When people ask me “is annuity a good investment?” I have to stop them right there. The first thing I tell them is that annuities aren’t investments at all—they’re insurance products designed to provide guaranteed income. Once we clear up that fundamental misunderstanding, we can have a real conversation about whether an annuity makes sense for their situation.
For a complete overview, see how annuities work.
I’ve been helping families navigate these decisions for years, and I’ve learned that the answer isn’t a simple yes or no. It depends entirely on what you’re trying to accomplish, your age, your risk tolerance, and how an annuity fits into your overall retirement strategy.
What Exactly Is an Annuity?
An annuity is a contract with an insurance company where you pay a premium (either as a lump sum or through payments over time), and in return, the insurance company promises to pay you an income stream—either immediately or at some point in the future.
Think of it as the opposite of life insurance. With life insurance, you pay premiums and the company pays a death benefit when you die. With an annuity, you pay premiums and the company pays you while you’re alive. It’s essentially insurance against outliving your money.
There are several types of annuities, and this is where things get complicated for most people:
- Immediate annuities start paying you right away
- Deferred annuities grow your money first, then pay later
- Fixed annuities guarantee a specific return
- Variable annuities tie your returns to market performance
- Indexed annuities offer returns linked to market indexes with downside protection
When Annuities Can Make Sense
You Need Guaranteed Income
The strongest case for an annuity is when you need guaranteed income that you can’t outlive. Let’s say you have $500,000 saved but you’re worried about market crashes, sequence of returns risk, or simply living too long. An immediate annuity can convert that lump sum into a guaranteed monthly paycheck for life.
Imagine you’re 67, you’ve saved diligently your whole career, but you’re terrified of another 2008-style market crash right when you need to start withdrawing from your 401k. Taking $200,000 to buy an immediate annuity that guarantees around $1,100 per month for life could let you sleep better knowing that income is locked in no matter what happens to the markets.
You Want to Diversify Your Retirement Income
Here’s something most people don’t think about: having all your retirement money in market-based accounts creates what’s called “sequence of returns risk.” If the market crashes early in your retirement and you’re forced to withdraw money at the bottom, your portfolio may never recover.
An annuity can provide a foundation of guaranteed income, allowing you to be more aggressive with the rest of your portfolio since you know your basic expenses are covered.
You’re a Conservative Saver Who Hates Risk
Some people simply cannot stomach market volatility. I’ve met folks who kept hundreds of thousands in CDs earning 1% because they were so afraid of losing money. For these people, a fixed annuity paying 4-5% with the backing of an insurance company might make perfect sense.
When Annuities Are a Bad Idea
You’re Young and Have Decades Until Retirement
If you’re 35 years old asking about annuities for retirement, I’m going to steer you toward other options. You have 30+ years for compound growth to work its magic, and locking yourself into the conservative returns of most annuities doesn’t make sense when you could be building real wealth through other strategies.
The exception might be if you’ve already maximized other tax-advantaged options and are looking for additional tax-deferred growth, but even then, there are usually better alternatives.
You Need Liquidity
Most annuities come with surrender charges if you need to access your money early. These can last 5-10 years and can be substantial. If there’s any chance you might need that money for emergencies, home purchases, or other major expenses, an annuity probably isn’t right for you.
You Haven’t Maximized Other Options First
Before considering an annuity, you should generally max out your 401k, IRA, and explore other tax-advantaged strategies. I often see people getting sold expensive variable annuities when they haven’t even contributed enough to get their full company match on their 401k. That’s backwards.
The Real Problems with Annuities
Let me be honest about the issues I see in this industry:
High Fees on Variable Annuities
Variable annuities can have total fees of 2-3% per year or more. Between management fees, mortality and expense charges, and rider fees, these costs can significantly erode your returns over time. A simple calculation shows how devastating high fees can be over 20-30 years.
Complex Products with Hidden Gotchas
I’ve reviewed annuity contracts that are 200+ pages long with so many conditions and exceptions that even I have trouble understanding them. Many people buy annuities without truly understanding what they’re getting into.
Aggressive Sales Tactics
The commission structure on annuities can create conflicts of interest. Some agents push high-commission products that may not be in the client’s best interest. I’ve seen people talked into putting their entire life savings into an annuity when a much smaller allocation would have made more sense.
How to Evaluate an Annuity Properly
If you’re considering an annuity, here’s what I recommend:
Understand the Purpose
Be crystal clear about what you’re trying to accomplish. Are you looking for guaranteed income? Tax-deferred growth? Downside protection? Different types of annuities serve different purposes.
Compare to Alternatives
Don’t just compare one annuity to another—compare to all your alternatives. Could you accomplish the same goal with a ladder of CDs? A diversified portfolio with a conservative withdrawal rate? A different insurance strategy entirely?
Look at the Insurance Company’s Rating
You’re counting on this company to pay you for potentially decades. Make sure they have strong financial ratings from agencies like A.M. Best, Moody’s, and Standard & Poor’s. I generally recommend sticking with companies rated A or better.
Understand All Costs
Get a clear breakdown of all fees and charges. Some are obvious, others are buried in the contract. Make sure you understand how these costs will impact your returns over time.
Better Alternatives to Consider
Before committing to an annuity, consider these alternatives:
Bond Ladders or CDs
For guaranteed income, you might create a ladder of bonds or CDs that mature when you need the income. You maintain more control and often get better rates.
Dividend-Paying Stocks
For income-focused investors, a portfolio of quality dividend-paying stocks might provide better long-term returns with the potential for income growth over time.
Cash Value Life Insurance Strategies
For the right person, a properly designed cash value life insurance policy can provide many of the benefits people seek from annuities—tax-deferred growth, tax-advantaged distributions, and guarantees—but with more flexibility and potentially better long-term returns.
I often show clients how a max-funded indexed universal life policy using strategies like MPI can provide the downside protection they want with better upside potential than most annuities.
- Understand that annuities are insurance products designed for guaranteed income, not investments meant for growth potential.
- Consider annuities if you need steady retirement income and want protection against outliving your money or market crashes.
- Compare multiple annuity options and bring existing quotes to an independent agent for thorough review before making decisions.
- Recognize that annuities work best for conservative savers who prioritize guaranteed payments over higher growth potential.
- Evaluate your age, risk tolerance, and overall retirement strategy since annuities involve trade-offs like limited liquidity and potentially lower returns.
The Bottom Line on Annuities
Annuities aren’t inherently good or bad—they’re tools that work well for specific situations. They can make sense as part of a diversified retirement plan if you need guaranteed income, want to reduce sequence of returns risk, or simply value the peace of mind that comes with guarantees.
But they’re not magic, and they’re not right for everyone. The key is understanding exactly what you’re buying, how it fits into your overall plan, and whether you’re getting good value for what you’re paying.
My general rule is that annuities should provide income you need, not returns you want. If you’re looking for growth and wealth building, there are usually better options. If you need guaranteed income you can count on, an annuity might be exactly what you need.
The most important thing is to work with someone who will take the time to understand your specific situation and can explain your options clearly. Don’t rush into any decision, and make sure you understand all the terms before you sign anything.
Looking for help with your retirement planning? I work with families to evaluate all their options—including annuities when they make sense. Reach out for a consultation and let’s discuss what might work best for your situation.
