How to Avoid Common Annuity Buying Mistakes

12 October 2025

So, you’re thinking about buying an annuity. Maybe you've stumbled across the term while planning for retirement or perhaps someone has pitched it to you as a “safe” investment. Either way, annuities can be great financial tools—but only if you understand them.

Unfortunately, many people dive into the annuity market without doing their homework. That’s where the trouble begins. If you've ever bought a car without checking under the hood, you know what I mean. The shiny exterior doesn't always tell the full story—and neither do annuity brochures.

In this post, we're going to break it all down and chat about how to avoid common annuity buying mistakes. I’ll walk you through what to watch out for, what questions to ask, and how to make sure you don’t end up with a financial product that doesn’t align with your goals.

What’s an Annuity, Anyway?

Before we dive into the mistakes, let’s quickly get on the same page about what an annuity is. Simply put, it’s a contract between you and an insurance company. You give them a chunk of your money, and in return, they promise to pay you a series of payments either immediately or in the future.

Think of it as a reverse life insurance policy. Instead of protecting your loved ones in the event of your death, it’s a way to make sure you don’t outlive your money.

There are fixed annuities, variable annuities, and indexed annuities, each with their own pros and cons. And that’s where some of the confusion starts.

Mistake #1: Not Understanding the Type of Annuity You’re Buying

This is probably the most common mistake out there. Seriously, would you buy a used vehicle without knowing whether it’s gas, diesel, or electric? Of course not. But people do this with annuities all the time.

Fixed vs. Variable vs. Indexed

- Fixed annuities: Pay a guaranteed interest rate and offer predictable payouts. Low risk, low reward.
- Variable annuities: Let you invest in sub-accounts similar to mutual funds. Riskier, but with growth potential.
- Indexed annuities: Tie returns to a market index like the S&P 500. They’re a bit of a hybrid—some growth potential, but still some protection.

If you jump into an annuity without knowing what type it is—or worse, without understanding how it fits into your retirement plan—you’re setting yourself up for disappointment.

Pro Tip: Ask questions. Lots of them. Don’t stop until you hear an explanation that makes sense to you.

Mistake #2: Focusing Only on the Sales Pitch

Ever been charmed into buying something you didn’t really need just because someone said all the right things? You're not alone. Annuity salespeople can be persuasive. Many work on commission, meaning they get paid when you buy.

So, what do you do? Be skeptical. Not cynical, but definitely skeptical.

Common Sales Lines to Watch For:

- “This annuity is guaranteed to outperform the market.”
- “You’ll never lose a dime!”
- “This is a once-in-a-lifetime opportunity.”

Sound familiar? If it feels too good to be true, it probably is.

Instead of taking the salesperson's word as gospel, dig deeper. Request a prospectus, read reviews, and talk to an independent financial advisor. Someone who doesn’t stand to benefit from your purchase can offer a more objective opinion.

Mistake #3: Ignoring Fees and Surrender Charges

Let’s talk about the not-so-fun part: fees.

Annuities often come loaded with costs, and ignoring them is like buying a house without asking about the property taxes. You could end up paying thousands more than you expected.

The Common Culprits:

- Surrender charges: If you pull your money out early (typically within 7-10 years), you’ll likely face hefty penalties.
- Administrative fees: Small on paper, but they add up over time.
- Mortality & expense risk charges (especially in variable annuities): These can range around 1.25% annually.
- Investment management fees: For those with variable annuities, you’ll also pay fees for the underlying investment options.

Always, and I mean always, read the fine print. Ask for a full breakdown of costs—if the agent can’t or won’t give you one, that’s a big red flag.

Mistake #4: Overestimating Guarantees

Yeah, the word “guaranteed” sounds nice and cozy. Who wouldn’t want guaranteed income for life? But here’s the kicker: those guarantees come with conditions, and they usually come from the issuing insurance company—not the federal government.

What’s Actually Guaranteed?

- The payment amount might be guaranteed, depending on the annuity.
- Some annuities promise a minimum interest rate.
- Certain riders offer guaranteed lifetime withdrawals—but often at a cost.

