Annuities.
Useful for some, oversold to many.

Section 1 · The types

Immediate annuity (SPIA)

• Pay a lump sum. Receive monthly payments for life (or a fixed period).
• Transfers longevity risk to the insurance company.
• Legitimate use case: you are 70, have $200,000, worry about outliving your money. Trade $200,000 for approximately $1,200/month guaranteed for life. If you live to 95, you come out ahead. If you die at 75, you do not. The honest trade: you are buying longevity insurance, not an investment.

Deferred annuity

• Accumulate first, convert to income later.
• Various subtypes: fixed, variable, indexed.
• Often has surrender charges if you access the money early (7-10 year lock-up).
• Commission to the seller: often 5-8% of the amount.

Variable annuity

• Tax-deferred investment account wrapped in an insurance contract.
• Invested in mutual-fund "subaccounts."
• Higher fees than just owning the mutual funds directly (often 2-3%+/year).
• Inside an IRA: completely pointless, IRAs are already tax-deferred.
• Inside a taxable account: tax-deferral advantage rarely justifies the higher fees.
• This is the annuity most commonly sold to people who do not need it.

Equity-Indexed Annuity (EIA)

• Returns tied to an index with a floor and a cap (similar to IUL).
• Complex. High commissions. Difficult to evaluate.
• Surrender charges can be 10-15 years.
• If you need the floor, buy a fixed annuity. If you want market exposure, buy an index fund. The combination rarely beats the simpler components.

Section 2 · The commission problem

Annuities pay some of the highest commissions in financial products. Variable annuity commissions: often 5-7% of the amount invested verify×DON'T TRUST, VERIFYClaim: Variable annuity commissions are commonly 5-7% of premium.Verify at: SEC Variable Annuity guidance ↗SEC requires prospectus disclosure of all charges. Compare commission against direct-purchase fund costs..

This creates a strong incentive for commission-based advisors to recommend annuities regardless of suitability. The tell: if an advisor is recommending an annuity inside an IRA (where there is zero tax benefit from the annuity wrapper), question the recommendation closely. See How to Find a Fee-Only Fiduciary Advisor.

Section 3 · When annuities make sense

An SPIA (immediate annuity) makes sense when:

• You have more assets than you can spend in a moderate market crash but worry about living very long.
• Converting a portion (not all) of retirement assets to guaranteed income reduces sequence-of-returns risk on the rest.
• You have no pension and Social Security will not cover basic expenses.

Size: not more than necessary to cover basic expenses above Social Security. Leave the rest invested.