Christian Simmons, writer and researcher for RetireGuide
  • Written by
    Christian Simmons

    Christian Simmons

    Financial Writer

    Christian Simmons is a writer for RetireGuide and a member of the Association for Financial Counseling & Planning Education (AFCPE®). He covers Medicare and important retirement topics. Christian is a former winner of a Florida Society of News Editors journalism contest and has written professionally since 2016.

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    Michael Santiago
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    Michael Santiago

    Senior Financial Editor

    Michael Santiago, a senior financial editor, joined RetireGuide in 2023. With over 10 years of professional writing and editing experience, he brings a wealth of expertise in creating content for diverse industries, including travel and healthcare. Having traveled to more than 40 countries across five continents and lived in Europe and Asia for several years, Michael's global perspective enriches his work. He combines his strong writing skills, editorial judgment and passion for crafting accurate and engrossing content to enhance the user experience on RetireGuide.

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    Brandon Renfro, Ph.D., CFP®, RICP®, EA
    Brandon Renfro, RetireGuide Reviewer

    Brandon Renfro, Ph.D., CFP®, RICP®, EA

    Retirement and Social Security Expert

    Brandon Renfro is a Retirement and Social Security Expert and financial planner. He focuses on helping clients create a secure financial future in retirement and co-owns Belonging Wealth Management. He is also a former finance professor and writes for several publications.

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  • Published: June 26, 2023
  • Updated: July 17, 2023
  • 8 min read time
  • This page features 3 Cited Research Articles
Fact Checked
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A qualified expert reviewed the content on this page to ensure it is factually accurate, meets current industry standards and helps readers achieve a better understanding of retirement topics.

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How to Cite RetireGuide.com's Article

APA Simmons, C. (2023, July 17). Are Annuities a Good Investment? RetireGuide.com. Retrieved April 17, 2024, from https://www.retireguide.com/annuities/buy/are-annuities-a-good-investment/

MLA Simmons, Christian. "Are Annuities a Good Investment?" RetireGuide.com, 17 Jul 2023, https://www.retireguide.com/annuities/buy/are-annuities-a-good-investment/.

Chicago Simmons, Christian. "Are Annuities a Good Investment?" RetireGuide.com. Last modified July 17, 2023. https://www.retireguide.com/annuities/buy/are-annuities-a-good-investment/.

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Key Principles

RetireGuide’s mission is to provide seniors with resources that will help them reach important financial decisions that affect their retirement. Our goal is to arm our readers with knowledge that will lead to a healthy and financially sound retirement.

We’re dedicated to providing thoroughly researched annuity information that guides you toward making the best possible financial decisions for you and your family.

We partner with Senior Market Sales (SMS), a leader in the insurance industry with over 30 years of experience and a network of 66,000 independently licensed agents across the United States.

Our partnership with SMS (and Insuractive, the company’s consumer-facing branch) allows us to deliver expertly researched and reviewed content at no cost or obligation to all of our visitors. It also gives our visitors the opportunity to take the next step in their financial journey by requesting help from our partner through the phone numbers or forms provided on our website.

If a visitor chooses to inquire about an annuity or other financial product through SMS as a result of our research and accurate information, RetireGuide may receive compensation for connecting the visitor with SMS. The revenue we earn for helping visitors get the help they’re seeking makes RetireGuide stronger for our audiences.

The content and tools created by RetireGuide adhere to strict editorial guidelines to ensure quality and transparency.

Editorial Independence

While the experts from SMS are available to help you navigate various annuity options, RetireGuide retains complete editorial control over the information it publishes.

We operate independently from SMS, which allows the award-winning RetireGuide team to provide you with unbiased information.

Visitors can trust our inflexibility regarding our editorial autonomy. We do not allow our partnership to influence RetireGuide’s editorial content whatsoever.
Key Takeaways
  • Annuities are sold by insurance companies, rather than financial institutions.
  • Since they protect your principal while providing a regular monthly payout, annuities can be a smart investment for retirees.
  • Fixed annuities guarantee a pre-set payout. The payout for variable annuities can go up or down with market performance.
  • You can customize your annuity with riders and payment options.

An annuity is essentially a contract between you and an insurance company. This financial vehicle is designed to provide a fixed, guaranteed stream of income. You pay the insurance company a premium, either all at once or as regular monthly installments, in return for a future monthly payout. You can customize your annuity with riders to make it fit your particular needs and circumstances.

Annuities can be fixed or variable. Fixed annuities detail a specific monthly payout amount, while the payout from variable annuities might fluctuate due to market conditions. Annuities are also categorized by when they begin to pay out; immediate annuities start right away, while deferred annuities start at a pre-defined later date.

Is Investing In Annuities A Wise Decision?

Annuities provide you with regular income, which makes them a smart choice when planning for your retirement. Although many people rely on Social Security for all their financial needs in retirement,  Social Security is only intended to supplement your retirement income, not replace it. Unfortunately, for 37% of men and 42% of women, Social Security represents 50% or more of their retirement income, according to the Social Security Administration.

An annuity can be a good part of a long-term plan but it isn’t generally considered a wise short-term investment strategy. It’s important to assess your financial goals when crafting a financial plan that will lead to a comfortable retirement. Those goals, along with your level of risk tolerance and your personal circumstances, will help you decide if an annuity should be part of your retirement portfolio. Consider consulting with a financial advisor to examine your financial needs so you can properly set your priorities.

