portion of your savings to surrender charges. Before buying an annuity, confirm the surrender period length and the exact schedule of charges.

Inflation Risk in Fixed Annuities

A fixed annuity provides guaranteed income, but the guaranteed rate may not keep pace with inflation over a 20- or 30-year retirement. A monthly payment that covers your expenses comfortably today may represent a shrinking share of your budget a decade later. Inflation-protected alternatives — such as Treasury Inflation-Protected Securities or variable annuities with inflation riders — may provide better long-term protection, though they introduce other risks.

Credit Risk and Insurance Company solvency

Unlike bank accounts, annuities are not FDIC-insured. They are backed only by the issuing insurance company’s financial strength. If the insurer becomes insolvent, you could lose some or all of your annuity value, though most states provide guaranty fund protection up to a certain limit — typically $100,000 to $500,000 per contract, depending on the state. Always verify the insurer’s financial strength rating from A.M. Best, Standard & Poor’s, or Moody’s before purchasing.

Fee Risk in Variable and Indexed Annuities

Variable annuities charge mortality and expense fees, administrative fees, and investment management fees that can total 2% to 3% annually. These fees apply regardless of whether the underlying investments perform well. Over a 20-year period, annual fees of 2.5% reduce your ending balance by roughly 40% compared to a no-fee alternative. Indexed annuities typically charge lower but still meaningful fees, often 1% to 2% per year, plus rider costs for added benefits.

Liquidity Risk

Annuities are designed for long-term commitments. Most allow only one free withdrawal per year of up to 10% of the contract value. Taking withdrawals beyond this limit triggers surrender charges. During the surrender period, accessing your full annuity value can result in substantial penalties. For retirees who may need to access their savings for healthcare or other emergencies, this lack of liquidity is a real and serious risk.

Risk of Choosing the Wrong Annuity Type

Each annuity type carries a different risk profile. A variable annuity’s income payments fluctuate with market performance — you could receive significantly less income in a market downturn. An indexed annuity’s floor protects your principal but caps your upside. A fixed annuity’s guarantee is strong but may underperform inflation over time. Matching the annuity type to your actual income needs, risk tolerance, and time horizon is critical.

The Risk of Not Shopping Around

annuity illustrations shown by one agent reflect a specific insurer’s products and crediting methods. Annuity terms, fees, surrender charges, and caps on indexed returns vary dramatically between carriers. An annuity that appears generous from one insurer may offer significantly less value than a competitor’s alternative. Working with an independent agent who represents multiple carriers — like Buckalew Financial Services — ensures you see the full picture before committing.

Get Annuity Guidance Before You Commit

Buckalew Financial Services helps retirees in Florida understand annuity products before they buy. We represent multiple A-rated carriers and can help you compare features, fees, and income guarantees side by side. Call 813-863-5917 for a free consultation.