Annuities Can Be Good and a Bad Investment, Depending on Your Goals
Annuities are misunderstood. They’re either loved as income-producing lifelines or dismissed as inflexible, overpriced traps. The truth is, both views are valid—depending on your goals, age, financial needs, and understanding of the product. We cover every reason annuities are a good investment and every reason they’re a bad one, across all types: fixed, fixed indexed (FIA), variable, immediate (SPIA), deferred (DIA), and annuities with guaranteed lifetime withdrawal benefits (GLWBs).
If you decide after reading this guide that annuities are a good investment for you, start comparing rates. When you compare annuity rates across insurers, differences of even a fraction of a percent compound into meaningful dollars over time. Shopping blindly almost always results in lower long-term returns.
Why Annuities Are a Bad Investment
Helpful Tip: We believe in full transparency. Before you buy, you need to understand the specific disadvantages of annuities—like surrender charges and complexity—to ensure they don’t derail your plan.
Illiquidity
Most annuities lock your money for 2–10+ years.
- Withdrawals above the free amount (usually 10%) result in steep surrender charges. Find out how to get out of an annuity.
- MYGAs and FIAs are especially restrictive during the early years.
- Pro Tip: Only invest funds you won’t need for emergencies.
- Why it’s bad: You’re penalized for withdrawing more than the penalty-free withdrawal amount during the surrender period (2–10+ years).
- Who it hurts: People who might need cash access, younger investors, or those who aren’t 100% sure about the contract.
- Alternative: Use MYGAs with shorter surrender periods, or bond/CD ladders for more flexibility.
Complexity
- Why it’s bad: Riders, caps, spreads, and bonus structures confuse many buyers, leading to poor decisions.
- Who it hurts: Uninformed buyers, especially seniors who are vulnerable to sales tactics.
- Alternative: Fixed annuities or MYGAs are simpler options. Always use a licensed, independent broker.
- Pro Tip: Read our deep dive on FIA complexity to understand if the extra moving parts are worth the potential return.
High Fees in Variable Annuities
- Variable annuities often charge 2%–4% per year in M&E (mortality and expense) fees, rider costs, and fund expenses.
- GLWBs on fixed indexed annuities charge annual rider fees.
- Fees are acceptable only if you’re using the rider or income.
- Why it’s bad: VAs often charge 3–4%+ annually between M&E, fund, and rider fees.
- Who it hurts: Anyone looking for market growth without realizing the drag from fees.
- Alternative: Use no-fee indexed annuities or low-cost mutual funds for growth.
Limited Upside Potential
- MYGAs cap your return to a fixed interest rate.
- FIAs may not pay dividends and limit upside through caps, spreads, or participation rates.
- Variable annuities allow growth, but at the cost of principal risk and high fees.
- Alternative: Use annuities for the safe portion of your portfolio. Keep growth assets in Roth IRAs or taxable brokerage accounts.
Taxed as Ordinary Income
When you withdraw gains, they’re taxed as ordinary income, not at lower capital gains rates.
- Non-qualified annuities do not receive a step-up in basis at death, unlike stocks or real estate.
- Why it isn’t good: Withdrawals are taxed at income rates, which are higher than capital gains rates.
- Who it hurts: High-net-worth individuals using non-qualified annuities.
- Alternative: Roth IRAs or permanent life insurance offer better tax treatment.
No Step-Up in Basis
- Why it’s bad: Your beneficiaries must pay income tax on gains in non-qualified annuities.
- Who it hurts: Estate planners and their heirs.
- Alternative: Use brokerage accounts or real estate, which receive a step-up in basis at death.
Surrender Charges Limit Flexibility
- Why it’s bad: If your goals change, you’re stuck—or you’ll pay a penalty to leave.
- Who it hurts: People unsure of their long-term financial plans.
- Alternative: Choose shorter-term MYGAs or FIAs with enhanced liquidity riders.
Annuitization Is Permanent
- Why it’s bad: SPIA annuitization is irreversible. You lose access to the principal, and the insurer keeps the money if you die early.
- Who it hurts: Buyers who didn’t understand the trade-off.
- Alternative: Use GLWB riders on indexed annuities for revocable income and better legacy options.
Risk of Weak Insurer
- Why it isn’t good: Not all carriers are financially strong. Lower-rated companies may offer teaser benefits to attract buyers.
- Who it hurts: Anyone prioritizing yield over safety.
- Alternative: Only consider A- or higher AM Best-rated insurers. Compare Comdex scores and carrier history.
Inflation Erodes Fixed Payouts
- Why it isn’t good: annuity income stays the same while costs rise.
- Who it hurts: Long-lived retirees or early retirees buying SPIAs with no inflation riders.
- Alternative: Use annuities with increasing income riders, or ladder annuity purchases over time.
Misleading Sales Practices
- Bonuses, illustrated returns, or cherry-picked indexes are often exaggerated.
- Some agents push high-commission products without regard for suitability.
- Solution: Work with an independent broker who compares multiple annuity types.
- Note: Commissions aren’t inherently bad. Unlike fees paid to financial advisors, which come directly out of your pocket regardless of market performance, commissions are paid by insurance companies. Since you’re purchasing a contract rather than making an investment, these commissions don’t positively or negatively impact your contract’s value. In contrast, advisor fees are charged in both good and bad market conditions and directly affect your portfolio’s performance. The key distinction is that the provider absorbs commissions, while fees reduce your returns in all market environments.
Engineered Indexes and Renewal Rate Risk
- Many FIAs no longer use traditional indexes like the S&P 500.
- Insurers create proprietary indexes that are less transparent and harder to research.
- Renewal caps and participation rates can drop after the first year. However, some FIAs have renewal rates locked in for the term.
- Buyer Beware: Not all contracts are created equal. Check our “Blacklist” of the worst annuities you can buy to ensure you aren’t being sold a lemon.
