The number one fear Scott Kelly has heard from clients in 26 years of financial services is not market volatility. It is not inflation. It is simpler than both: running out of money before running out of life.
The financial term for this is longevity risk. A 65-year-old today has roughly a 50 percent probability of living past 85, and a meaningful probability of reaching 90 or beyond. (Source: Society of Actuaries RP-2014 Mortality Tables.) A standard investment portfolio that is expected to last 20 years may face a 25 or 30 year draw-down instead. The market does not care about your timeline.
There is one category of financial product specifically engineered to address this problem: annuities. Scott Kelly is a specialist. He works with clients at Westport Wealth Partners to evaluate whether an annuity belongs in a retirement income plan, and if so, which type, at what amount, and when.
This page explains how annuities actually work, what the legitimate criticisms are, what they cost, and when Scott recommends them and when he doesn't.
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What Problem Is an Annuity Actually Solving?(Understanding the Core Mechanism)
An annuity is a contract between an individual and an insurance company. The individual makes a payment, a lump sum or a series of payments, and the insurance company promises to pay a stream of income in return, beginning at a specified date and continuing for a specified period or for the rest of the annuitant's life.
That lifetime income function is the annuity’s defining feature. Everything else (return potential, tax deferral, estate planning features) are secondary to this core function.
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What annuities are not designed to do:
- Generate maximum long-term growth (historically, equities have generally offered greater long-term growth potential)
- Provide maximum liquidity (many investment accounts generally offer greater liquidity)
- Replace an emergency fund or cover near-term expenses
If a client's primary concern is maximum market participation and they have sufficient assets that running out of money is genuinely not a risk, an annuity is probably not the right tool. Scott says this directly. It is one of the things clients notice: "he doesn't try to put you in something you don't need."
All annuity guarantees are subject to the claims-paying ability of the issuing insurance company. Annuities are long-term investments designed for retirement purposes.
How Much Does a Fixed Indexed Annuity Actually Cost?(The Real Answer Most People Don't Get)
The cost of a fixed indexed annuity is one of the most commonly misunderstood aspects of the product category, partly because the costs are structured differently from traditional investment products.
A fixed indexed annuity generally does not have an explicit annual management fee. Instead, product costs are typically embedded in the contract's crediting methodology, including features such as participation rates, cap rates, and spreads.
The participation rate determines the percentage of an index's gain that is credited to the contract. For example, if the S&P 500® returns 15% during the crediting period and the contract has a 60% participation rate, the contract would be credited with 9% (before any other applicable limitations or adjustments). The remaining 6% of the index gain is not credited to the contract. Participation rates are part of the product's crediting methodology and help the insurance company manage the costs associated with providing principal protection and other contract features.
some contracts limit the maximum credit in a strong year. If the S&P 500 returns 22 percent and the cap is 10 percent, the policyholder receives 10 percent regardless of the additional market return above the cap.
if a living benefit rider is added (the feature that guarantees income regardless of account value), this typically costs 0.75 to 1.5 percent of the benefit base per year, deducted from the account value. This is an explicit, disclosed cost.
show the cost structure explicitly, in writing, before any recommendation is made. Then model how the product performs in the specific scenarios relevant to the client's plan.
The total economic cost, participation rate spread plus any rider charges, is the correct way to evaluate what an FIA costs relative to what it provides. The comparison that critics often make (FIA vs. S&P 500 index fund in a strong bull market) is a legitimate critique of upside limitation but an incomplete comparison if it ignores the floor in down years.
The Four Types of Annuities and When Each One Makes Sense
guaranteed interest rate for a set period (typically 2-10 years), similar in structure to a CD but issued by an insurance company. The client knows exactly what they will earn. No market exposure. No caps. No participation rates. At time of writing (July 2026), competitive fixed annuity rates have been meaningfully higher than in the low-rate environment of 2019-2021; compare current rates against CDs and Treasuries with similar terms when evaluating. Best for: clients who want complete predictability on a portion of assets, no interest in market exposure, and an alternative to bank CDs.
interest credited based on a market index, with a floor that prevents losses (typically 0%) and a cap or participation rate that limits the upside. The client cannot lose principal due to index performance. Best for: clients who want some participation in positive markets, zero downside exposure, and a product that can generate a guaranteed income stream through a living benefit rider. The most commonly misunderstood product in retail finance.
a hybrid product with greater upside potential than an FIA in exchange for a buffer rather than a floor. The buffer (typically 10-20 percent) absorbs the first 10-20 percent of any loss; losses beyond the buffer are borne by the policyholder. Greater upside because the insurance company is not absorbing all of the downside risk. Subject to market risk including loss of principal. Best for: clients who can accept some defined level of loss in exchange for higher potential return than an FIA.
investment subaccounts (similar to mutual funds) inside an insurance wrapper. Account value fluctuates with underlying investments. Optional riders add death benefit, living benefit, or guaranteed minimum income features. Subject to market risk and possible loss of principal. Historically criticized for high costs and aggressive sales practices; the market has improved but evaluation requires careful cost analysis. Best for: clients who want market participation with specific insurance features that are not available outside the annuity wrapper, and who have evaluated total cost against alternatives.
