Annuities come with bold promises: “7% guaranteed growth!” “Lifetime income you can’t outlive!” Sounds great, right? But when you peel back the layers, many annuities—especially indexed annuities—are packed with fine print, restrictive rules, and disappointing returns.

In this post, we’ll break down a real indexed annuity case study and compare it to a simple 60/40 investment portfolio. The result? That “guaranteed” income comes with major compromises—while the plain-vanilla portfolio offers more growth, control, and legacy potential.

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What Does an Annuity Really Guarantee?

1. The Misleading Growth Rate

You’ll often hear that an annuity offers a 7% guaranteed growth rate—but it’s not what you think. That growth usually applies to a fictional number called the “income base”, not your real money.

Let’s break it down:

• Linda, age 65, puts $200,000 into a fixed indexed annuity with a 7% roll-up for 10 years.
• After 10 years, her income base grows to $393,000.
• But this isn’t an account she can tap—it’s just used to calculate her $19,650/year lifetime income (5% of that income base).

Reality check:

• Linda’s actual account value might be significantly lower depending on market performance.
• The $393,000 isn’t real—it’s just a calculator tool used to make the product look more attractive.

2. The House Always Wins

Annuities are designed to transfer market risk from you to the insurance company—but at a cost that favors them:

• Low credited returns: Insurers often invest your money conservatively (in bonds, etc.) and keep the difference between their earnings and your credited rate.
• Surrender penalties: Withdraw early? You’ll pay steep fees for up to 10 years.
• Mortality credits: If you pass away early, your remaining balance stays with the insurer—unless you’ve paid extra for a death benefit rider.

Bottom line: These “guarantees” aren’t free—they come at the expense of growth, flexibility, and legacy potential.

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Annuity vs. DIY: A 30-Year Side-by-Side

Here’s how Linda’s annuity stacks up against a do-it-yourself 60/40 portfolio invested in low-cost index funds:

Metric	Indexed Annuity	60/40 Portfolio
Income Start	Year 11 (age 76)	Immediately
Annual Income	$19,650 (fixed for life)	Starts at $19,650, rises with inflation
Total Income (30 yrs)	$393,000	$792,000+ (inflation-adjusted)
Remaining Principal	$0 (insurance company keeps it)	$600,000+ (for heirs or emergencies)
Tax Treatment	100% ordinary income	Capital gains & qualified dividends (lower tax)
Heirs Receive	$0 (unless rider purchased)	Full remaining balance

Why the DIY Route Wins

1. More Income Over Time
   • The annuity delivers $393,000 in total over 30 years.
   • The 60/40 portfolio provides more than double that, adjusted for inflation.
2. Inflation Resilience
   • Annuity payouts stay flat while prices rise.
   • A diversified portfolio allows you to adjust withdrawals for inflation, preserving your lifestyle.
3. Access & Flexibility
   • Annuities restrict access with surrender charges and fixed payouts.
   • A portfolio gives you control, whether you need to adjust spending or tap into principal.
4. Legacy & Wealth Transfer
   • Annuity money often disappears when you die (unless you pay for extra protection).
   • A DIY portfolio builds equity you can pass on to family, charities, or other causes.

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When Might an Annuity Make Sense?

Annuities aren’t evil—they just aren’t for everyone. They might be useful for:

• People who are extremely risk-averse and fear market volatility.
• Retirees without other guaranteed income sources (like a pension or rental property).
• Those who expect to live well into their 90s or beyond and want to hedge longevity risk.

For most others, a diversified investment plan with flexible withdrawals is the better path to financial security.

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Conclusion: Don’t Fall for the Hype

Annuities are insurance contracts—not investments. Their “guarantees” come wrapped in trade-offs: lower returns, less control, limited liquidity, and reduced legacy potential.

If your goal is to grow wealth, generate income, and maintain control, consider:

✅ A well-diversified 60/40 portfolio
✅ Inflation-adjusted withdrawals (e.g., the 4% rule)
✅ Tax-efficient investments (like ETFs or Roth accounts)

Skip the smoke and mirrors. Financial freedom is better built on transparency and flexibility than empty guarantees.

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