Not FDIC-Insured
- Annuities are backed by life insurers and protected by state guaranty associations—not FDIC.
- Limits vary by state (typically $250k–$500k per owner per insurer).
- Always check carrier ratings (A- or better recommended).
Why Some Types of Annuities Might Be a Bad Investment
Immediate Annuities
- Lack of Liquidity: Immediate annuities lock in your funds, making it challenging to access your money in emergencies without penalties.
- Inflation Risk: Payments are fixed and may not keep pace with inflation, reducing purchasing power over time.
- Irrevocability: Once purchased, you cannot change or cancel the contract, which can be problematic if your financial situation changes.
Fixed Annuities
- Low Returns: Fixed annuities often offer lower returns compared to other investment options like stocks or mutual funds.
- Interest Rate Risk: Fixed annuities can become less attractive in a rising interest rate environment as newer products offer higher rates.
- Limited Growth Potential: These annuities do not benefit from market upswings, limiting overall growth.
Fixed Indexed Annuities (FIAs)
- Complexity: FIAs have complex terms, including caps, spreads, and participation rates that can be difficult to understand.
- Limited Upside Potential: Despite linking to market indexes, caps on returns limit the upside potential.
- Surrender charges: Early withdrawal can incur high surrender charges, reducing liquidity.
Variable Annuities
- High Fees: Variable annuities often come with high fees, including mortality and expense risk charges, administrative fees, and fund expenses.
- Market Risk: Unlike fixed annuities, variable annuities are subject to market fluctuations, which can result in losses.
- Complexity and Transparency: Due to their complexity, understanding the terms and conditions of variable annuities can be challenging.
Registered Index-Linked Annuities (RILAs)
- Market Risk: While RILAs offer some downside protection, they still expose you to market risks, which can result in losses.
- Complex Features: Similar to FIAs, RILAs have complex terms that can be difficult to understand fully.
- Limited Upside: Despite offering potentially higher returns, the caps and participation rates can limit the actual benefits.
When Product Design, Not the Category, Creates the Problem
Every Reason Why Annuities Are A Good Investment
Guaranteed Income for Life
One of the most compelling reasons to consider annuities is their ability to provide guaranteed income for life. As you approach retirement, having a steady income stream becomes crucial. Unlike stocks or bonds, annuities ensure you won’t outlive your savings, offering financial peace of mind regardless of market fluctuations.
- How it works: Single Premium Immediate Annuities (SPIAs) and deferred annuities with a Guaranteed Lifetime Withdrawal Benefit (GLWB) provide income for life—even if your account runs out.
- Why it matters: Outliving your savings is the top fear in retirement. Annuities eliminate this risk.
- Who needs it: Retirees without pensions, solo retirees, women (due to longer lifespans), and early retirees using non-qualified SPIAs with life insurance to avoid IRS penalties before 59½.
- No alternative offers this: No mutual fund, ETF, or stock can guarantee lifetime income.
Tax-Deferred Growth
Annuities are a powerful tool for retirement savings due to their tax-deferred growth feature. This favorable tax feature allows your investments to grow without being taxed until withdrawal. By deferring taxes, you can potentially accumulate a larger retirement fund, maximizing your savings over time.
- Why it matters: Compounding grows faster without taxes dragging you down yearly.
- Who needs it: High-income earners who’ve maxed out tax-advantaged accounts or anyone doing a 1035 exchange.
- Alternatives: Roth IRAs grow tax-free, but have income and contribution limits.
- Works Best With: Non-qualified money when your 401(k) and IRA contributions are maxed out.
Protection from Market Volatility
Fixed and indexed annuities offer a safety net against market downturns. These products protect your principal, ensuring stability even during economic uncertainties. Unlike mutual funds or individual stocks, annuities are insulated from direct market impacts, making them a secure choice for conservative investors.
- MYGAs (Multi-Year Guarantee Annuities) and fixed annuities offer fixed interest over time.
- Fixed Indexed Annuities (FIAs) credit interest based on index performance with no downside risk.
- Use Case: Retirees can use annuities to replace bonds and stabilize portfolios during volatile markets.
Customizable Options
Annuities come in various forms—fixed, variable, and indexed—each catering to different risk tolerances and financial goals. This flexibility allows you to tailor your investment strategy to your specific needs, offering a more personalized approach to retirement planning.
Avoid Probate
Unlike assets that go through probate, annuity death benefits are paid directly to the beneficiaries you name in the contract. This exception means your loved ones can receive the money faster, privately, and without the delays or legal costs of probate court. It’s a built-in estate planning advantage that simplifies wealth transfer.
- Why it matters: It saves time, reduces legal costs, and keeps transfers private.
- Who needs it: Anyone with heirs, complex family situations, or without a living trust.
- Alternatives: Trust-owned assets can also bypass probate but require ongoing maintenance.
Early Retirement Strategy Without Penalties
A life-only SPIA funded with non-qualified money avoids the 10% IRS early withdrawal penalty—even if you’re under age 59½.
- Why It Matters: You can retire early and still get a guaranteed income.
- Best Practice: Always pair a life-only SPIA with permanent life insurance to restore your legacy.
Long-Term Care and Death Benefits
Some annuities provide additional benefits, such as long-term care coverage and death benefits. Many annuities waive surrender penalties if you’re diagnosed terminally ill or admitted to a nursing home. These features protect you and your loved ones against unexpected healthcare costs and financial uncertainties, providing comprehensive security for your retirement years.
- Why it matters: Certain annuities are designed to double or triple your premium if you need long-term care.
- What it does:
- Pays for home care, assisted living, or nursing homes.
- This approach preserves family assets while providing critical support.
- Who needs it: Retirees with no long-term care insurance or those concerned about sudden health expenses.
