The Truth About Annuities: Expectations vs Reality

When it comes to annuities, expectations and reality often look very different. Some people dismiss annuities entirely, convinced they all carry high fees. Others are drawn in by flashy sales pitches that make them sound like magic products. Both views miss the truth.

Annuities are contracts. They are risk-transfer tools designed to provide specific, contractual guarantees, not dreams or hypotheticals. To use them correctly, you have to strip away the hype and focus on what they can actually do.

The Four Purposes of Annuities

Every annuity falls into one or more of four categories. I call this the P.I.L.L. framework:

1. Principal Protection
2. Income for Life
3. Legacy
4. Long-Term Care/Confinement Care

If your financial goals don’t align with one of these four, then an annuity probably isn’t the right tool for you. It’s that simple.

Expectation #1: Market Upside with No Downside

The most popular sales pitch for Indexed Annuities is the promise of “market upside with no downside.” On the surface, it sounds perfect: participate in market gains while protecting your principal from losses.

Reality: It doesn’t work that way. Indexed Annuities typically average 2% to 4% annually over the long term. Some years may deliver higher returns, but those are offset by years with zero growth. You’re not going to see steady 7%–10% annual returns, despite what advertisements or seminar presentations claim.

If a product truly offered full market growth with zero downside, every major institution in the world would buy nothing else. The Federal Reserve would put all its assets into it. That’s not how it works. Indexed Annuities are designed to provide modest, bond-like returns with principal protection not equity-level growth.

Expectation #2: Guaranteed Inflation Protection

Inflation is a huge concern for retirees, and it’s common to hear pitches claiming that certain annuities “adjust for inflation.”

Reality: No annuity directly tracks inflation. None.

Some income annuities offer Cost-of-Living Adjustment (COLA) riders, which increase payouts annually at a set percentage (like 2% or 3%). But these increases come at a cost. Typically, it takes six to nine years for the higher payments to compensate for the lower starting income compared to a level payout.

Annuity companies don’t give away inflation protection for free. The only true “inflation annuity” is Social Security, because its adjustments are politically driven rather than actuarially priced. An annuity can provide guaranteed lifetime income, but don’t expect it to perfectly track inflation.

Expectation #3: One Product Can Solve Everything

Salespeople often pitch annuities as “all-in-one” solutions, offering upfront bonuses, market growth, lifetime income, principal protection, and even long-term care benefits all rolled together.

Reality: No annuity solves for everything. Just as there isn’t one pill that cures every illness, there isn’t one contract that covers every retirement goal.

If you need principal protection, buy it for that. If you want lifetime income, buy it for that. If you want legacy or long-term care, address those separately. Trying to roll them all into a single product usually leads to disappointment.

Why Sales Pitches Fall Short

The gap between expectations and reality often stems from how annuities are sold. Many pitches lean on hypotheticals, backtested numbers, or “too good to be true” promises.

But when the policy arrives in the mail, what you actually own is the contract. That contract outlines exactly what the annuity will do—and that’s all it will ever do.

If you bought into a dream about upfront bonuses, double-digit growth, or “free” benefits, the contract will quickly bring you back to reality. There are no philanthropists in the annuity industry. Those big insurance-company buildings weren’t built by giving money away.

The Right Questions to Ask

To cut through the noise, focus on two simple questions:

1. What do you want the money to contractually do?
2. When do you want those contractual guarantees to start?

If your answer is “market growth,” then you don’t need an annuity. Period. But if you want guaranteed income, principal protection, legacy planning, or long-term care coverage, then the right annuity may be a good fit.

Final Thoughts

The reality of annuities is clear: you don’t buy them for what they might do, you buy them for what they are contractually guaranteed to do.

Ignore the hype. Avoid the “bad chicken dinner” seminars that promise market growth with no risk. Don’t chase upfront bonuses or products that claim to solve everything at once. Instead, focus on the contract, the guarantees, and how they fit into your specific financial plan.

When you align your expectations with reality, annuities can play a valuable role in retirement planning, providing protection, guarantees, and peace of mind where the markets can’t.