August 5


Annuities and Free Steak Dinner Seminars

I’m sure you’ve heard the term thrown around before. Maybe you’ve looked into purchasing one yourself. Retirees are often pitched annuities at “free” steak dinners from financial advisors. But, if you don’t have a clear idea of what annuities are, or if purchasing one would fit into your financial plan, how do you know if you’re making the right decision?

Annuities come in all kinds of flavors, sizes, and colors. I would argue that annuities are the single most complicated product I see on the consumer financial market. My mom was a 2nd grade teacher, so I am going to try to channel her teaching ability and make this as simple as possible.

The definition of a pure annuity is actually pretty straightforward. An annuity is a contract that guarantees you a set amount of money each month for the rest of your life. Social Security is a great example of an annuity. The federal government is guaranteeing you a check for the rest of your life. Once you die, the check stops. That is the very definition of an annuity. A teacher’s pension is another example of an annuity.

But the financial industry likes to take very simple concepts and make them incredibly complex. Here are some products insurance companies have created:

Immediate annuity

Fixed annuity

Variable annuity

Equity Indexed Annuity

An immediate annuity is just like Social Security. Say you give an insurance company $100,000. They will then look at your age and gender and make a determination of how much money they are willing to give you each month for the rest of your life. If you are 65 you might get $400/mo. If you are 75 it might be $500 a month. The older you are, the larger the payment, due to the fact that you will probably not be collecting the benefit as long.

fixed annuity is very similar to a CD. It will pay you a fixed amount of interest for a specified amount of time. For example: A fixed annuity from XYZ insurance company will pay you 3% per year for 5 years. After the five years are up you have access to your money again.

Variable annuities are complex products that allow you to invest in variable accounts —  similar to mutual funds. A variable annuity allows you to have certain monthly income guarantees while still investing your money in the markets. The prospectuses for these things are hundreds of pages long.

Equity indexed annuities are a hot topic, as I see them being sold at nearly every “free” steak dinner seminar in town. The sales pitch is: you can’t lose any money if the stock market goes down, and if the stock market goes up, you get some of the gains. I’ve found that these products can have some issues. While you won’t lose any money if the markets go down, you are very limited in the amount of money you make if the market goes up.

Before you buy an annuity, read this.

So now you know what annuities are. The bigger question is: Is one right for you? Here are a few things you should know about annuities before deciding.


Annuities are taxed in a rather inefficient manner. All growth in an annuity is taxed as regular income. Generally speaking, income taxes are higher than capital gains rates. Growth in stock prices are taxed as a capital gain.

Surrender Penalties. 

Want some money out of your annuity? Not so fast. Many annuities charge you a significant penalty if you take more than 10% of your money per year. Most penalty periods can last anywhere from 5 to 12 years. Penalties for withdrawals in excess of 8% are common.


Variable annuities have significantly higher fees than index funds and exchange-traded funds.

Age Restrictions.

You must be at least 59-½ to withdraw money from an annuity or the IRS assesses a 10% penalty.

So what do you do if you are pitched an annuity at a free steak dinner? Be wary, chew your food, and take your time. Of all the annuity owners I’ve met, about 5% of them actually understand what they own. Try not to listen to the hype.

Dave’s final take on annuities: meh.

Should you buy an annuity? My opinion, after 18 years of research is: probably not. It goes without saying that everyone is in a different situation, and for some it might be a good fit, but I’ve found there are much better alternatives to achieve similar goals. It drives me nuts that annuities are generally sold using fear-based sales tactics. (Markets are going to crash horribly, you might run out of money, Wall St is rigged).

You want to make your financial decisions based on facts and data — not on fear.

My Type-A personality loves to understand investment options backward and forward. I can’t help but go back to the fact that a diversified portfolio of stocks and bonds has unparalleled historical success. Why reinvent the wheel? Why make something more complicated than it needs to be? Is it just so advisors can pitch those free steak dinners?

In the Retirement Revolution, we serve up facts, not fear. No steak knife required.

Be Blessed,


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