Few financial products generate stronger opinions than annuities.
Ask one person about them and you may hear:
"An annuity can provide income you can't outlive."
Ask someone else and they'll tell you:
"Annuities are expensive and lock up your money."
So who's right? Potentially both:
Because asking whether annuities are "good" or "bad" may be the wrong question.
A better question is:
Does a particular annuity solve a specific problem in your retirement plan—and are the benefits worth the costs and tradeoffs?
First, What Is an Annuity?
At its core, an annuity is a contract with an insurance company.
Depending on the type of annuity and the features selected, it may be designed to provide accumulation potential, principal protection, tax deferral, income or some combination of those features.
But the word annuity describes a broad category.
Fixed annuities, fixed indexed annuities and variable annuities can work very differently. Even two contracts within the same category can have significantly different features, costs, restrictions and guarantees.
That's why blanket statements about annuities can be misleading.
Why Retirees Consider Them
One challenge of retirement is creating income without knowing exactly how long retirement will last.
Most retirees know when their paycheck stops.
They don't know how long they'll need to replace it.
Certain annuity contracts can help address that uncertainty by providing an income stream based on the terms of the contract. Depending on the product, that income may continue for a specified period or potentially for life.
For someone concerned about longevity, that can be attractive.
Annuities can also potentially help separate a portion of retirement income from the day-to-day movement of the stock market.
But those benefits come with tradeoffs.
The Part That Often Gets Overlooked
Annuities can be complex.
Depending on the contract, considerations may include:
- Surrender charges for withdrawals during a specified period
- Limits on how much can be withdrawn without charges
- Contract fees or optional rider costs
- Caps, participation rates or other limits affecting interest-crediting methods on some products
- Investment risk associated with variable annuities
- Tax consequences when money is withdrawn
- The financial strength and claims-paying ability of the issuing insurance company
Some contracts are relatively straightforward.
Others include multiple features that can make them more difficult to evaluate.
That's why an annuity shouldn't be purchased simply because someone wants "safety" or "guaranteed income."
The details matter.
Are Annuities Expensive?
Some are. Some are not.
The cost structure varies significantly depending on the type of annuity and optional benefits selected.
Rather than simply asking, "What does this cost?", investors should also ask:
"What am I receiving in exchange for that cost?"
If you're paying for an income guarantee you don't need, the feature may provide little value to your plan.
If predictable lifetime income addresses an important risk in your retirement strategy, you may view the same feature differently.
That's why comparisons should be based on your objectives—not simply on which product has the most features.
What About Liquidity?
This is one of the most important considerations.
Many annuities are designed to be held for the longer term. Withdrawals beyond amounts permitted by the contract may result in surrender charges, particularly during the early years.
For that reason, money that may be needed for emergencies or near-term expenses may be better kept somewhere more accessible.
An income strategy shouldn't solve one problem while creating another.
When Might an Annuity Be Worth Considering?
An annuity may be worth evaluating when a retiree is particularly concerned about:
- Creating predictable retirement income
- Outliving their assets
- Reducing dependence on market withdrawals for essential expenses
- Creating an additional income source beyond Social Security or a pension
But an annuity may be less appropriate for someone who needs significant liquidity, has sufficient guaranteed income already, has a short time horizon, or simply doesn't need the benefits being offered.
Don't Just Ask Whether Annuities Are Good or Bad
Instead, ask:
"What specific retirement problem would this annuity solve?"
Then ask:
"What am I giving up in exchange?"
That's the conversation that matters.
Annuities aren't automatically a retirement lifeline.
They aren't automatically an expensive mistake, either.
They're financial tools with benefits, costs, limitations and tradeoffs.
Understanding those tradeoffs before you make a decision can help determine whether an annuity deserves a place in your retirement income strategy—or whether another approach may be more appropriate.
What's Next?
If you’re curious what your retirement actually looks like month‑to‑month, I’m happy to walk through it with you. No cost. No pressure. Just a straightforward conversation to see how income, expenses, and risk line up in real life, not just on paper. Schedule a phone or video call HERE.
Not quite ready to meet? I've created some guides you might find interesting. You can learn more and download them at the links below:
To your retirement,
Ben Harvey, RICP®
Annuities are best suited for long term investors. Some features may be available only by the purchase of a rider, an optional addition to an annuity or life insurance policy that is available for an additional fee. Withdrawals prior to age 59 1/2 may be subject to an additional 10% tax penalty. Surrender charges may apply. Guarantees are provided by the claims-paying ability of the underlying insurance company. The strategies or products discussed may not be suitable for all individuals. All investing involves risk, including potential loss of principal. Individual results may vary based on unique circumstances. Consult a qualified financial professional to discuss your specific situation and suitability needs.
