Annuities

Annuities: the most misunderstood tool in retirement planning

Annuities can provide guaranteed lifetime income — but they are not right for everyone. Here is an honest, education-first look at how they work.

What annuities do — and do not do

An annuity is a contract with an insurance company: you give them a lump sum (or a series of payments), and they promise to pay you income — either immediately or in the future. Done right, an annuity can eliminate the fear of outliving your money. Done wrong, it can lock up your assets in a high-fee product that does not serve your needs. The key is understanding what you are buying and why.

Types of annuities

Not all annuities are the same. Understanding the differences is essential before making any decision.

Immediate annuity (SPIA)

You give the insurance company a lump sum, and they begin paying you income immediately — for life, for a set period, or both. Simple, transparent, and effective for covering essential expenses.

Best for: Covering essential monthly expenses with guaranteed income

Deferred income annuity (DIA)

You pay now for income that starts at a future date — often age 80 or 85. Acts as longevity insurance, protecting against outliving your assets. Lower cost than other annuity types.

Best for: Longevity protection — income starting at an advanced age

Fixed annuity

Earns a guaranteed interest rate for a set period, similar to a CD. No market risk, predictable growth. A conservative accumulation tool, not an income product.

Best for: Safe accumulation with a guaranteed rate

Fixed indexed annuity (FIA)

Earns interest linked to a market index (like the S&P 500) with a floor of 0% — you cannot lose principal due to market declines. Growth is capped or subject to a participation rate.

Best for: Growth potential with downside protection

Variable annuity

Invests in sub-accounts similar to mutual funds. Returns vary with market performance. Often sold with expensive riders (guaranteed income, death benefit). Fees can significantly erode returns.

Best for: Rarely the best option — evaluate fees carefully

What to consider before buying an annuity

Fees matter enormously

Variable annuity fees — mortality and expense charges, administrative fees, rider fees — can total 2-4% per year. At that cost, the guaranteed benefits rarely justify the expense compared to lower-cost alternatives.

Surrender charges limit liquidity

Most annuities have surrender periods of 5-10 years, during which withdrawals above a free-withdrawal amount trigger surrender charges. Make sure you have sufficient liquid assets before committing.

Insurance company strength matters

Annuity guarantees are only as strong as the insurance company behind them. Check the financial strength ratings (A.M. Best, Moody's, S&P) before purchasing any annuity.

Tax treatment is complex

Annuity withdrawals are taxed as ordinary income (not capital gains). Withdrawals before age 59.5 trigger a 10% penalty. Annuities held inside an IRA provide no additional tax benefit — a common sales pitch to avoid.

Common questions

Get an objective second opinion on any annuity

We are education-first advisors. We will help you understand exactly what you own — or what you are being offered — and whether it fits your retirement plan.

Schedule a Conversation