"Should I buy an annuity?" is one of the most common questions people ask as they approach retirement — and it's one of the hardest to answer with a one-size-fits-all response. Annuities can be an excellent tool for the right person, and a poor fit for someone else. This guide walks through the honest pros, cons, and the situations where an annuity typically makes sense.
The core question: what problem are you trying to solve?
Annuities exist to solve one very specific problem: the risk of outliving your money. Retirement can last 30 years or more. If your only plan is to draw down a 401(k) or IRA, a bad decade of market returns early in retirement can leave you short. An annuity converts a portion of your savings into a guaranteed paycheck you can't outlive.
If longevity risk isn't a concern for you — for example, you have a large pension, significant Social Security, or more than enough assets — an annuity may be unnecessary. If it is a concern, an annuity is one of the few products designed to solve it.
Reasons to buy an annuity
1. You want guaranteed lifetime income
A lifetime annuity is the only retail financial product that pays you for as long as you live, no matter what markets do. For many retirees, replacing part of a pension is the #1 reason to buy.
2. You're worried about market volatility
A fixed or fixed indexed annuity protects your principal from market drops. If watching your 401(k) fall 30% would derail your retirement, moving a portion into a protected product may help you sleep at night.
3. You've maxed out other tax-advantaged accounts
Annuities have no annual contribution limits. If you've maxed your 401(k) and IRA and want additional tax-deferred growth, an annuity can extend that benefit.
4. You want to lock in today's rates
Fixed and multi-year guaranteed annuities (MYGAs) let you lock in a rate for 3, 5, or 10 years — useful when interest rates are elevated.
5. You want to leave a legacy
Many annuities offer death benefit riders that guarantee your beneficiaries receive at least what you put in, regardless of market performance.
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Reasons an annuity might NOT be right
1. You need liquidity
Annuities are long-term contracts. Most have surrender periods of 5–10 years where withdrawing more than 10% annually triggers a penalty. If you might need the money soon, keep it liquid.
2. You already have plenty of guaranteed income
If your Social Security plus a pension already covers your essential expenses, you may not need to add another layer of guaranteed income.
3. You want maximum growth potential
Fixed annuities pay modest rates. Indexed annuities cap your upside. If you're comfortable with market risk and have a long time horizon, low-cost index funds may outperform.
4. You don't understand what you're buying
The rule is simple: never buy an annuity you can't explain in one sentence. Variable and indexed products can be extremely complex. If a salesperson can't explain the fees, caps, and surrender schedule clearly, walk away.
A framework to decide
Ask yourself these five questions:
- Will my Social Security and any pension cover my essential monthly expenses?
- Would running out of money at age 85 or 90 be a real concern?
- How would I feel if my investment account dropped 30% next year?
- Do I need access to this money in the next 5–10 years?
- Am I comfortable committing to a long-term contract?
If Social Security doesn't cover your essentials, longevity is a concern, and you don't need the money short-term — an annuity is worth serious consideration. If you have plenty of guaranteed income and want full liquidity, it probably isn't.
How much of my savings should go into an annuity?
A common guideline is to annuitize enough to cover the gap between your essential expenses and your guaranteed income sources (Social Security + pension). Many advisors suggest keeping annuity allocations between 25% and 40% of retirement assets — enough to lock in income, but not so much that you lose flexibility.
What to do next
Before buying anything, compare quotes from multiple A-rated carriers. Rates, fees, and rider terms can vary dramatically between insurers, and the difference over a 20-year payout can be tens of thousands of dollars. AnnuitySelector matches you with top-rated providers in under 60 seconds — free, no phone calls required.
Frequently asked questions
Most buyers are between 55 and 70. Buying too early ties up money you may need; buying too late can mean smaller payouts. The sweet spot is usually 5–10 years before you plan to start income.
Annuities aren't really investments — they're insurance products designed to guarantee income. They shouldn't replace a diversified portfolio but can complement one by covering essential expenses.
It varies by age, gender, type, and interest rates. As a rough example, a 65-year-old buying a lifetime immediate annuity today might receive $550–$650 per month for life on $100,000.
In a fixed or fixed indexed annuity, your principal is protected from market losses. In a variable annuity, you can lose money. In all annuities, surrender charges can reduce what you get back if you exit early.
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