When you’re researching retirement income strategies, chances are you’ve come across annuities somewhere in your research. Maybe your financial advisor mentioned them, or you’ve seen ads promising guaranteed income for life. In this comprehensive annuities review, I’ll break down exactly what these products are, how they work, and whether they might make sense for your retirement planning.
For a complete overview, see our complete guide to annuities.
As someone who’s spent years helping families navigate retirement income strategies, I’ve seen both the benefits and the limitations of annuities firsthand. My goal here isn’t to sell you on any particular product, but to give you the complete picture so you can make an informed decision.
What Are Annuities?
At its core, an annuity is a contract with an insurance company where you pay premiums in exchange for a stream of income payments, either immediately or at some point in the future. Think of it as the opposite of life insurance—instead of leaving money to your beneficiaries when you die, an annuity pays you while you’re alive.
There are several different types of annuities, each with their own features and benefits:
Immediate Annuities
With an immediate annuity, you hand over a lump sum to the insurance company and they start paying you income right away—usually within a year. This might make sense if you’re already retired and need to convert a chunk of savings into reliable monthly income.
Deferred Annuities
Deferred annuities work more like traditional retirement accounts. You make payments over time (or contribute a lump sum), the money grows tax-deferred, and then at some point in the future, you can start taking income payments.
Fixed vs. Variable vs. Indexed Annuities
Fixed annuities offer a guaranteed interest rate and predictable growth. Your money grows steadily, but the returns are typically modest.
Variable annuities let you invest in sub-accounts similar to mutual funds. Your returns depend on market performance, which means more potential upside but also more risk.
Indexed annuities tie your returns to a market index like the S&P 500, but with a guaranteed floor (usually 0%) to protect against losses and a cap on potential gains.
The Main Benefits of Annuities
Guaranteed Income for Life
The biggest selling point of annuities is that many offer guaranteed income you can’t outlive. In a world where pensions are disappearing and people are living longer, this can provide valuable peace of mind.
Tax-Deferred Growth
Money inside an annuity grows tax-deferred, similar to a 401k or IRA. You don’t pay taxes on the growth until you start taking withdrawals, which can help accelerate accumulation during your working years.
No Contribution Limits
Unlike 401ks and IRAs, annuities don’t have annual contribution limits. If you have a large lump sum to put toward retirement—maybe from an inheritance or business sale—an annuity can accommodate it.
Principal Protection
Many annuities offer some form of principal protection, especially fixed and indexed varieties. Your account value won’t go backward due to market losses, though fees and charges can still reduce your balance.
The Drawbacks and Limitations
High Fees and Charges
This is the big one. Annuities are notorious for their fee structures, which can include:
- Surrender charges if you withdraw money early (often 6-10 years)
- Annual management fees
- Rider fees for additional benefits
- Mortality and expense charges
These fees can significantly eat into your returns over time.
Limited Liquidity
Most annuities tie up your money for years. If you need access to your funds early, you’ll typically face surrender charges that can be substantial—sometimes 10% or more of your account value.
Complexity
Variable and indexed annuities can be incredibly complex products with features that are difficult to understand. I’ve seen contracts that are hundreds of pages long with terms that would confuse even experienced financial professionals.
Inflation Risk
Fixed annuities offer predictable income, but that income typically doesn’t adjust for inflation. What seems like adequate income today might not maintain your purchasing power 20 or 30 years from now.
How Annuities Compare to Other Retirement Strategies
Annuities vs. 401k/IRA
Traditional retirement accounts offer more flexibility and typically lower fees, but they don’t provide guaranteed income. You’re responsible for managing withdrawal rates and sequence of returns risk.
Annuities vs. The MPI Strategy
This is where my experience with properly designed Indexed Universal Life policies using the MPI strategy becomes relevant. While both annuities and the MPI strategy can provide tax-advantaged growth and retirement income, there are some key differences:
The MPI strategy typically offers more liquidity—you can access your cash value through policy loans without surrender charges. It also provides a death benefit for your beneficiaries, creating potential generational wealth transfer opportunities.
With the MPI strategy, you might be able to use a 10% distribution rate through policy loans that are generally not treated as taxable income, compared to the 4% rule that’s often recommended for traditional retirement accounts.
