3 Mistakes People Make When Comparing Annuities to 401(k)s (And How to Avoid Them)

Thinking about annuities vs. your 401(k)? Good move. However, making the wrong comparison could be costly. Here are three big mistakes people usually make when Comparing Annuities to 401(k)s — and how you can spot them (before someone tries selling you something that sounds great but isn’t).

3 Mistakes People Make When Comparing Annuities to 401(k)s (And How to Avoid Them)

Mistake 1: Ignoring Fees & Hidden Costs

What people get wrong: They see the “guaranteed lifetime income” or “tax deferral” benefit of an annuity and think that’s it. They don’t factor in the fees that eat into what they really get.

Examples & stats:

• Variable annuities can carry mortality and expense (M&E) fees of 0.5% to 1.5% per year. Bankrate+2SmartAsset+2

• Optional riders (bonuses you pay extra for, like income guarantee or death benefits) often cost 0.25% to 1%+ annually. Bankrate+2Gainbridge+2

• Surrender charges (penalties for taking money out early) can be up to ~10% initially, declining over time. Bankrate+1

Why that matters: Your 401(k) also has fees (fund expense ratios, maybe admin fees, etc.), but usually they’re more transparent, and you’re more in control (choosing funds, balancing risk, etc.). If the fees on the annuity are high, they might wipe out much of the “guarantee” you liked.

Mistake 2: Overlooking Flexibility & Liquidity

What people get wrong: They see annuities as forever-safe, forever steady—and they forget that once you lock in certain kinds, it’s hard to change your mind without cost.

Examples & realities:

• Some annuities have long surrender periods (7-10 years or more) where you pay heavy penalties for early withdrawals. Guardian Life+1

• 401(k)s (or IRAs) are generally more flexible. Even though withdrawing early has penalties, you can still adjust investments, move money, change allocations, etc.

• If market conditions shift (say interest rates go down, or your life situation changes), being locked into a rigid annuity might hurt more than help.

Mistake 3: Betting Everything on Guarantees (Without Checking Strength & Risks)

What people get wrong: They assume “guaranteed” means “perfect, no risk, backed by angels.” Not true. The guarantee depends on the issuer (insurance company) and contract terms. And sometimes the things they guarantee aren’t the parts people actually care about.

Examples & facts:

• The strength of the guarantee is only as good as the financial health of the company offering it. If they’re weak, or poorly diversified, you might lose (or see reduced payouts).

• Guarantees often come with trade-offs: lower growth potential, caps, participation rates, or even more fees in exchange for those guarantees.

• Market volatility, inflation & longevity risk still matter: if your annuity’s payout doesn’t adjust for inflation, your “guaranteed” income may buy less over time.

✅ How to Make the Right Comparison

Here are some ways you, me, and anyone shopping for retirement tools can do this smartly:

• List total costs: commission, fees, riders, surrender charges. Compare with typical fees in your 401(k).

• Check guarantee strength: look up the insurance company’s ratings, how long they’ve been in business, how diversified they are.

• Evaluate flexibility needs: Will you need access to funds? Might your priorities change?

• Combine tools: sometimes a part in 401(k), part in annuity makes sense — you keep growth potential and some predictable income.

If you're considering annuities, I’m happy to walk you through real numbers to see how the trade-offs work out in your situation.

👉 Get a Quote from Nicole Irwin — no pressure, just a conversation. I’ll ask questions, lay out what different carriers offer, and help you pick what fits best (not just what a company wants to sell).