He Rolled $800,000 Into An Annuity At 65 Because He Was Told He Couldn’t Lose Money. Then He Read The Surrender Schedule.

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Picture a 65-year-old former operations manager sitting across from a salesperson who makes one promise stick. Put the money in this annuity and you can’t lose a dime. He moves $800,000 of after-tax savings into a deferred annuity. A year later he needs cash for a new roof and his daughter’s wedding. He opens the contract and finds the page he skipped past: the surrender schedule.

People his age hold most of the money these products are built for. Households ages 55 to 69 held 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” Actually Rested On

The promise covered less than it sounded like. The guarantee of principal and credited interest in a fixed or fixed indexed annuity is backed by the insurance company’s claims-paying ability, and no federal agency stands behind it. If an insurer fails, state guaranty associations act as a backstop. Coverage limits vary by state, and each association sets its own caps and rules.

The sales talk also skipped over access to the money. “Can’t lose money” usually means market declines won’t reduce the contract value. It says nothing about what happens if the owner needs that value early.

How a Surrender Schedule Takes Its Cut

A surrender charge is a fee the insurance company subtracts when the owner cancels the contract, or withdraws more than it allows, during the surrender period. Insurers use it largely to recover the commission paid to the selling agent and other upfront costs. The charge typically starts highest in year one and steps down each year until it reaches zero.

Here is a hypothetical schedule, for example only:

Under this hypothetical schedule, cashing out the whole contract in year one would cost $56,000. So “can’t lose money” holds only if he leaves the money alone.

Free Withdrawals Cushion the Charge

Most deferred annuities include a free-withdrawal provision, which lets the owner take a set piece of the contract value each year without a surrender charge. In our hypothetical, with a 10% annual allowance, he could take $80,000 in year one with no charge. If he surrendered the rest that year, the year-one charge would apply to the remaining balance, costing $50,400. Many contracts also waive charges for events such as terminal illness or nursing home confinement. Some add a market value adjustment, which can raise or lower the surrender value as interest rates move.

Taxes Land on Top of the Charge

He paid with after-tax money, so this is a nonqualified contract. Withdrawals made before the annuity starting date come out of earnings first. The tax code handles a withdrawal as income up to the excess of the cash value “determined without regard to any surrender charge” over his 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. He is 65, so he is clear of the additional tax on early distributions, which applies to withdrawals taken before the taxpayer attains age 59½.

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

Three Options Once You’re Already Locked In

• Wait out the schedule. The charge reduce every year and eventually hits zero. Cash needs in the meantime have to come from other money.
• Stay within the free-withdrawal allowance. Spreading large expenses over several contract years can avoid charges entirely.
• Make a tax-free exchange. The tax code says no gain or loss is recognized on the exchange of “an annuity contract for an annuity contract” (26 U.S.C. § 1035(a)(3)). The exchange avoids tax, but the old insurance company can still take its surrender charge, and the new contract usually starts a fresh surrender period. If the money had come from a 401(k) rollover, the contract would sit inside an IRA and move under IRA transfer rules instead.

How the Contract Stacks Up Against Plainer Options

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 its market price with no surrender charge. Bank CDs carry early-withdrawal penalties set by the bank. An annuity adds tax deferral on nonqualified savings and options to turn the balance into lifetime income. Compare each offer’s rate against these benchmarks over the same time frame, and check the full contract terms alongside the headline rate.

Who This Contract Fits and Who Gets Trapped

A deferred annuity with a surrender schedule tends to fit someone who:

• Won’t need the money for the full surrender period
• Keeps a separate cash reserve for big expenses
• Wants tax deferral and principal protection backed by an insurer’s claims-paying ability

It tends to trap someone who:

• Expects large costs in the first few contract years
• Puts most of their liquid net worth into one contract
• Already has guaranteed income covering essential bills

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

Before signing, read 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 decide whether “can’t lose money” turns out to be true for you.

The post He Rolled $800,000 Into an Annuity at 65 Because He Was Told He Couldn’t Lose Money. Then He Read the Surrender Schedule. appeared first on 24/7 Wall St..