What Scott Actually Recommends and When He Says No
Scott Kelly's decision framework for annuities is not complicated. He asks three questions before recommending anything.
Does this client have a genuine longevity risk problem? If the assets are substantial, the spending needs are modest, and running out of money in 30 years is not a realistic concern, an annuity may not be the right solution regardless of how well it is structured.
Is there income they cannot outlive that they specifically need? Some clients have meaningful pensions or Social Security benefits that already cover essential expenses. An annuity that duplicates guaranteed income the client already has adds cost without solving a problem.
Is the time horizon compatible with the surrender period? Most fixed and fixed indexed annuities have surrender charge periods of three to ten years during which early withdrawals incur a penalty. If the client has a reasonable probability of needing access to this capital within that window, the surrender structure is wrong for them regardless of the product's other attributes.
If all three questions clear, Scott evaluates specific products for the situation. He does not have a preferred company or a preferred product. He has a preferred outcome: a client who understands what they own, why they own it, and what it is designed to do for them.
What he tells clients when annuities don't make sense: "I don't think this is the right tool for your situation, and here's why."
Scott's approach is education first. He is not compensated to recommend products that do not fit.
Frequently Asked QuestionsAnnuities in Connecticut
Why do some financial advisors say annuities are bad?
Some financial advisors have a structural financial incentive to discourage annuity ownership: fee-based advisors who charge a percentage of assets under management do not earn a fee on assets placed in an annuity. That incentive does not make their advice wrong in every case, some annuity products are genuinely poorly suited to specific clients, and the legitimate criticisms of high-cost variable annuities with aggressive surrender schedules are real. But a blanket dismissal of an entire product category from advisors whose compensation depends on you not owning it deserves scrutiny. Scott Kelly's position is straightforward: annuities solve a specific problem that no investment product solves. Whether that problem applies to a specific client is an individual question. All annuity guarantees are subject to the claims-paying ability of the issuing insurance company.
How do I know if an annuity is right for me?
Three factors determine whether an annuity belongs in a retirement income plan: genuine longevity risk (sufficient life expectancy and spending needs that outliving assets is a real concern), a specific need for income that cannot be outlived beyond what Social Security and any pension provide, and a time horizon compatible with the surrender period of the specific product being evaluated. If all three are present, the product evaluation begins. Westport Wealth Partners evaluates annuities alongside all other retirement income tools in the context of a complete financial plan. Products not suitable for all investors.
What happens if I need my money back after buying an annuity?
Most fixed and fixed indexed annuities allow penalty-free withdrawals of a specified percentage of account value per year, typically 10 percent, without surrender charges. Withdrawals beyond the free amount during the surrender charge period incur a declining surrender charge (for example, 7 percent in year one, declining to zero by year eight). All withdrawals of taxable amounts are subject to ordinary income tax. Withdrawals prior to age 59½ may also be subject to a 10 percent federal tax penalty. Understanding the liquidity provisions before purchase is essential. Westport Wealth Partners does not recommend surrender periods that are incompatible with a client's genuine liquidity needs.
What is the difference between a fixed indexed annuity and a fixed annuity?
A fixed annuity pays a guaranteed interest rate for a set period, with no connection to market performance. The client knows exactly what they will earn. A fixed indexed annuity credits interest based on the performance of a market index, with a floor that prevents negative returns when the index declines and a cap or participation rate that limits the credit when the index rises. Fixed indexed annuities have greater earning potential in positive market environments but more complexity in their mechanics. Both provide principal protection. The right choice depends on the client's income timeline, need for simplicity, and comfort with the indexed crediting structure.
Can an annuity serve as part of an estate plan?
Annuities can be structured with death benefits that pass account value (or a guaranteed minimum) to named beneficiaries outside of probate. Variable annuities can include enhanced death benefits that lock in the highest account value at specified intervals. However, annuities are generally not the most estate-planning-efficient vehicle for passing wealth to heirs compared to alternatives like life insurance or trust structures. Estate planning with annuities requires coordination with an estate planning attorney. Raymond James does not provide legal services.
At what age does an annuity make the most sense?
The most appropriate age for purchasing an annuity depends on the type. A deferred income annuity or fixed indexed annuity with a living benefit rider purchased in the pre-retirement years (55-65) allows the income base to grow before distributions begin. An immediate income annuity or structured payout is most efficient for clients who need income now and have already retired. There is no universal right age: the decision depends on income needs, time horizon, and the role the annuity is designed to play in the overall plan. Products are not suitable for all investors.
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Any opinions are those of the author, are subject to change without notice and are not necessarily those of Raymond James. This material is being provided for information purposes only, it does not purport to be a complete description of the content herein and does not constitute a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.