- Alternative insurance: Hybrid long-term care annuities or life insurance with LTC riders provide more robust coverage.
No Contribution Limits
Unlike retirement accounts such as IRAs and 401(k)s, annuities don’t have annual contribution limits, which makes them a good option for high-income individuals looking to invest more for retirement.
- Why it matters: Once you’ve maxed out other accounts, annuities keep your money growing tax-deferred.
- Who needs it: Business owners, doctors, high-income earners, or inheritance recipients.
- Alternative: Brokerage accounts have no limits, but no tax advantages either.
Diversification
Annuities add diversification to an investment portfolio by providing a balance between growth and income. Fixed index annuities, for example, can be linked to a market index while still offering downside protection.
No Required Minimum Distributions (RMDs) in Nonqualified Annuities
Non-qualified annuities (funded with after-tax dollars) don’t require RMDs at age 73 as traditional IRAs or 401(k)s. This funding allows for more control over when you start taking withdrawals.
Long-Term Care Riders
Some annuities come with optional long-term care riders, providing additional coverage for healthcare expenses. This additional benefit can be a cost-effective way to address long-term care risks without purchasing a separate policy. You can customize annuities with features that:
- Guarantee lifetime income (GLWB)
- Accelerate payments for long-term care
- Increase payments over time for inflation
- Protect death benefits for heirs
- These riders can be expensive, but they help you tailor the contract to your goals.
Legacy Planning
With various payout options and beneficiary designations, annuities can be used as a reliable tool for estate planning.
- Why it matters: Your heirs don’t lose out if you die early.
- Who needs it: Those wanting to leave a legacy while receiving income now.
- GLWB Contracts: Can continue income to a spouse or refund unused value at death.
- SPIAs and DIAs: Add refund or period-certain options to prevent losing principal if you die early.
- Alternatives: Life insurance is better for pure legacy planning.
High Withdrawal Rates Compared to Traditional Strategies
Annuities with Guaranteed Lifetime Withdrawal Benefits (GLWBs) often offer higher withdrawal rates (5%-8%) than the standard 4% rule used in traditional retirement planning. This income strategy can increase retirement income while reducing withdrawal risks.
Pro Tip: While the “4% rule” is common in traditional investing, annuities with income riders can often provide safe withdrawal rates of 6% to 8%. Use our annuity calculator to model your specific retirement timeline and see how much more monthly income an annuity can provide compared to a standard brokerage account.
Protection Against Longevity Risk
Since annuities can provide income for life, they protect against longevity risk—the risk of outliving your savings. This feature is particularly valuable in an era of increasing life expectancy.
Simplified Money Management
Once an annuity is purchased and structured, it automates the income generation process. This automation removes the guesswork involved in managing withdrawals and ensures consistent cash flow.
Potential for Upside Growth (With Protection)
Fixed index annuities allow for potential upside through index-linked returns without risking the principal. You can benefit from stock market growth while being protected from losses.
- Why it matters: Participate in growth without risk of loss.
- Who needs it: Retirees who want higher potential returns but are too risk-averse for equities.
- Alternative: Buffered ETFs and structured notes offer partial downside protection, but with market risk and no income guarantees.
- Base Hit Strategy: Designed to earn moderate returns over time, not huge one-year gains.
- Unique Benefit: Annual reset locks in gains and establishes a new floor.
FIAs Earn Interest in Bull and Bear Markets
Using the annual point-to-point strategy, FIAs:
- Capture upside in bull and bear markets (within caps or participation rates).
- Lock in gains each year.
- Reset your “floor” annually, protecting against future declines.
Competitive Rates Compared to Low-Yield Alternatives
Multi-year guaranteed annuities (MYGAs) and fixed annuities often offer better rates than certificates of deposit (CDs) or bonds. The higher rates make them attractive to conservative investors seeking stable returns.
- Why it matters: You know exactly what your return will be.
- Who needs it: Retirees who want bond-like returns without interest rate risk.
- Alternative: CDs or Treasury notes offer similar guarantees but lack tax deferral.
Flexible Payout Structures
Annuities offer various payout structures, including single-life, joint-life, and period-certain options. These choices give investors control over how long income is guaranteed.
Ability to Defer Social Security Benefits
By using annuity income to cover living expenses, retirees can delay claiming Social Security benefits. This strategy increases their eventual Social Security payout, which grows by about 8% per year of deferral after full retirement age.
Reduced Cognitive Risk in Retirement
As individuals age, managing investments becomes more challenging. Annuities reduce the burden of ongoing investment decisions, lowering the risk of financial mismanagement in later years.
Avoids Sequence of Returns Risk
Annuities provide consistent income regardless of market conditions, protecting retirees from sequence of returns risk—the danger that poor market performance early in retirement could erode a portfolio too quickly.
Contractual Guarantees
Unlike other investments, annuities offer contractual guarantees provided by the insurance company. These guarantees include income, principal protection, and interest rates, making annuities unique compared to other financial products.
Can Fund Mortgages or Other Fixed Expenses
Want to live mortgage-free in retirement? Use your annuity income to make regular mortgage payments.
- Strategy: Buy a fixed indexed annuity with a GLWB (if over 59½) or a life-only SPIA with life insurance (if younger).
- Bonus: After the home is paid off or sold, the annuity continues paying income.
Business Owners Can Guarantee Income Regardless of Success or Failure
Use an annuity to ensure your personal income even if your business underperforms or fails.
- GLWB or SPIA payouts guarantee a minimum income stream.
- Valuable for solo entrepreneurs, freelancers, or business owners with no pension.
Creditor Protection (Varies by State)
In many states, annuities are protected from creditors, meaning they can’t be seized in a lawsuit or bankruptcy. This protection makes them a valuable asset protection tool, especially for professionals or business owners at higher legal risk. The level of protection varies by state, so it’s essential to check your local laws.
