Are Annuities Good Investments?

Assumptions

• The investor has a long-term horizon of at least 15 years.
• No funds are withdrawn before age 59½.
• The analysis compares net-of-fee, after-tax returns.
• Focus is on deferred variable annuity and indexed annuity products.

Clarifying Note: Annuities are not legally classified as investments. They are regulated as insurance contracts. This is a critical distinction—true investments aim to maximize return, while annuities are designed to offload risk to an insurer. That difference alters the product’s incentives, construction, and usefulness in an optimized portfolio.

Experiment

1. Historical Performance

Morningstar data (2022) reveals that most variable annuities return between 3.1% and 5.2% annually after fees. These include mortality charges, sub-account fees, and income rider expenses. Over 15 years, this compounds into a major drag.

In comparison, Alpha’s efficient portfolio of ETFs—60% SCHB (broad equity), 40% SCYB (short-term bonds)—has delivered over 7.8% annualized returns with far less cost or restriction.

Morningstar breaks down the performance gap here.

2. Mathematical Logic

According to John Bogle, compounding is easily defeated by high fees. In annuity contracts, total fees of 2.5%–3.5% reduce even a 7% gross return to just 3.5%–4.5%. Compare that to Alpha’s ETF portfolios, which average just 0.07% in annual costs.

The math alone makes insurance-heavy products unattractive for serious long-term investors focused on performance and flexibility.

3. Expert Opinions

• Tony Robbins calls most contracts “guaranteed mediocrity” in his book Money: Master the Game.
• Wade Pfau, a noted retirement scholar, suggests that Single Premium Immediate Annuities (SPIAs) may help longevity, but warns against deferred variable annuities with complex riders.
• CFA Institute reports that high-fee insurance structures consistently underperform low-cost passive strategies over time.

Conflict of Interest Warning

One of the most overlooked facts about annuities is that they are also one of the highest-commission products in the financial industry. Agents can earn 6%–10% upfront for selling these contracts. This introduces a fundamental conflict of interest: annuities are often sold for compensation, not recommended for client benefit. As a fiduciary, Alpha Financial Nordic accepts no commissions of any kind—ever.

Efficient Frontier Placement

Visualized on the efficient frontier, most annuity products land far below portfolios optimized for return per unit of risk. Even with guarantees, their opportunity cost and lack of liquidity make them structurally inefficient.

Investors give up growth, flexibility, and transparency—all in exchange for a promise that may be better delivered through ETF-based income ladders.

Case Study Example

In a recent client review, Alpha replaced a $500,000 annuity product earning 4.1% with a diversified ETF portfolio. Net return over 5 years was projected to increase by $87,000—after accounting for tax and risk levels—while improving withdrawal flexibility.

Conclusion

❌ Verdict: Known Deception
For investors focused on long-term growth and risk-adjusted return, annuities fall short. High costs, hidden fees, surrender charges, and inflation risks make them inferior to well-structured portfolios built on modern asset allocation.

The Ultimate Portfolio Verdict

It’s not just the performance gap—it’s the structural design. These are insurance contracts, sold for commission, not engineered for return. That alone disqualifies them from inclusion in any truly optimized investment strategy.

Alpha Financial Nordic excludes annuity contracts from our Ultimate Portfolio. For those needing income, we recommend TIPS ETFs, municipal ladders, H-Y Bonds, and dynamic withdrawal strategies with transparent pricing and liquidity.