When I sit down with someone asking “are annuities good,” I can tell they’ve probably heard conflicting information. Maybe a friend swears by their annuity, while another person calls them a complete waste of money. The truth is, like most financial products, annuities aren’t inherently good or bad—it depends entirely on your specific situation and what you’re trying to accomplish.
For a complete overview, see learn more about annuities.
Let me break down what I’ve learned after years of helping families navigate their retirement planning options, including when annuities make sense and when they don’t.
What Are Annuities, Really?
Think of an annuity as a contract with an insurance company. You give them money (either as a lump sum or through payments), and in return, they promise to pay you income for a specified period—sometimes for the rest of your life.
There are several types:
- Immediate annuities - You pay a lump sum and start receiving payments right away
- Deferred annuities - Your money grows for years before you start taking income
- Fixed annuities - Guaranteed interest rate and predictable payments
- Variable annuities - Your money is invested in mutual fund-like accounts
- Indexed annuities - Returns tied to market indexes but with downside protection
Each serves a different purpose, and understanding these differences is crucial to determining if annuities are good for your situation.
When Annuities Can Be Good
Guaranteed Income Stream
The biggest advantage of annuities is certainty. If you’re approaching retirement and losing sleep over market volatility, an immediate annuity can provide guaranteed monthly income for life. You’ll know exactly what’s coming in each month, regardless of what the stock market does.
I’ve worked with clients who had $500,000 in their 401k but were terrified of running out of money. Converting a portion of that into an immediate annuity gave them a guaranteed income floor—peace of mind you can’t put a price on.
Longevity Protection
Here’s something most people don’t consider: What if you live to 95? That’s 30+ years of retirement to fund. Annuities with lifetime income riders protect against outliving your money. The insurance company takes on that longevity risk instead of you.
Tax-Deferred Growth
With deferred annuities, your money grows tax-deferred until you withdraw it. This can be beneficial if you’ve maxed out other tax-advantaged accounts like 401ks and IRAs.
The Downsides of Annuities
High Fees and Complexity
Variable annuities, in particular, can come loaded with fees. Management fees, mortality and expense charges, rider fees—they can easily add up to 2-3% annually. That’s a significant drag on your returns over time.
I’ve reviewed annuity contracts that were so complex even the agents selling them didn’t fully understand all the moving parts. If you can’t explain how your financial product works, that’s usually a red flag.
Limited Liquidity
Most annuities come with surrender charges if you need to access your money early. These can last 7-10 years or more and can be substantial—sometimes 7-10% of your account value. If you might need that money for emergencies, an annuity might not be appropriate.
Inflation Risk
Fixed annuities provide predictable payments, but they don’t adjust for inflation. What seems like adequate income today might not feel the same in 20 years when everything costs more.
Are Annuities Good Compared to Other Options?
This is where it gets interesting. When someone asks me about annuities, I always want to understand what they’re trying to solve for.
If You Want Guaranteed Income
Annuities excel here. But before recommending one, I’d want to explore other options. For instance, properly designed cash value life insurance using strategies like the MPI approach can provide tax-advantaged income in retirement while maintaining more flexibility and potentially higher distribution rates.
Remember my comparison about the 4% rule? If you have $1 million in a traditional retirement account, following the 4% rule gives you $40,000 annually. After taxes, you’re looking at maybe $36,000 take-home—that’s $3,000 per month.
An annuity might guarantee you something similar, but you’ve given up control of your principal. Alternative strategies might give you better income potential while preserving more options.
If You Want Market Upside with Downside Protection
Indexed annuities offer this, but they come with caps on your gains. You might get 80% of the market upside up to a maximum of 6-7% annually. The insurance company keeps the rest.
Again, this is where properly designed life insurance strategies can be compelling. You get similar downside protection (that 0% floor we talk about) but potentially better upside participation.
The Real Questions to Ask
Instead of “are annuities good,” here are better questions:
What am I trying to accomplish? If it’s guaranteed income, annuities might make sense for a portion of your assets. If it’s wealth accumulation or legacy planning, there might be better options.
How much liquidity do I need? If you might need access to your money, the surrender charges on annuities could be problematic.
What are the fees? Make sure you understand all costs involved. Sometimes the fees eat up much of the benefit.
How does this fit my overall plan? An annuity shouldn’t be your entire retirement strategy. It might make sense as one piece of a larger puzzle.
My Honest Take on Annuities
Are annuities good? For the right person in the right situation, absolutely. They can provide guaranteed income and peace of mind that other financial products can’t match.
But they’re not magic, and they’re not right for everyone. The insurance industry has some bad actors who oversell annuities to people who don’t need them or push products with excessive fees.
Would you stop using plumbers because one guy overcharged you? Would you never buy a car again because one salesman was pushy? The same principle applies here. The product isn’t the problem—it’s about finding someone who understands what they’re doing and will recommend what’s truly best for your situation.
In my experience, most people benefit from a diversified approach to retirement income. Maybe that includes an annuity for a guaranteed income floor, some growth-oriented accounts for inflation protection, and tax-advantaged strategies for flexibility.
What to Do Next
If you’re considering an annuity, don’t rush into anything. Take time to understand exactly what you’re buying and how it fits your overall retirement plan. Get a second opinion from someone who isn’t trying to sell you a specific product.
Most importantly, make sure you understand all your options. The retirement strategies most people follow today were built decades ago in a completely different world. There might be better approaches available that can give you the security you want while preserving more flexibility and growth potential.
Related Reading
- Are Annuities Safe Investments: Expert Analysis
- Annuities Reviews: What You Need to Know
- Are Fixed Annuities Safe: Expert Analysis
- Fixed Indexed Annuity Pros and Cons: Expert Analysis
Ready to explore all your retirement income options? As an independent agent, I can help you compare different strategies—from annuities to life insurance to traditional retirement accounts—and find an approach that truly fits your needs and goals.
Get Your Personalized Retirement Strategy Analysis
- Evaluate annuities based on your specific retirement goals and risk tolerance rather than viewing them as universally good or bad financial products.
- Consider annuities when you need guaranteed lifetime income or protection against outliving your retirement savings, especially if market volatility keeps you awake at night.
- Understand that variable annuities often carry high fees of 2-3% annually and complex terms that can significantly impact your long-term returns.
- Prepare for limited access to your money due to surrender charges that can last 7-10 years, making annuities unsuitable if you need emergency fund flexibility.
- Recognize that fixed annuities provide predictable payments but don’t adjust for inflation, potentially reducing your purchasing power over a long retirement.