- Why it matters: Annuities can function as an asset protection strategy.
- Who needs it: Professionals with legal exposure (doctors, landlords, business owners).
- Alternative: Asset protection trusts provide legal defense, but are more complex and expensive.
Lifetime Income That Doesn’t Stop When You Sell an Asset
Use annuity income to pay for real estate holding costs or fund home flipping projects.
- After the asset is sold, your annuity keeps paying.
- You keep the profit and the paycheck.
Spousal Continuation
Many annuities allow a spouse to continue the income stream upon the annuitant’s death, ensuring financial stability for the surviving partner.
RMD-Friendly with QLACs
Qualified Longevity Annuity Contracts (QLACs) let you defer up to $210,000 from your IRA or 401(k) beyond age 73, reducing taxable RMDs and prolonging retirement income.
Roth IRA Annuities Provide Tax-Free Income
Roth IRA annuities offer tax-free income during retirement. This feature benefits both individuals and married couples by providing a predictable, lifetime income without the burden of future tax liabilities. It’s a reliable strategy for tax-efficient retirement planning.
Medicaid Annuities Help Protect Assets While Qualifying for Medicaid
Medicaid-compliant annuities allow retirees to convert assets into an income stream, helping them qualify for Medicaid while preserving wealth for the healthy spouse. This exception is a common strategy to protect assets when planning for long-term care.
Annuities with Bonuses Provide Guaranteed Returns
Some annuities offer upfront bonuses on initial premiums, boosting the contract’s value immediately. Combined with guaranteed minimum interest rates, these annuities provide attractive, risk-free growth for conservative investors seeking enhanced returns.
Enhanced Death Benefits as Life Insurance Alternatives
Annuities with enhanced death benefits can serve as life insurance alternatives, especially for applicants who may not qualify for traditional life insurance due to health issues. Additionally, these enhanced benefits(up to a 50% bonus) can be used with qualified retirement accounts to provide a legacy for beneficiaries, ensuring financial protection for loved ones.
How To Match Your Needs With The Best Products
| Need | Product Solution |
|---|---|
| Lifetime Income | GLWB on Indexed Annuity |
| Income Before 59½ | SPIA with Life Insurance |
| Long-Term Care | LTC Annuity or Hybrid Life Policy |
| Tax-Free Growth | Roth IRA, Roth Annuity, or Life Insurance |
| Death Benefit Protection | Term or Permanent Life Insurance |
| Deferring RMDs | QLAC |
| Asset Protection | Annuity (state-dependent) or Trust |
Who Should Buy Annuities?
- Age 50+
- Retirees seeking a predictable income
- People without pensions
- Investors needing principal protection
- Savers with non-qualified funds
- Business owners seeking income stability
- Individuals planning for long-term care or legacy
Helpful Tip: Fitting into one of these categories is a great starting point, but your specific financial picture matters most. If you are still weighing the pros and cons against your personal retirement goals, read our detailed guide to answer the question: Are annuities right for me?
Who Should Avoid Annuities?
- Under 45 and focused on aggressive growth
- Anyone needing liquidity or quick access to funds
- Investors who hate fees but don’t need income protection
- People who don’t understand how annuities work
- DIY investors who prefer total control and market exposure
Related Insurance That Complements Annuities
| Insurance Type | Why You Might Need It |
|---|---|
| Life Insurance | Offsets annuitization loss and creates a tax-free legacy |
| Long-Term Care Insurance | Doubles or triples annuity value in hybrid structures |
| Disability Insurance | Protects younger workers using annuities for early retirement |
| Medigap or Medicare Advantage | Matches annuity income to health cost planning |
| Critical Illness Insurance | Helps fund care if health conditions arise unexpectedly |
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Annuities aren’t right for everyone. But when matched to the right need, they can protect your future like nothing else. Make an informed decision because the wrong annuity could cost you flexibility, income, or growth. Let The Annuity Expert help you:
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- Pair annuities with life or LTC insurance
- Avoid high fees, poor liquidity, and low-value contracts
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Questions From Our Readers
Why should you not buy annuities?
Annuities are long-term investments for retirement, not short-term investments to spend before retirement.
What are the pros and cons of annuities?
Annuities offer guaranteed income, the potential for higher returns, and tax-deferred growth, but can also have high fees, limited liquidity, investment risk, surrender charges, and reduced control. Understanding the terms and weighing the pros and cons before deciding is essential.
What are the pros and cons of annuities for older adults, and how do I know if they’re right for my parents?
Annuities provide guaranteed income, can include long-term care and inflation protection riders, act as life insurance alternatives, and Medicaid-compliant annuities help with asset protection. Downsides include limited liquidity, fees, and reduced benefits if life expectancy is short. They’re ideal if your parents need income, care planning, and asset preservation.
Is a fixed annuity a good investment?
A fixed annuity can be a good investment for individuals seeking a reliable source of income in retirement. With a predetermined interest rate and guaranteed payouts, it offers stability and security. However, it may not be the best option for those looking for higher returns or flexibility in accessing their funds. It is advisable to consult with a financial advisor to determine if a fixed annuity aligns with your investment goals and risk tolerance.
Are annuities high-risk?
Generally, annuities are considered low risk, especially as a strategy to shield retirement funds from market volatility. Fixed annuities, for example, provide stable returns. However, variable annuities carry some risk as their performance depends on the underlying investment options, and it is possible to lose money with them. The risk level depends on the type of annuity you choose.
Are annuities only for retirement?
No, annuities are not exclusively used for retirement purposes. They are versatile financial tools that can be used in various situations. For instance, annuities are often utilized for structured settlements in court cases, providing consistent payments to the beneficiary over time. Additionally, lottery winners frequently opt for annuities to receive their winnings in periodic payments rather than a lump sum, helping manage large amounts of money more effectively and potentially reducing tax burdens.
