Published January 17th, 2026

As more seniors look for reliable ways to secure steady income during retirement, annuities have become a popular option. These financial products promise to provide a predictable stream of income, which can offer peace of mind amid the uncertainties of aging and market changes. However, annuities come with a level of complexity that can be overwhelming, especially when faced with unfamiliar terms and multiple product choices.

This complexity sometimes leads to costly mistakes that may affect long-term financial security and peace of mind. It's natural to feel uncertain when navigating these decisions, but understanding the common pitfalls and knowing which questions to ask can make a significant difference. With clear, straightforward information, seniors can approach annuity choices with confidence and clarity.

The purpose here is to highlight frequent mistakes that often arise when selecting annuities and to provide simple, jargon-free guidance to help avoid them. This approach supports making informed decisions that align with personal goals and retirement needs, creating a more comfortable and secure financial future. 

Understanding Different Types of Annuities and Their Features

Before looking at mistakes, it helps to sort annuities into a few main buckets. Each type handles growth, timing, and risk in a different way. Matching that mix to retirement income needs, comfort with market swings, and health outlook matters more than the product name on the brochure.

Fixed annuities

A fixed annuity works like a CD from an insurance company. The insurer promises a set interest rate for a period of time. The main appeal is predictable growth and income. The tradeoff is usually lower growth potential and the risk that the rate may not keep up with inflation over the long haul.

Fixed annuities often suit someone who wants steady, bond-like income and loses sleep over stock market drops.

Variable annuities

A variable annuity ties growth to investment subaccounts, similar to mutual funds. Values rise and fall with the market. The possible benefit is higher growth over time, which may help offset inflation. The risk is obvious: account value and income can go down, sometimes sharply.

Variable annuities also tend to carry layers of fees for investments and features. Those fees cut into returns, so they deserve close attention.

Immediate annuities

An immediate annuity starts paying income soon after you put in a lump sum, often within a month to a year. Think of it as trading a portion of savings for a regular paycheck. This can simplify budgeting and remove the worry of managing those dollars.

The main risk is loss of flexibility. Once the income terms are set, it is usually hard or impossible to get the lump sum back.

Deferred annuities

With a deferred annuity, money grows first and income starts later. The growth phase may be fixed, variable, or a blend, depending on the contract. Deferred annuities can fit someone still building retirement income or planning for a later phase, such as age 75 or 80.

The key question is whether the timing of income, growth approach, and risk level line up with the rest of the retirement plan. A mismatch here often leads to the common mistakes many retirees face with annuities. 

Common Mistakes Seniors Make When Choosing Annuities

A few patterns tend to repeat when retirees choose annuities. Most come from small gaps in understanding that grow into bigger problems over time. Knowing where decisions often go off track makes it easier to protect retirement income.

Misunderstanding payout options

One frequent mistake is choosing a payout option based only on the highest monthly check. With immediate annuities and income riders on deferred contracts, the largest payout often comes with tradeoffs.

For example, a single-life payout usually pays more than a joint-life payout, but stops when the first person dies. That leaves a spouse or partner with no income from that annuity. Choosing payments "for life" instead of a set number of years can also confuse people. A life-only option may stop after a short period if death comes early, with no refund to heirs.

The cost shows up later as strain on the survivor's budget, less money for long-term care, or a forced change in lifestyle. A payout choice needs to match household needs, not just today's highest number on the illustration.

Overlooking fees and charges

Variable annuities and some deferred annuities layer fees: mortality and expense charges, investment management costs, riders for income or death benefits, and sometimes extra administrative charges. Each fee trims growth. Over time, that drag can leave far less money available for income.

Another area people miss is surrender charges. Many contracts limit how much can be withdrawn each year without a penalty, especially in the first several years. A retiree who later needs a larger lump sum for health care, home repairs, or helping family may face steep charges or a forced delay.

These costs matter most when markets are flat or down. High fees plus weak returns increase the risk that income will feel tight just when money is needed most.

Ignoring tax implications

Many assume all annuity income is taxed the same way. In practice, taxation depends on whether the annuity is in an IRA or other retirement account, how long money has been in the contract, and the structure of the payout.

With non-qualified annuities (funded with after-tax dollars), earnings are taxed when withdrawn, and withdrawals are usually treated as earnings first. That can push taxable income higher in a given year. Larger withdrawals may affect Medicare premiums or the taxation of Social Security benefits.

When tax effects are ignored, people sometimes delay income too long or take big withdrawals at once. The result is a surprise tax bill that erodes the sense of security the annuity was meant to provide.

Not matching annuities to retirement goals

Another pattern is buying based on a sales pitch instead of a clear role in the retirement plan. A fixed annuity might be used for money that needs growth, or a variable annuity for money that must stay stable. An immediate annuity may be purchased before other savings and income sources are understood.

Without a clear purpose, an annuity may sit in the wrong place on the timeline. Money needed in five years gets locked into a long surrender period, or funds meant for later life are placed in an option that pays out too soon and ends too early.

The impact shows up as gaps: not enough reliable income to cover essential bills, or not enough flexible savings for health needs, home upkeep, and family support. Each annuity type - fixed, variable, immediate, or deferred - serves a different role. The mistake is treating them as interchangeable instead of tools for specific jobs.