The reality is no annuity can guarantee huge market-like returns without risk. It’s like trying to have your cake and eat it too—great in theory, not always possible in real life.

Mistake #5: Not Considering Liquidity Needs

Life happens. Emergencies, unexpected expenses, a dream vacation you just can’t pass up. But guess what? Annuities aren’t exactly flexible. In fact, they can be downright rigid.

Why Liquidity Matters

When you lock money into an annuity, you’re basically agreeing to let it sit there for a long time. If you decide to take out more than your annual allowed amount, you might face penalties. And if you withdraw before age 59½? Say hello to the IRS and a 10% early withdrawal penalty.

Ask yourself this: Can I afford to set this money aside and not touch it for several years? If the answer is no, you might want to look at other options, like high-yield savings accounts or short-term CDs.

Mistake #6: Forgetting About Inflation

Today’s dollar won’t stretch as far tomorrow. That’s just how inflation works. So, if your annuity pays out a fixed sum for life, you could find yourself struggling to keep up with rising costs down the line.

What Can You Do?

- Look for annuities with inflation riders (though they often reduce your starting income).
- Consider laddering annuities—buying multiple annuities over time to spread out risk and possibly benefit from better rates later.
- Combine annuities with other investments that historically outpace inflation—like stocks or real estate.

Mistake #7: Putting All Your Eggs in One Basket

Diversification isn't just a buzzword—it's the cornerstone of smart investing. And yet, some folks put a huge chunk of their retirement savings into a single annuity. That’s risky.

Think of an annuity as one ingredient in your financial recipe. You still need other components—IRAs, 401(k)s, mutual funds—to create a well-balanced retirement plan.

Bottom line: An annuity might be right for some of your money, but probably not all of it.

Mistake #8: Not Reviewing the Insurance Company’s Ratings

Here’s something many buyers overlook: the financial health of the insurance company backing their annuity. If the issuer goes under, those "guaranteed" payments could be in jeopardy.

Check These Rating Agencies:

- A.M. Best
- Moody’s
- Standard & Poor’s
- Fitch

You want an insurer with strong financial ratings. Think of it like choosing a seatbelt—there’s no point in having one if it doesn’t work properly when you need it most.

Mistake #9: Skipping the Fine Print (Don’t Do It!)

Contracts are boring. I get it. But annuity contracts? They’re a minefield if you don’t pay attention.

Many people sign without fully reading their contract, missing out on crucial details about payouts, beneficiaries, fees, and deadlines. It’s like agreeing to terms and conditions without scrolling past the first paragraph—something we’ve all been guilty of!

Take your time. Ask for a sample contract beforehand. Highlight confusing clauses and get them clarified in writing.

Mistake #10: Not Consulting a Fee-Only Financial Advisor

If there’s one piece of advice you take from this entire article, let it be this: Work with a fee-only financial advisor.

Unlike commission-based advisors or sales agents, fee-only advisors don’t earn money by selling you a product. They’re paid by you, to help you—not to help themselves.

They can give you an unbiased opinion on whether an annuity fits your overall financial plan. It’s like hiring a mechanic to inspect a car before you buy it. Totally worth the peace of mind.

Wrapping It All Up

Buying an annuity is a big decision, and it's one that shouldn’t be rushed. Yes, annuities can provide financial security, lifetime income, and peace of mind—but only if you avoid the pitfalls that have trapped so many others.

Here’s a quick recap to keep in your back pocket:

- Know the type of annuity you’re buying
- Don’t blindly trust the sales pitch
- Understand all fees and surrender charges
- Be realistic about guarantees
- Keep an eye on liquidity
- Plan for inflation
- Diversify!
- Check the insurance company’s ratings
- Read the fine print (yes, all of it!)
- Get a second opinion from a fee-only advisor

An annuity should make your future feel more secure—not more stressful. So take it slow, ask the right questions, and make sure the annuity you pick actually fits your goals—not someone else’s commission check.