Are guaranteed annuities a good investment?
Guaranteed annuities can provide stable income, but whether they’re a good investment depends on individual goals and risk tolerance. They offer predictable payouts but often have lower returns compared to other investments. Consider financial needs, liquidity, and long-term objectives before deciding on suitability.
Are annuities a good investment for a 70-year-old?
MYGAs, Fixed Indexed Annuities, and Long-Term Care Annuities can be suitable investments for a 70-year-old. They offer stable income, potential for growth, and additional benefits like long-term care coverage.
Are 5-year fixed annuities a good investment?
A 5-year fixed annuity might not be the best choice in a high-interest-rate environment. Conversely, it can be an excellent investment in a low-interest-rate environment.
Are annuities a good idea for retirement income?
Overall, annuities are the best vehicle for retirement income. However, annuitization is not a good idea because you lose control over your savings. GLWB distribution is the best method for retirement income.
What type of annuity does Suze Orman recommend as a good investment?
She has often discussed deferred fixed-indexed annuities in her interviews and books as an excellent option for those wanting a secure retirement income.
“If you don’t want to take risks but still want to play the stock market, a good index annuity might be right for you.” – Suze Orman’s The Road to Wealth.
Are annuities a scam?
Annuities are generally not a scam and are one of the oldest investment vehicles. However, many poorly designed contracts exist, so working with an annuity expert is essential to ensure you choose the right one.
Are annuities affected by the stock market?
Variable and Registered Index-Linked Annuities (RILAs) are affected by the stock market. Fixed and fixed index annuities, however, are not influenced by market fluctuations, offering more stability.
Are annuities bad for seniors?
Variable and Registered Index-Linked Annuities (RILAs) are generally not ideal for seniors due to exposure to market losses and higher fees. Fixed and fixed index annuities can be better options, offering stability and lower costs.
Are annuities good for young investors?
Annuities are usually more beneficial for investors over 40. For those under 40, a Fixed Index Annuity (FIA) may work as a bond alternative within the safe portion of a portfolio, offering growth potential without market risk.
Are deferred income annuities a good investment?
Deferred Income Annuities (DIAs) are often not ideal because you lose control of your assets and may forfeit the investment if you cancel. Deferred annuities with a Guaranteed Lifetime Withdrawal Benefit (GLWB) solve these issues while still providing lifetime income.
Are deferred fixed annuities a good investment?
Deferred fixed annuities can be a strong choice in higher interest rate environments, typically outperforming CDs. They are less attractive when interest rates are low.
Are fixed-income annuities a good investment?
Fixed-income annuities are most effective when income is distributed through a Guaranteed Lifetime Withdrawal Benefit (GLWB). They are less favorable if income is taken through annuitization, which limits flexibility.
Are fixed index annuities a good investment?
Yes, fixed index annuities (FIAs) can be a solid option for the conservative-to-moderate part of a retirement portfolio, providing principal protection with growth potential linked to market indexes.
Are immediate annuities a good investment?
Single Premium Immediate Annuities (SPIAs) are less attractive because you give up control of your assets and earn little interest. A GLWB with immediate income is often a better choice, allowing you to keep control while earning interest.
I’m 27 and trying to plan for the long term. Are annuities beneficial, or are they overrated? I’ve heard they have high fees, low returns, confusing terms, and lack flexibility. Are they ever worth considering?
At age 27, it’s early to buy annuities for retirement income, but it’s smart to understand how they fit into a long-term plan. Annuities aren’t growth tools like stocks—they’re income tools designed to reduce risk later in life. That said, if you’re building a conservative portion of your portfolio and want to avoid bond volatility, a fixed indexed annuity (FIA) could be used as a bond alternative in your safe bucket. This option is rare at your age, but not unheard of.
You’re right to be cautious. Many variable annuities come with high, often confusing fees. But not all annuities are created equal. Fixed and fixed indexed annuities typically have no annual fees, unless you add optional benefits. While your money is locked up during a surrender period (usually 5–10 years), most contracts let you withdraw around 10% annually without penalty. So, while they’re not entirely liquid, they aren’t completely inaccessible either.
Returns on annuities are lower than stock market averages, but that’s because they offer principal protection. You’re trading off some upside for safety and predictability. This feature matters more as you near retirement, not when you’re in your 20s. If inflation is a concern (which it should be), some annuities offer inflation-adjusted payout options or riders that increase income over time.
As for the complexity—yes, annuities can be confusing. That’s why you should only buy one through an independent advisor who can compare multiple companies, explain the terms clearly, and align it with your goals.
In short, annuities make the most sense later in life when your priority shifts from growing wealth to preserving income. At 27, focus on maxing your Roth IRA, 401(k), and HSA. Just keep annuities on your radar for future use—especially when you’re ready to turn savings into reliable income. They’re not a scam or a bad deal, but they are often misunderstood and misused.
What is a better investment for retirement: a retirement annuity or investing in property?
A retirement annuity offers guaranteed income and no landlord duties. Property may offer growth and rental income, but it includes maintenance, vacancies, and market risk. Annuities suit hands-off, income-focused retirees; property suits those seeking control and willing to manage assets. Many use both for balance.
I mistakenly invested my Roth IRA in a variable annuity with a surrender fee. Should I cancel it now, take the 4% hit, and reinvest in low-cost ETFs like VOO, or wait two more years for the surrender period to end?
Since this is inside a Roth IRA, taxes aren’t a concern—only the 4% surrender charge. If your annuity is underperforming and you plan to invest aggressively (e.g., VOO) for decades, paying the fee may be worth it to avoid further opportunity cost. Staying in low-growth annuities for two more years could result in a larger loss than the $3,200 penalty due to missed market gains. However, verify if the annuity includes any living or death benefits—if not, there’s no good reason to stay. In the future, avoid advisors who sell products that benefit them more than you.