Investments and account types mentioned may not be suitable for all investors. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Be sure to contact a qualified professional regarding your situation before making any investment or withdrawal decision. Withdrawals and contract provisions may reduce contract values, death benefits, and any applicable rider benefits. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
Variable annuities are long-term investment alternatives designed for retirement purposes. Withdrawals of taxable amounts are subject to income tax and, if made prior to age 59 1/2, may be subject to a 10% federal tax penalty. Early withdrawals may be subject to withdrawal charges. Partial withdrawals may also reduce benefits available under the contract as well as the amount available upon a full surrender. An investment in variable annuities involves risk, including possible loss of principal. The contracts, when redeemed, may be worth more or less than the original investment.
A fixed annuity is a long-term, tax-deferred insurance contract designed for retirement. It allows you to create a fixed stream of income through a process called annuitization and also provides a fixed rate of return based on the terms of the contract. Fixed annuities have limitations. If you decide to take your money out early, you may face fees called surrender charges. Plus, if you're not yet 59½, you may also have to pay an additional 10% tax penalty on top of ordinary income taxes. You should also know that a fixed annuity contains guarantees and protections that are subject to the issuing insurance company's ability to pay for them.
Index annuities are contracts issued by an insurance company that offer earning potential linked to participation in the growth, if any, of an index or benchmark. All deferred annuities are long-term investment alternatives designed for retirement purposes. All annuity contract and rider guarantees, or annuity payout rates, are subject to the claims-paying ability of the issuing insurance company, which is solely responsible for obligations under its contracts. Withdrawals will generally be subject to a surrender penalty if redeemed during the surrender charge period and if they are in excess of any free withdrawal provisions. Since annuities grow tax-deferred, any withdrawals made prior to age 59 1/2 may be subject to a 10% federal tax penalty in addition to any gains being taxed as ordinary income. The S&P 500 index is an unmanaged index of 500 widely held stocks. Investors cannot invest directly in an index.
Considerations for Registered Index-Linked Annuities (RILAs). All investments involve risk and should be carefully considered before investing. RILAs are complex insurance products and may not be suitable for all investors. RILAs are subject to the claims-paying ability of the issuing insurance company. All contract guarantees, including optional riders and benefits, are backed solely by the financial strength and claims-paying ability of the insurer. RILAs may include fees and expenses that can affect performance. Product costs may be reflected through cap rates, participation rates, or protection levels. Depending on the contract, charges may include annual product fees, rider fees, and declining surrender charges for early withdrawals. Fees and charges vary by issuer and contract. Returns are generally tied to the performance of an underlying market index and are determined at the end of a segment term. While RILAs provide a level of downside protection, investors may lose principal if index losses exceed the protection level selected. RILAs linked to an index do not receive dividends paid by the underlying securities. A RILA's growth potential and downside protection are determined by specific contract provisions, including caps, participation rates, buffers, and floors. These terms vary by product and should be carefully reviewed before investing. RILAs are generally designed to be held for the full segment term. Withdrawals or contract liquidation before segment maturity may result in an interim value adjustment and could be worth more or less than the amount invested. Early withdrawals may also be subject to surrender charges, ordinary income taxes, and, if taken before age 59½, a 10% federal tax penalty. Withdrawals may reduce both account value and death benefits. Because of their complexity, RILAs are subject to investment suitability review and may be subject to additional concentration limits or supervisory requirements. Investors should carefully consider their objectives, risk tolerance, liquidity needs, and time horizon before investing. Investors participate in positive market performance subject to applicable caps, participation rates, or other contract limitations. The insurance company absorbs losses only up to the selected level of protection; losses beyond that level will reduce account value. Investors should carefully consider the investment objectives, risks, charges, and expenses of any RILA before investing. The prospectus contains important information regarding the contract and its underlying investment options. Read the prospectus carefully before investing or sending money.
The Social Security and Annuity Coordination QuestionDo You Need Both?
Social Security is itself a form of guaranteed lifetime income, and for many clients approaching retirement, it is the single most important piece of their income floor. Coordinating Social Security timing with the annuity decision is one of the planning conversations Scott has with almost every retirement income client.
A client who delays Social Security claiming to age 70, receiving up to approximately 77% more per month than the age-62 benefit, depending on an individual's Full Retirement Age and eligibility, may need a bridge income source during the years between retirement and 70. A fixed annuity with a defined payout period, or a deferred income annuity (DIA) that begins payments at 70, can serve this function. The bridge strategy allows the client to maximize the lifetime Social Security benefit while not depleting investment accounts to generate income during the waiting period.
For married clients, the higher-earning spouse's claiming age determines the survivor benefit available to the surviving spouse. This decision has implications that extend for potentially 30 or more years. It belongs inside a comprehensive financial plan, coordinated with the annuity decision, not made independently of it.
Raymond James does not provide tax advice. Coordinate with your CPA on the tax treatment of Social Security benefits and annuity distributions.