Wilhelm Wealth: Armored Retirement

You've Been Told Annuities Are Bad. Here's the Other Half of the Story.

By Aaron Wilhelm, President, Wilhelm Wealth · Updated

You might expect an annuity specialist to tell you Dave Ramsey is wrong about everything. I won't. He has helped millions of people get out of debt, and some of his warnings about annuities are fair.

But if you've been told "annuities are bad" so many times that you've never looked at one closely, you may be missing the one tool designed to answer the question that keeps most retirees up at night: Will my money last as long as I do?

Here are Ramsey's six biggest objections, each answered in a sentence or two. The details follow below.

Ramsey's 6 Objections, Answered

Ramsey's objectionThe other half of the story
Returns are lower than the stock marketTrue. A fixed indexed annuity isn't built to beat the market. It's built to protect your principal from market losses and pay you income you can't outlive.
Fees eat into your growthMany fixed indexed annuities have no annual fee. Optional income riders do have a cost, and you should see it in writing before you buy.
Surrender charges tie up your moneyThey're real for a set number of years. Most contracts still let you take out a portion each year, often around 10%, penalty-free.
Inflation erodes your paymentsA fair concern. Some income riders offer payments that can increase over time, and most people keep part of their savings invested for growth.
Gains are taxed as ordinary income, unlike a RothNot if the annuity is inside a Roth IRA. Qualified Roth withdrawals are tax-free, so an annuity in a Roth can pay you a tax-free paycheck for life. In a traditional IRA or 401(k), that money was going to be taxed as ordinary income anyway.
Never buy what you don't understandAgreed, completely. Any advisor should be able to explain your contract in plain English, in writing.

Ramsey has also said there's no reason to buy an indexed annuity and that people should just invest in the market directly. That advice can work well for growth. It leaves out the risk that matters most once the paychecks stop: running out.

Where He Has a Point

Some of this criticism is earned. Annuities have been oversold, sometimes to people who needed the money in two years or who didn't understand what they bought. Surrender charges are real. Some contracts carry rider fees. And if your only goal is the biggest possible pile of money in 30 years, an annuity is usually not the tool for that.

So if anyone tells you annuities are perfect for everyone, walk away. They aren't. The real question is whether they are the right tool for one specific job: turning part of your savings into income you can't outlive.

What the Criticism Leaves Out

Ramsey compares annuities to stock funds as if both had the same job. They don't. One is built to grow money. The other is built to pay you a paycheck. Judging an annuity on growth alone is like judging a fire extinguisher on how well it decorates your kitchen.

The 12% assumption

Ramsey often uses a 12% average stock market return in his examples. Ben Carlson, CFA, points out that while the S&P 500's simple average from 1928 to 2018 was 11.36%, the return investors actually earned after compounding was 9.49%. That gap matters a lot when you plan your retirement income around it.

Average returns don't pay the bills. Withdrawals do.

Once you retire and start pulling money out, the order of your returns matters as much as the average. A market drop in your first few years of retirement, while you're also withdrawing, can do lasting damage that later good years may never repair. This is called sequence-of-returns risk.

That's why Morningstar's research puts the safe starting withdrawal rate for 2026 at 3.9%. That assumes a 30-year retirement, inflation-adjusted spending and a 90% chance the money lasts. On $500,000, that's about $19,500 a year, a long way from what a 12% return would suggest.

Guaranteed income changes how people live

Researchers David Blanchett and Michael Finke found that retirees spend about twice as much from savings turned into guaranteed income as they do from the same amount left sitting in savings. Blanchett described it as annuities giving retirees "a psychological license to spend."

In plain English: people with a guaranteed paycheck stop worrying about running out and actually enjoy the retirement they saved for.

How a Fixed Indexed Annuity Actually Works

A fixed indexed annuity (FIA) is not a stock market investment. Your money is not in the market. Instead, the insurance company credits interest based on how a market index performs, up to a limit (called a cap or participation rate). When the index goes down, you are credited zero for that period, not a loss. Your principal is protected from market losses.

The trade-off is simple: you give up some of the upside in exchange for never giving back gains to a market crash. An optional income rider can then turn that account into a paycheck for life, no matter how long you live.

Why timing matters: don't wait until retirement day

Most people think of an annuity as something you buy the day you retire. That can cost you. Many income riders reward patience. In the years before you turn income on, the rider's income base can grow at a roll-up rate set in the contract, and the payout percentage typically rises with each year you wait. Starting 1 to 5 or more years before you need income can mean a meaningfully larger paycheck for the rest of your life.

One important distinction: the income base is used only to calculate your lifetime income. It isn't cash you can withdraw or walk away with, and roll-up rates and terms vary by contract.

The Roth IRA advantage

Ramsey is a big fan of Roth IRAs, and so am I. What most people never hear is that an annuity can be held inside a Roth IRA. Once your withdrawals are qualified (generally after age 59½ and once the Roth has been open at least five years), they are tax-free under IRS rules. Pair that with a lifetime income rider and you can create a paycheck that is guaranteed for life and tax-free. That's something no stock fund can promise.

Timing matters here. The five-year clock starts January 1 of the year of your first Roth contribution or conversion, so starting sooner matters. And a conversion isn't always worth it: you pay the tax now, so it tends to pay off when your tax rate today is the same as or lower than what you expect later, the money has years to grow, and you can pay the tax from savings outside the IRA. For many people, the best window is the years after work stops but before Social Security and required withdrawals begin.

There's a bonus for anyone on or near Medicare. Your Medicare premiums can rise with your income through a surcharge called IRMAA, which is based on your adjusted gross income plus tax-exempt interest. Qualified Roth withdrawals aren't counted, so tax-free annuity income from a Roth won't push your Medicare premiums higher the way traditional IRA withdrawals can. (Read more about IRMAA here.)

Want to see how much of your income is truly guaranteed today? The free worksheet 7 Critical Questions to Ask Before You Retire walks you through it.

Is an Annuity Right for You? Ask Yourself These Questions

  1. If the market dropped 30% the year you retired, how would that change your plans?
  2. How much of your monthly spending is covered by income that's guaranteed for life, like Social Security or a pension?
  3. What would it mean for you to know your bills are covered, no matter how long you live?
  4. If some of your savings are in a Roth IRA, have you looked at turning part of it into tax-free lifetime income?
  5. If you started planning your income five years before retirement instead of the day you retire, how much larger could your lifetime paycheck be?

If those questions made you a little uneasy, an annuity may deserve a place in part of your plan. If you need the money within a few years, are decades from retirement, or don't yet have an emergency fund, it's probably not the right fit yet, and that's okay.

Ramsey is right about one thing above all: never buy what you don't understand. So let's make sure you understand it. My free video, How to Create Your Own Pension-Style Paycheck That Lasts for Life, walks through how it works in plain English.

Watch the Free Video →

Aaron Wilhelm, President, Wilhelm Wealth

Aaron Wilhelm is a licensed insurance agent (FL License #W557952, CA License #0M57473). Annuity guarantees are backed by the claims-paying ability of the issuing insurance company. Fixed indexed annuities are not stock market investments and do not directly participate in any index. Surrender charges may apply to early withdrawals, and optional riders may carry additional fees. Tax-free treatment of Roth IRA withdrawals depends on meeting IRS requirements; consult a tax professional about your situation. This article is educational information, not investment, tax or legal advice. Wilhelm Wealth is not affiliated with or endorsed by Dave Ramsey or Ramsey Solutions.

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