I’m 54 with $1.6M in retirement assets, $250K in cash, no mortgage, and $40K/year in child support for four more years. My advisor suggests putting $950K into an annuity to get $5,000/month for life. I want a stable income from ages 59 to 65 due to health concerns. Is this a good idea, or are there better alternatives?
Annuities can be a smart fit in your situation, especially given your health concerns and goal of securing a predictable income from age 59. A $950K annuity generating $5,000/month (with survivor benefits) offers peace of mind, protects against market drops, and ensures essential expenses like housing and healthcare are covered. This investment strategy makes sense for your “Coast FIRE” goal, especially since your remaining assets can be invested for growth. The survivor benefit ensures your spouse is also covered.
However, before committing, clarify whether the advisor is proposing a Single Premium Immediate Annuity (SPIA) or a Fixed Indexed Annuity (FIA) with a Guaranteed Lifetime Withdrawal Benefit (GLWB). SPIAs are irreversible and don’t allow access to the principal, whereas FIAs offer income, some access to funds, and a death benefit. With health issues, an FIA + GLWB may be more flexible and still meet your needs.
Also consider layering income: set up the annuity to cover essentials and use your remaining investments to bridge to Social Security and Medicare. At age 59, healthcare premiums will be one of your most significant expenses—so guaranteed income that supports those costs is wise. If you’re eligible for a Health Savings Account (HSA), max it out and preserve it for tax-free medical spending.
Alternatives? If you’re wary of annuitization, a bond ladder or dividend income portfolio could work, but won’t provide longevity protection. Given your health, though, some insurers may offer enhanced payouts depending on your condition (called impaired risk underwriting), which could raise your annuity income further.
What kind of annuity could be considered a fixed income alternative or supplement to bonds in portfolio allocation?
A fixed indexed annuity (FIA) is often used as a fixed income alternative or supplement to bonds within a portfolio. It provides principal protection while offering the potential to earn interest based on the performance of a stock market index, without the risk of market losses. Unlike bonds, FIAs are not directly affected by rising interest rates or bond price fluctuations. The pros include downside protection, tax-deferred growth, and the option for guaranteed lifetime income through a rider. However, FIAs may have limited upside due to caps or participation rates and can impose surrender charges if funds are withdrawn early.
Should I consider an annuity at age 46 if I’m worried about market volatility and retirement security?
Yes, it’s reasonable to consider an annuity at age 46—especially if market volatility is making you anxious and you’re seeking more predictability. A fixed indexed annuity (FIA) can serve as a safe, bond-like alternative with no market downside, tax-deferred growth, and optional lifetime income later. You don’t have to start income now; many annuities allow you to grow your money until you’re ready. It’s too early to lock into income, but it’s not too early to protect a portion of your future. Just avoid annuities with high fees or long surrender periods.
What are some red flags to watch for in annuities if I want moderate gains with lower risk than equities?
Yes, beyond the surrender period, red flags include high annual fees (especially in variable annuities), engineered indexes with no public track record, declining renewal rates on fixed indexed annuities, and annuitization requirements that permanently lock up your money. Watch for misleading bonus offers with long vesting schedules or income riders that inflate values you can’t walk away with. If you want moderate gains and lower risk, consider a fixed indexed annuity with a traditional index like the S&P 500, a guaranteed lifetime income rider (GLWB), and no annual fees. Avoid products pushing maximum complexity.
Do annuities belong in your $1M+ portfolio?
Yes, annuities can play a strategic role in a $1M+ portfolio by reducing risk, generating guaranteed income, and protecting against market downturns. For high-net-worth investors, fixed indexed annuities offer principal protection with growth potential, while deferred income annuities or GLWB riders ensure lifetime income. They also help shift assets out of taxable accounts and simplify estate planning. However, avoid high-fee variable annuities and products with illiquid terms unless income is the goal. Annuities shouldn’t replace growth assets, but can complement them by securing essential income and reducing withdrawal pressure during market declines.
Should we use a guaranteed income annuity and Roth conversions as we approach retirement with $1.85 million saved?
Yes, combining a guaranteed income annuity with Roth conversions can be a strong retirement strategy. The annuity offering 8% simple interest likely refers to an income base for a guaranteed lifetime withdrawal benefit (GLWB), not a real account return, so it’s essential to understand the difference between the two. It provides predictable income, reduces sequence-of-return risk, and protects your portfolio in down markets. Roth conversions help lower future RMDs and reduce taxes in retirement. With $1.85 million saved across tax-deferred and taxable accounts, this approach balances tax planning, income security, and long-term flexibility—especially if paired with other liquid assets for unexpected needs.
Should I use annuities to guarantee income for life if I plan to spend most of my retirement savings?
Yes, if you plan to spend down most of your portfolio, annuities with guaranteed lifetime income can be one of the smartest moves you make. A guaranteed lifetime withdrawal benefit (GLWB) rider or a life-only SPIA ensures you never run out of income, no matter how long you live or how the markets perform. This strategy removes the guesswork from retirement planning and protects against longevity risk. It also frees up other assets for emergencies or discretionary spending. Just avoid annuitization unless necessary—GLWBs provide more flexibility and preserve access to the principal if your needs change.
Are annuities a good option for ensuring a stable income during retirement?
Yes, annuities can be a strong option for stable retirement income. They offer contractually guaranteed payouts for life or a set period, which protects you from outliving your money. Fixed indexed annuities with a guaranteed lifetime withdrawal benefit (GLWB) provide income, principal protection, and growth potential tied to an index. Immediate annuities offer income right away but with less flexibility. Annuities work well for retirees who want a predictable income and less exposure to market risk, but they’re less suited for those needing full liquidity or maximum growth. Always compare options to match your needs and goals.