Annuities vs. Traditional Investments
A diversified investment portfolio might offer higher long-term returns than an annuity, but without the guarantees. It really comes down to your risk tolerance and need for guaranteed income.
Who Might Benefit from Annuities?
Despite their limitations, annuities can make sense for certain situations:
Conservative Investors
If you’re extremely risk-averse and value guaranteed income over growth potential, a fixed annuity might align with your priorities.
Pension Replacement
If you’re used to the idea of a pension and want to create something similar, an immediate annuity can provide that guaranteed monthly check.
Longevity Insurance
If you’re worried about outliving your money and have a family history of long lifespans, the guaranteed income feature becomes more valuable.
Tax-Deferred Growth
If you’ve maxed out other tax-advantaged accounts and want additional tax-deferred growth, an annuity provides that option.
Red Flags to Watch Out For
High-Pressure Sales Tactics
Any advisor who’s pushing you to “act now” or making guarantees about returns should raise red flags. Legitimate annuity recommendations should come with thorough analysis and no pressure.
Promises That Sound Too Good to Be True
If someone’s promising high returns with no risk, be skeptical. All financial products involve trade-offs.
Lack of Disclosure About Fees
Make sure you understand exactly what you’ll be paying in fees and charges. A good advisor should be transparent about all costs involved.
Switching Existing Annuities
Be very cautious about recommendations to surrender an existing annuity for a new one. This often benefits the advisor more than the client.
Questions to Ask Before Buying
Before considering any annuity, ask these key questions:
- What are all the fees and charges, and how do they impact my returns?
- How long are the surrender charges, and what are the penalties?
- What happens if I need access to my money early?
- How does the income rider work, and what does it actually guarantee?
- What are the financial strength ratings of the insurance company?
- Are there other strategies that might better meet my needs?
My Professional Take on Annuities
After years of helping families with retirement planning, here’s my honest assessment: annuities can serve a purpose, but they’re not right for everyone, and they’re rarely the complete solution to retirement income planning.
The guaranteed income feature is valuable for some people, but it comes at a cost—high fees, limited liquidity, and often modest returns. For many of my clients, especially those who are open to learning about alternatives, properly designed life insurance strategies like the MPI approach can provide similar benefits with more flexibility.
That said, I’ve worked with clients where a small immediate annuity made sense as part of a larger retirement income strategy—maybe to cover basic expenses with guaranteed income while using other strategies for growth and discretionary spending.
- Understand that annuities are insurance contracts that convert your savings into guaranteed income streams, working as the opposite of life insurance by paying you while you’re alive rather than beneficiaries when you die.
- Choose between immediate annuities for current retirees needing income now, or deferred annuities that grow tax-deferred over time before converting to future income payments.
- Consider fixed annuities for predictable growth, variable annuities for market-linked potential, or indexed annuities that offer market upside with downside protection through guaranteed floors.
- Take advantage of annuities’ unique benefits including guaranteed lifetime income, tax-deferred growth, no annual contribution limits, and principal protection against market losses.
- Evaluate high fees and charges carefully, as annuities are known for complex fee structures that can significantly impact your overall returns and account value over time.
The Bottom Line
Annuities aren’t inherently good or bad—they’re tools that work better for some situations than others. The key is understanding exactly what you’re getting, what you’re paying for it, and whether it aligns with your overall retirement goals.
If you’re considering an annuity, take your time. Get multiple opinions. Make sure you understand all the features, benefits, and limitations before committing. And remember—once you’re in an annuity, getting out early can be expensive.
Most importantly, don’t let anyone pressure you into a decision. The right retirement income strategy is the one that fits your specific situation, risk tolerance, and long-term goals.
Finding the right retirement income strategy doesn’t have to be complicated. As an independent agent, I work with multiple top-rated carriers and can help you explore all your options—whether that’s annuities, life insurance strategies, or other approaches.
Related Reading
- Annuities Reviews: What You Need to Know
- Are Annuities Safe Investments: Expert Analysis
- How Safe Are Annuities
- Are Fixed Annuities Safe: Expert Analysis
Let me help you compare your options. I’ll analyze your situation and help you understand the pros and cons of different strategies so you can make an informed decision.