When payout structure, fees, taxes, and goals all line up, annuities can support a steadier retirement paycheck. When those pieces are guessed at or rushed, the same products create stress instead of comfort. 

How to Ask the Right Questions When Considering Annuities

The best way to avoid the mistakes above is to slow the process down and ask clear, direct questions. A good advisor should welcome this and give you space to think before signing anything.

Questions about purpose and fit

What problem is this annuity solving? Ask how it fits with other income sources, savings, and your expected spending over time.

When does income start and stop? Make sure the timing of payments lines up with when extra income is actually needed.

What happens to the money when I die? Clarify what a spouse, partner, or heirs receive under each payout option.

Questions about payout choices

Which payout options are available, and how do they differ? Have the advisor walk through single life, joint life, period certain, and refund options in plain language.

What do I give up to get the higher payment? Connect any larger monthly check to tradeoffs in survivor protection or flexibility.

Questions about fees, surrender charges, and access

List every fee I will pay each year. This includes insurance charges, investment costs, rider fees, and any extra administrative charges.

How long is the surrender period, and what are the penalties? Ask for a schedule of surrender charges and how much can be withdrawn each year without a fee.

If I need a large lump sum later, what are my options? Talk through scenarios like health expenses, home repairs, or helping family.

Questions about taxes and contract details

How will this annuity be taxed year by year? Ask how withdrawals or income affect your tax bracket, Social Security taxation, and Medicare-related costs. If the contract is deferred, ask specifically about the tax benefits of deferred annuities in your situation.

Which parts of the contract can change? Clarify what is guaranteed and what may be adjusted by the company, such as interest rates, caps, or fees.

Can you show me where each of these answers appears in the contract? Have key points highlighted so there is no guesswork later.

It is always acceptable to say, "I need time to think about this," take notes home, and read through the contract unhurried. A calm, question-filled conversation now protects retirement income and helps the annuity support, rather than strain, the rest of the plan. 

Tips for Avoiding Liquidity Problems and Unexpected Fees

Liquidity issues usually show up when savings are locked away just when cash is needed most. Many annuities allow only limited free withdrawals each year, often a set percentage of the account. Anything over that amount triggers a surrender charge during the early years of the contract. That structure protects the insurance company's long-term promise, but it reduces flexibility for larger, unplanned expenses.

To avoid annuity withdrawal mistakes seniors make, start by mapping out likely cash needs: medical care, home repairs, car replacement, and family support. Money that may be needed within the surrender period belongs in more accessible accounts, not in the most restricted annuity. For any annuity under review, ask for the exact surrender schedule, the free-withdrawal amount, and what happens if a larger lump sum is required.

Fees sit in a different bucket but affect the same goal: steady income over time. Common charges include administrative fees, mortality and expense (M&E) charges, investment management costs in variable annuities, and extra rider fees for income or death benefits. Surrender fees apply when money leaves early. Each layer trims growth, which can reduce the size and staying power of future payments.

Before committing, request a clear list of every ongoing fee in dollars, not just percentages. Compare options with similar features so differences in cost stand out. Ask which fees are guaranteed, which the company may change, and how those charges affect your projected income at different ages.

When liquidity limits and fee structures are understood upfront, it becomes easier to match annuities to retirement goals instead of working around surprises later. That knowledge lowers anxiety and supports more confident decisions about how much to put into an annuity and how much to keep flexible. 

Aligning Annuity Choices With Your Retirement Goals

Annuities work best when they sit inside a clear retirement plan instead of off to the side. The contract should support income needs, health outlook, and any wishes to leave money to family or charity.

Start with income. List the bills that must be paid for life and which sources cover them: Social Security, pensions, savings, and part-time work. An annuity suited to essential expenses will look different from one meant only to supplement travel or gifts. A mismatch here leads to either tight cash flow or money locked away that would have been better kept flexible.

Health and longevity assumptions matter as well. Someone with a strong family history of long life may value guaranteed lifetime payments. Another person facing serious health concerns may prefer keeping more control and liquidity. The wrong structure in either case can reduce choices later or leave a spouse exposed.

Legacy goals also shape decisions. Some contracts focus on the largest personal payout, others protect a minimum for heirs. Picking the wrong emphasis can undercut long-held plans for children or charitable giving.

An independent insurance advisor reviews these pieces together, compares contracts from multiple companies, and focuses on fit instead of pushing a single carrier's product. That outside view helps avoid annuity mistakes that affect retirement income and keeps the contract aligned with real priorities and timelines.

Choosing the right annuity can feel overwhelming, but it becomes more manageable when you focus on your unique retirement goals and ask the right questions. Avoiding common pitfalls - like overlooking fees, mismatching payout options, or ignoring liquidity needs - helps protect your income and peace of mind. Thoughtfully matching annuities to your timeline, health outlook, and legacy wishes ensures they work as a reliable part of your overall plan, not a source of stress.

Working with an independent, local advisor familiar with seniors' needs can offer clarity and confidence without pressure. Having ongoing support and clear explanations makes annuity decisions less intimidating and more secure. If you'd like to learn more or review your options in a way that fits your situation, consider reaching out for a no-obligation conversation. Taking time now to understand your choices can make a meaningful difference in your retirement security.