What’s the best way to generate $2,500–$3,000/month in fixed income from a $300K lump sum without using traditional annuities?
To generate $2,500–$3,000/month from a $300K lump sum, you’ll need to spend principal—no traditional investment or bond will safely yield 10–12% annually. A standard annuity might feel restrictive, but there are better alternatives.
A Fixed Indexed Annuity (FIA) with a Guaranteed Lifetime Withdrawal Benefit (GLWB) is your best fit. It provides guaranteed lifetime income and continues to earn interest based on a market index while paying you monthly. You don’t lose access to your money, and the income keeps coming even if the account runs out.
Another option is laddered Multi-Year Guaranteed Annuities (MYGAs). They pay fixed rates around 5–5.3% and can be structured for short- to medium-term withdrawals. These work if you’re okay spending down the principal over 5–8 years.
You can also combine strategies: use $200K in a GLWB annuity for lifetime income and the remaining $100K in a MYGA or high-yield dividend ETF for extra income now.
Avoid relying solely on dividend funds or high-yield bonds—they’re volatile and won’t guarantee the income you need. If your goal is predictable income, a GLWB-based annuity offers the best mix of stability and access.
Is buying an annuity at 53½ with income starting at 59½ a good idea if I’ve already retired with $2.7M in assets and $65K/year expenses?
Yes, it can make sense—especially if your priority is long-term income stability over maximizing growth. A $604K annuity paying $36K annually starting at 59½ is effectively a Deferred Income Annuity (DIA) or a Fixed Indexed Annuity (FIA) with a Guaranteed Lifetime Withdrawal Benefit (GLWB). The 6% payout you mentioned isn’t a return—it’s a withdrawal rate based on the income value, which typically grows during the deferral period.
Your current assets and income sources easily cover expenses until then, so delaying income is not a problem. In fact, deferring the start date increases the guaranteed payout. You’ve already identified the key trade-offs: no inheritance from that chunk of principal (though everything else will go to heirs), potential underperformance versus the stock market, and overfunding once Social Security kicks in. But these aren’t necessarily downsides—just realities based on your goals.
The most significant advantage you’re capturing is longevity risk protection—you’re securing income no matter how long you live, without needing to manage a portfolio in old age actively. That peace of mind is why many retirees are turning to annuities as a “personal pension.”
The only real red flag? Make sure the product you’re being offered isn’t annuitized. If it is, you lose access to the principal forever. Instead, consider an FIA with a GLWB, which provides the same income guarantees, allows access to funds if needed, and typically offers death benefits to heirs. It’s also more flexible if your plans change.
So no, you’re not missing anything obvious. You’ve done a solid job weighing the pros and cons. Just confirm the annuity type, compare quotes from multiple A-rated carriers—not just Fidelity—and consider structuring part of your portfolio for guaranteed income while keeping the rest for growth, liquidity, and legacy. Many people in your situation are doing the same.
Should I consider an annuity if I plan to invest a lump sum now and start drawing income in 25 years?
Yes, if you’re planning to hold a lump sum for 25 years before taking income, a deferred income annuity (DIA) or a fixed indexed annuity (FIA) with a Guaranteed Lifetime Withdrawal Benefit (GLWB) can be a strategic choice. Over that long deferral period, your income base grows—often with guaranteed interest or roll-ups—resulting in a much higher future income payout. An FIA with a GLWB offers more flexibility than a DIA, since you keep access to the principal and can leave money to heirs. It’s a way to lock in future income while reducing market risk and mental burden in old age.
If all my savings were invested in annuities, and there was a huge market crash, could I lose it all (or a significant portion)?
No, not if you’re using the correct type of annuities. Fixed annuities, fixed indexed annuities (FIAs), and multi-year guaranteed annuities (MYGAs) all protect your principal regardless of market conditions. Even during a crash, your contract value won’t drop due to market losses. Only variable annuities are exposed to market downturns—your account value can decline with the market, though income guarantees may still apply if you have a rider. Always choose A-rated insurers and avoid variable annuities if your goal is principal protection.
What are your thoughts on investing in Registered Index-Linked Annuities (RILAs or Buffered Annuities)?
Registered Index-Linked Annuities (RILAs), or buffered annuities, are becoming more common because they offer partial downside protection with market-based growth potential. They appeal to people who want better returns than CDs or MYGAs but less risk than investing directly in equities. On paper, the value proposition sounds great: no explicit fees, built-in buffers or floors, and capped upside. As you are deciding whether annuities fit an investment strategy, best annuities for aggressive investors can help separate higher upside potential from the market risk, fees, crediting limits, and guarantee tradeoffs used to get it.
However, these products still carry market risk. Unlike fixed indexed annuities (FIAs), RILAs are registered securities, and your account value can lose money if market losses exceed your buffer. For example, with a 10% buffer, a 25% market drop still exposes you to a 15% loss.
They’re also more complicated than they seem. Credit terms like caps, participation rates, buffers, and durations vary widely. Many are tied to engineered indexes rather than traditional ones like the S&P 500, making it hard to predict or understand how gains are credited. These terms are usually reset annually and can become less favorable after the first year.
RILAs often have no upfront fees, but the real cost is baked into the limited upside. In bull markets, you may significantly underperform a basic index fund. Withdrawals above 10% per year are often subject to surrender charges, and gains are taxed as ordinary income, not capital gains.
They’re heavily marketed because insurers and advisors earn strong margins. Some advisors push RILAs without comparing them to more appropriate options like MYGAs or FIAs with GLWBs, which offer true principal protection and guaranteed lifetime income.
I don’t typically use RILAs unless a client fully understands the risks, has a long time horizon, and doesn’t need the money during the surrender period. For conservative investors or those seeking stable income, I prefer FIAs with GLWBs or MYGAs. They offer more protection, simpler crediting, and better long-term predictability.
