Planning for retirement is no small task. You want your money to last, grow, and protect you from the unknown. That is where annuities sometimes come into the picture. But let’s be honest—when you hear the word “annuity,” what comes to mind? For some, it is safety. For others, confusion or even fear. So let us talk about it clearly—person to person.
Here is a simple breakdown of the pros and cons of annuities and what you really need to know before you buy one.
What is an annuity and how does it work?
An annuity is a contract between you and an insurance company. You give them a chunk of money—either all at once or over time—and in return, they agree to pay you income in the future. This can be monthly, quarterly, yearly, or even a lump sum depending on the type of annuity.
There are a few common types:
- Fixed annuities: You get a set, predictable payment.
- Variable annuities: Your payment depends on market performance.
- Indexed annuities: Tied to a market index like the S&P 500, with some limits and protections.
You can start getting payments right away (immediate annuity) or wait until later (deferred annuity). Sounds simple, but the details matter a lot.
What are the advantages of annuities in retirement?
There are a few good reasons why some retirees choose annuities. If you are looking for peace of mind, these points might speak to you:
- Guaranteed income for life: This is probably the biggest advantage. Annuities can provide monthly income for the rest of your life, so you do not run out of money, no matter how long you live.
- Protection from market ups and downs: If you are retired or close to it, market crashes can be scary. With certain annuities, your money is not directly tied to the stock market, so you are more protected.
- Helps with emotional decisions: When the market drops, people often panic and make poor choices. An annuity can give you steady income that helps you stay calm and focused.
- Can act like a personal pension: If you do not have a pension, an annuity can play that role. It provides structure to your retirement income plan.
What are the downsides of buying an annuity?
Annuities are not perfect. Here are a few things you really need to look out for:
- High fees: Some annuities—especially variable ones—come with a lot of fees. These may include mortality fees, rider fees, investment costs, and more. Always ask for a breakdown before you buy.
- Limited access to your money: Most annuities have surrender periods—usually 5 to 10 years—where you cannot touch your money without a penalty. If you need cash quickly, that can be a problem.
- Complex terms and conditions: The fine print on annuities can be confusing. Terms like “caps,” “spreads,” and “participation rates” can be hard to understand unless you ask a lot of questions.
- May not protect against inflation: Some annuities pay the same amount every month, even years later. But as prices go up, that fixed income may not go as far.
- Taxes on withdrawals: When you take money out, it is taxed as regular income—not at the lower capital gains rate. That could be a bigger tax hit than you expect.
When is an annuity a good fit for your retirement plan?
An annuity may be worth considering if you:
- Worry about outliving your money
- Want income you can count on no matter what the market does
- Do not have a pension
- Prefer something steady over risky growth
- Want part of your retirement income to be guaranteed
But it is not a one-size-fits-all solution. Some people prefer keeping their money flexible and investing it themselves.
What should you check before buying an annuity?
Here are a few smart steps before you say yes to any annuity:
- Know your goal. Are you trying to protect your money, grow it, or get steady income?
- Understand the surrender period. How long will your money be locked up?
- Ask for a fee breakdown. Make sure you are not overpaying for features you do not need.
- Check the insurer’s rating. These guarantees are only as strong as the company behind them.
- Talk to a fiduciary adviser. You want someone legally required to act in your best interest—not just someone selling products.
