Of all the misconceptions that follow annuities around, this one may be the most persistent — and the most damaging, because it causes people to dismiss a product that might genuinely serve them well based on something that simply isn’t accurate.
The truth is more nuanced. Yes, most annuities have surrender schedules — periods during which taking out more than a certain amount triggers a charge. But calling annuities “completely illiquid” misses the full picture by a wide margin.
Let’s walk through what access actually looks like in practice.
First, a quick history lesson.
Annuities are one of the oldest financial products in existence — the first versions date back to the Roman Empire, where citizens would make a lump sum payment in exchange for annual payments for life. The Latin word “annua” literally means annual payments.
The core purpose hasn’t changed. Annuities exist primarily to provide guaranteed income — whether for life or for a specific period of time — and they remain the only financial product available today that can guarantee you will not outlive your money. Pensions once served this role for many Americans, but they’re becoming increasingly rare in the private sector. For most people, an annuity is the only realistic way to replicate that experience.
Guaranteed lifetime income — available in as little as 30 days.
For annuities designed to provide guaranteed lifetime income, the income stream can begin as soon as 30 days after the contract is issued. And because activating that income stream is considered exercising a built-in contract feature — not a withdrawal — surrender charges don’t apply. The surrender schedule is bypassed entirely.
In other words, the primary thing annuities were designed to do is available immediately and without penalty.
What about people who just want withdrawals?
Annuities handle this well too. It’s extremely common for contracts to allow withdrawals of up to 10% of the account value per year without triggering surrender charges. Some contracts go further — allowing up to 30% of the account value to be withdrawn in a single contract year.
For someone using an annuity as part of a retirement income strategy, a 10% annual withdrawal provision is often more than sufficient — and in many cases, it’s a very deliberate and popular approach to generating retirement income.
Emergency and medical provisions.
Many annuity contracts include built-in waivers that suspend surrender charges entirely in specific circumstances — terminal illness diagnosis, nursing home admission, or the need for long-term care. These provisions are written directly into the contract, not added on as an afterthought.
For someone whose primary concern about locking money up is “what if something happens to me” — this is the answer.
“Why not just use bonds for income? At least those are liquid.”
This is a fair question, and it deserves a direct answer. The answer comes down to one word: stability.
The value of a fixed annuity is simply more stable than the value of a bond — and in retirement income planning, stability isn’t a nice-to-have. It’s foundational.
Consider 2022. The Bloomberg US Aggregate Bond Index — the broadest measure of the US bond market — posted a return of -13.02% that year. For someone relying on their bond portfolio to generate income, that meant selling at a significant loss to fund their retirement expenses. Remember, this is supposed to be their safe bucket of money — and it was down double digits in a single year.
It’s also worth putting that number in context: a -13% loss from a bond portfolio is often a steeper hit than simply paying the surrender charge to exit an annuity early, which in many cases is less than 10%. The product that gets criticized for being “illiquid” frequently costs less to exit than the “liquid” alternative lost in a single bad year.
A fixed annuity doesn’t work that way. The insurance company guarantees that your principal and earned interest won’t decrease due to market conditions — full stop. That means the income stream you plan around at the beginning of retirement is the same income stream you can count on when markets get difficult.
There’s another benefit to this stability that often gets overlooked: because a fixed annuity creates such a predictable, dependable income floor, we can often allocate a larger percentage of a client’s remaining assets to equities if that’s what they want. The rock-solid foundation of the annuity income means we don’t need to over-allocate to bonds as a cushion against market volatility. The annuity is already doing that job.
Why do surrender charges exist in the first place?
This is worth understanding, because it reframes the entire conversation.
When you purchase an annuity, the insurance company is making you a series of contractual promises — a guaranteed interest rate, guaranteed principal protection, guaranteed lifetime income, or some combination of all three. These aren’t marketing claims. They’re legally binding guarantees written into your contract.
In order to sustainably deliver on those promises, the insurance company needs to know that your funds will remain with them for at least a certain period of time. That runway allows them to invest your premium, earn a return on it, and ultimately make good on every guarantee they’ve committed to. The surrender schedule isn’t a penalty designed to trap you — it’s the mechanism that makes the guarantees possible in the first place. Without it, the math doesn’t work, and neither do the promises.
Think of it this way: the insurance company is essentially saying “we’ll guarantee you things no one else in the financial world will guarantee you — but we need a reasonable amount of time to deliver.” That’s a tradeoff most people find quite reasonable once they understand it.
And for those who simply can’t stomach a surrender schedule — even with the guarantees attached — the annuity market has evolved to meet that need too. There are newer annuity products available today with no surrender schedule whatsoever, offering 100% liquidity from day one while still providing many of the core protections annuities are known for.
The bottom line: surrender charges are not a trap. They’re a feature of a contract that’s making you guarantees no other financial product will. And if even that feels like too much of a constraint, there’s likely still a structure that works for you.
Liquidity looks different with annuities than it does with a savings account. That’s true. But “different” and “illiquid” are not the same thing — and for someone whose primary goal is a stable, predictable retirement income stream, the tradeoff is often exactly what they were looking for without realizing it.
If you’ve ever wondered how this might work for your specific situation, that’s a conversation worth having.
