He Put $800,000 Into an Annuity at 65 After Being Told It Was Safe. Then He Found the Surrender Schedule.

Quick Read

• The claim that you “can’t lose money” only holds if the funds stay in the contract; a hypothetical 7% surrender charge in the first year would cost $56,000 on $800,000.

• Free-withdrawal provisions can ease the pain, allowing an owner to take 10% a year, or about $80,000 in this case, without triggering a surrender charge.

• Principal protection depends on the insurer’s ability to pay claims, with no federal guarantee and state guaranty limits that differ by location.

• The biggest 401(k) decisions are often made once and then never revisited: when to roll over, what to invest in, and when withdrawals should start. That is what the report, 401k & IRA Tips and Answers, was designed to help with, and it is free now. (Sponsor)

Imagine a 65-year-old former operations manager listening to a salesperson make a simple promise: put the money in this annuity and you can’t lose a dime. He moves $800,000 in after-tax savings into a deferred annuity. A year later, he needs cash for a roof replacement and his daughter’s wedding. When he opens the contract, he finds the section he overlooked: the surrender schedule.

People in his age group hold a large share of the assets these products are meant for. Households ages 55 to 69 accounted for 41% of household-sector net worth and 49.5% of defined contribution pension entitlements and annuities in 2026 Q2, according to Federal Reserve data.

What “You Can’t Lose Money” Really Means

The promise is narrower than it sounds. In a fixed or fixed indexed annuity, the guarantee of principal and credited interest is backed by the insurance company’s claims-paying ability, and no federal agency stands behind it. If the insurer fails, state guaranty associations may step in. Coverage limits differ by state, and each association sets its own rules and caps.

The sales pitch also leaves out access to the money. “Can’t lose money” usually means market declines will not reduce the contract value. It does not say what happens if the owner needs to withdraw that value early.

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How a Surrender Schedule Takes Its Cut

A surrender charge is a fee the insurance company deducts when the owner cancels the contract or withdraws more than the contract allows during the surrender period. Insurers largely use it to recover commissions paid to the selling agent and other upfront expenses. The charge usually starts highest in the first year and declines each year until it reaches zero.

Under this hypothetical schedule, cashing out the entire contract in the first year would cost $56,000. So the promise that you “can’t lose money” is true only if the owner leaves the money untouched.

Free Withdrawals Can Reduce the Damage

Most deferred annuities include a free-withdrawal feature, which allows the owner to remove a set percentage of the contract value each year without paying a surrender charge. In this example, a 10% annual allowance would let him take $80,000 in year one with no charge. If he then surrendered the rest that year, the first-year charge would apply to the remaining balance, creating a cost of $50,400. Many contracts also waive surrender charges for circumstances such as terminal illness or nursing home confinement. Some also include a market value adjustment, which can increase or reduce the surrender value as interest rates change.

Taxes Come on Top of the Charge

He used after-tax money, so this is a nonqualified contract. Withdrawals made before the annuity starting date come out of earnings first. Under the tax code, a withdrawal is treated as income up to the amount by which the cash value, “determined without regard to any surrender charge,” exceeds the investment in the contract (26 U.S.C. § 72(e)(3)(A)). Distributions from a nonqualified annuity also count as net investment income for the Net Investment Income Tax, according to IRS Publication 939. Because he is 65, he is past the additional tax on early distributions, which applies to withdrawals taken before age 59½.

A large taxable withdrawal can also affect Medicare costs. In 2026, single filers with income above $109,000 and joint filers above $218,000 move beyond the standard Part B premium of $202.90 a month.

Three Options Once the Money Is Already Locked In

How the Contract Compares With Simpler Choices

The 10-year Treasury yielded 4.90% on November 4, 2026, and the national average 12-month CD paid 1.76% APY as of October 1, 2026. A Treasury can be sold before maturity at market value without a surrender charge. Bank CDs usually impose early-withdrawal penalties set by the bank. An annuity adds tax deferral on nonqualified savings and the possibility of lifetime income. Compare each offer’s rate against these benchmarks over the same time period, and read the full contract terms alongside the headline rate.

Who This Contract Helps, and Who It Can Trap

A deferred annuity with a surrender schedule is often a better fit for someone who:

• Will not need the money during the full surrender period

• Maintains a separate cash reserve for major expenses

• Wants tax deferral and principal protection backed by an insurer’s claims-paying ability

It can be a poor fit for someone who:

• Anticipates major expenses in the first few years of the contract

• Puts most of their liquid net worth into one contract

• Already has guaranteed income covering essential bills

For context, the average retired worker’s Social Security benefit is $2,071 a month after the 2.8% 2026 COLA.

Before signing, review the surrender schedule, the free-withdrawal percentage, any market value adjustment, the insurer’s financial strength, and your own state’s guaranty association limits. Those pages determine whether the promise that you “can’t lose money” proves true for you.

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