Annuities are one of the most debated financial products in retirement planning. Some advisors love them; others say to avoid them entirely. The truth, as usual, is somewhere in the middle. Here's an honest breakdown of the pros and cons.
The Pros
1. Guaranteed Income for Life
This is the single biggest advantage of a life annuity — and it's a genuine one. No other financial product guarantees monthly income that you cannot outlive. Social Security does this, but you can't increase your Social Security benefit by investing more money into it. With an annuity, the more you invest, the more guaranteed income you receive.
Why this matters: The number one financial fear among retirees is running out of money. An annuity eliminates that fear for the portion of your savings you convert.
2. Tax-Deferred Growth
During the accumulation phase (for deferred annuities), your money grows without annual taxation. You only pay taxes when you receive income. This is especially valuable for people who have already maxed out their 401(k) and IRA contributions and want additional tax-deferred savings.
3. Death Benefit Options
Contrary to popular belief, your money doesn't just "disappear" when you die. Most annuities offer options to protect your beneficiaries: period-certain guarantees (e.g., 10 or 20 years of payments), joint-and-survivor payouts for your spouse, and cash refund options that return any unpaid principal to your heirs.
4. No Market Risk
With a fixed or immediate annuity, your payments are guaranteed regardless of what the stock market does. In 2008, annuity holders received the same monthly check they always did, while many retirees with market-based portfolios saw their savings drop 40%. That kind of stability is invaluable for essential expenses.
5. Simplicity and Peace of Mind
Once you purchase a SPIA (single premium immediate annuity), there's nothing to manage. No rebalancing, no withdrawal rate calculations, no market watching. A check arrives every month. For retirees who are tired of managing investments — or concerned about cognitive decline — this simplicity has real value.
6. Inflation Protection (Optional)
Some annuities offer inflation-adjusted payments that increase each year (typically 2-3% annually). You'll start with a lower payment, but it grows over time. This can be a good option for people concerned about purchasing power over a 20-30 year retirement.
The Cons
1. Illiquidity
This is the most significant drawback. Once you purchase an immediate annuity, your lump sum is gone — converted into an income stream. You can't withdraw $20,000 for a new roof or an emergency. This is why financial experts recommend keeping a substantial emergency fund outside your annuity.
Mitigation: Never put more than 25-50% of your retirement savings into an annuity. Keep the rest in liquid investments for flexibility.
2. Fees (for Some Types)
Not all annuities are created equal when it comes to fees. Immediate annuities (SPIAs) and fixed annuities typically have little to no explicit fees — the insurance company makes money on the investment spread, not by charging you directly.
However, variable annuities can be fee-heavy — annual expenses of 2-3% or more are common. Surrender charges for early withdrawal can run 7-10% in the first years. Always ask for the total annual cost before purchasing any annuity.
3. Complexity
The annuity market is confusing. There are dozens of product types, riders, options, and variations. Variable annuities with living benefit riders, fixed indexed annuities with participation rates and caps — it can feel overwhelming.
Mitigation: Stick with simple products. A SPIA from an A-rated carrier is straightforward and easy to understand. If a product requires 40 pages to explain, it's probably not right for most retirees.
4. Inflation Risk (for Fixed Annuities)
A fixed annuity pays the same dollar amount for life. That $632/month feels great today, but after 20 years of 3% inflation, it would have the purchasing power of roughly $350 in today's dollars. Over a long retirement, inflation quietly erodes your income.
Mitigation: Choose an inflation-adjusted annuity, or keep a portion of your portfolio in growth investments that can outpace inflation.
5. Opportunity Cost
Money in an annuity earns a guaranteed return — but it's typically lower than what you might earn in the stock market over long periods. If the market averages 8-10% annually and your annuity effectively returns 5-6%, you're giving up potential growth in exchange for certainty.
Perspective: This is the trade-off for a guarantee. You could also lose 30% in the market. The question is whether the certainty of an annuity is worth more to you than the possibility of higher returns.
6. Insurance Company Risk
Your annuity is only as safe as the insurance company behind it. If the carrier fails, your payments could be at risk — although state guaranty associations provide a safety net (typically $100,000-$500,000 depending on the state).
Mitigation: Only buy from carriers rated A or better by AM Best. See our carrier reviews — every carrier we feature has an A+ or higher rating.
When Annuities Make Sense
- You're retired (or within 5 years) and need reliable monthly income
- You want to cover essential expenses (housing, food, healthcare) with guaranteed money
- You're healthy and expect to live to 85+
- Market volatility causes you real stress
- You want to simplify your finances — fewer accounts, less to manage
- You have enough savings to annuitize a portion while keeping the rest liquid
When Annuities Don't Make Sense
- You're under 50 and decades from retirement (invest for growth instead)
- You have less than $50,000 in total savings (keep it liquid for emergencies)
- You're in poor health with a shortened life expectancy (you won't receive enough payments)
- You need full access to your money at all times
- You're being pressured to buy by a high-commission salesperson
The Balanced Approach
The wisest retirees don't go all-in on annuities or all-in on investments. They use both: an annuity to cover essential expenses (the "income floor") and investments for growth, flexibility, and legacy goals.
If you're curious whether an annuity makes sense for your situation, download our free guide covering the 7 essential questions to ask before buying. Or request a free quote — our independent specialists will give you honest, unbiased advice.