RILAs aren’t scams—but they’re complex, and it’s easy to overestimate their safety or potential. Always compare them directly to FIAs and MYGAs to ensure the trade-offs align with your retirement goals.
Why don’t more people buy annuities when they retire?
Many retirees avoid annuities due to a mix of misunderstanding, mistrust, and a fear of losing control over their money. Some think all annuities require permanently giving up their principal (annuitization), when in fact, modern annuities with features like guaranteed lifetime withdrawal benefits (GLWBs) allow access to funds and income. Others are turned off by surrender charges, complex terms, or the belief they can do better in the market. Past aggressive sales tactics have also left a bad impression.
That said, annuity sales have hit records in 2025, especially among retirees seeking protection from market volatility, guaranteed lifetime income, and rising interest rates that have made annuity payouts more attractive. While skepticism remains, more people are recognizing annuities as a reliable retirement income tool—once they understand how the newer products work. The biggest barrier is usually a lack of education, not product performance.
How do annuities compare to other retirement investment options?
Annuities provide guaranteed income and principal protection, unlike most traditional investments. Fixed annuities offer predictable growth, similar to CDs or bonds, but with tax-deferred interest. Fixed indexed annuities (FIAs) allow market-linked gains without downside risk, while variable annuities offer higher growth potential but expose you to market losses and fees.
Compared to IRAs or 401(k)s, annuities don’t have annual contribution limits and can offer lifetime income through guaranteed withdrawal benefits. However, they typically have less liquidity, surrender charges, and may offer lower returns than stocks or mutual funds.
Annuities shine when you need income security, while other investments are better for growth and flexibility. The best retirement plans combine both.
Should financial advisors recommend annuities to their clients?
Yes, financial advisors should recommend annuities when they align with a client’s goals—especially for guaranteed lifetime income, principal protection, or longevity risk management. Annuities can reduce market reliance, cover essential expenses, and simplify retirement withdrawals. However, not every client needs one. Advisors must evaluate income needs, risk tolerance, liquidity, and tax implications before suggesting a product. Recommending annuities without alternatives or a proper explanation can violate fiduciary duty. When used correctly—like pairing a fixed indexed annuity with a GLWB—they can strengthen a retirement plan and provide security other investments can’t.
Is it worth hiring a financial advisor to discuss annuities and other financial products?
Is it worth hiring a financial advisor to discuss annuities and other financial products?
Yes, hiring a financial advisor can be worth it—if they’re independent, transparent, and focused on your goals. Annuities are complex, with different structures, fees, and trade-offs. A qualified advisor can explain how each type works, compare products from multiple carriers, and show how an annuity fits into your retirement plan alongside Social Security, investments, and taxes.
If you prefer a DIY approach but still want expert help, consider working with an annuity broker instead. Brokers specialize in annuities, give you access to dozens of carriers, and can help you compare options without managing your entire financial plan. Either route is better than buying direct from a carrier or relying on a sales pitch without understanding your choices.
Are SPIAs bad and indexed annuities good, or is that just sales talk?
That’s sales talk. Indexed annuities often pay higher commissions than SPIAs, which is why some agents push them harder. However, suppose a fixed index annuity with a GLWB provides higher lifetime income than a SPIA. In that case, it can actually be better for the consumer, since income is the SPIA’s only feature, and an FIA can add flexibility, growth potential, and a death benefit. Many experienced investors still favor SPIAs and MYGAs for their simplicity and low commissions. Still, the best choice comes down to which product delivers the most value and income for your specific needs.
Can fixed index annuities be a good alternative to bonds for the safe portion of a portfolio?
Yes—FIAs can serve as a bond alternative by protecting principal while offering growth potential tied to a market index. They typically have no direct market losses, and gains lock in periodically, which can outperform bonds in low-rate environments. While they won’t capture the whole market upside, they can deliver higher returns than fixed rates alone and add flexibility, such as GLWB riders for lifetime income.
Is a MYGA a good alternative to bonds for the safe portion of a portfolio?
Yes—MYGAs can work well as a bond alternative because they offer a fixed, contractually guaranteed rate and principal protection, often with minimal or no explicit fees. Unlike bonds, they’re not subject to market price swings, making them appealing for safety-focused investors. The key is understanding the details—rate term, surrender period, and insurer strength—and remembering that “annuity” is a broad term. Asking “which kind?” matters because MYGAs differ greatly from variable or indexed annuities in structure, cost, and risk.
If dividends can cover the shortfall until Social Security, making my withdrawal rate 0%, is an annuity still necessary?
Probably not for income needs, but an annuity could still serve as insurance against longevity risk, market downturns, or poor health later in life. Even if dividends cover expenses now, future income could drop if companies cut payouts, and market values can fluctuate. Annuities provide contractually guaranteed income that doesn’t depend on market performance, which can add peace of mind—but in your case, it’s more of a risk management tool than a necessity.
Are annuities a good addition to a diversified portfolio for those without pensions?
Yes—if you don’t have a pension, allocating part of your portfolio to an annuity can create a contractually guaranteed income stream, reducing the risk of outliving your assets. It shouldn’t be your only investment, but it can serve as a stable “income floor” alongside other assets. Like other financial products, annuities involve compensation—whether commissions, flat fees, or revenue from investments—but when chosen for the right purpose, the value of the income protection can outweigh the cost.
For retirees with modest savings, low expenses, limited investment knowledge, and low risk tolerance, an annuity can be a smart choice. It turns a portion of their assets into a contractually guaranteed income stream, removing the stress of managing investments and protecting them from market downturns. While advisors may earn commissions, the trade-off can be worth it when the client’s primary need is predictable income rather than growth. In these circumstances, the annuity acts as both income insurance and a safeguard against poor financial decision-making.