Annuities can be a great option for generating income in retirement, but it’s important to understand the tradeoffs. With an annuity, you give up some opportunity for growth in exchange for a guaranteed monthly payment.

How Annuities Can Benefit Your Retirement

The main benefit of buying an annuity is that it guarantees a regular income, which can also make it a good choice for diversifying your retirement portfolio. Annuities can also help you combat inflation. In addition, they can help you defer taxes and can even provide a death benefit for your beneficiaries. Less volatile than equity investments like stocks, an annuity can also provide you with security and peace of mind. 

Guaranteed Income For Life

An annuity contract can last for decades, which means you will always have a source of income during your retirement. Regardless of the market performance of your other retirement investments, your annuity income will continue to provide long-term security.

Tax-Deferred Growth

Annuities can grow tax-deferred. You won’t have to pay tax on your interest earnings until you begin to withdraw from them, at which point they are taxed as ordinary income. Contrary to a 401(k) or IRA, an annuity has no contribution limit.

Can you roll your IRA or 401(k) into an annuity?

Protection From Market Volatility

The income provided by most annuities is not subject to the fluctuation of the stock market. For instance, for an annuity with a fixed payout, the insurance company takes on the risk of poor market performance instead of you. Knowing exactly how much you’ll receive can help you build a solid retirement plan.

Protecting Your Beneficiaries

You can enhance your annuity with a death benefit rider, leaving behind a larger lump sum for your beneficiaries. That way your beneficiaries will be more secure and have help paying any taxes potentially owed on your estate.

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How soon are you retiring?

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What is your goal for purchasing an annuity?

Select all that apply

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Potential Drawbacks Of Annuities

Every financial vehicle has potential disadvantages and advantages, including annuities. An annuity limits not only your access to your funds but also to other opportunities with the potential for higher growth. Annuities also come with associated fees and charges. Although you are guaranteed an income stream, the returns are generally modest and there is always the risk that inflation might outrun your returns.

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Fees And Commissions

All investments have associated fees and charges; annuities are no exception. They also have surrender penalties, which can diminish your returns and leave you with less than you may have hoped for.

Limited Access to Funds

Annuities are considered illiquid investments, which means you typically cannot easily access the money they contain outside the pre-set limits. Additionally, the funds you spend to purchase an annuity might reduce your ability to invest in other potentially more rewarding opportunities.

Inflation And Other Risks

The returns on an annuity are generally modest. They are meant to be safe investments, so earnings are correspondingly small. There’s a chance that those smaller returns may not be able to keep up with the pace of inflation in the future. There is also the extremely rare risk that something might happen to the insurance company providing the annuity. If that happens, you might lose your premiums without receiving any of the payouts.

Is an Annuity Right for You?

If you’re looking for a way to ensure you don’t run out of money during your retirement, investing in an annuity might be a good choice. The returns on an annuity can be modest but the guaranteed income (and tax-deferred growth) can ensure you don’t outlive your savings.

Annuities can also help you pay for the cost of long-term care. As the majority of Americans over 65 will need long-term care at some point, it’s important to know how you can cover the cost.

When you choose to purchase an annuity, you’ll have to make some choices about how you want it to pay out, grow and more.

Factors To Consider Before Investing in Annuities
When and How Long You Receive Annuity Payments
With an immediate annuity, your payout begins right away, while a deferred annuity pays out in the future. The former can fill in income gaps as needed, while the latter has more growth potential.
How the Annuity Pays Out
You can choose how long your monthly payout should continue. Usually, payout terms can be 10 years, 20 years or for the rest of your life. You can also select an annuity that will continue to pay out as long as either you or your spouse is alive.
How You Want Your Annuity To Grow
If you’re concerned about protecting your principal, a fixed annuity may be a better choice. If you have a slightly higher tolerance for risk, you may prefer a variable annuity.
How You Want To Buy the Annuity
With a flexible premium annuity, you make several payments: one large lump sum to start, followed by multiple payments on your own schedule. You pay for a single premium annuity entirely with one premium.

Alternatives to Annuities

Buying an annuity is a personal choice and may not always be right for your personal needs and circumstances. Don’t hesitate to consult a financial professional for advice and information so you can decide if an annuity is right for you. There are also other annuity alternatives available to you.

What is asset allocation and why is it important?
Alternative Options
  • Bonds
  • Dividend-Paying Stocks
  • Real Estate
  • CDs
  • Money Market Accounts
  • Reverse Mortgages
  • Working Part-Time
  • Delaying Social Security
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Frequently Asked Questions About Investing In Annuities

Are annuities a good investment for retirees?
As they protect your principal and provide a guaranteed income, annuities can be excellent investments for retirees.
How much should you invest in an annuity?
The amount you invest in an annuity depends entirely on your capacity, goals and future needs. What may be too much for one individual could be insufficient for another.

Editor Malori Malone contributed to this article.

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Last Modified: July 17, 2023
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3 Cited Research Articles

  1. US Securities & Exchange Commission. (2023). Annuities. Retrieved from https://www.investor.gov/introduction-investing/investing-basics/glossary/annuities
  2. Administration for Community Living. (2022, May 10). Who Needs Care? Retrieved from https://acl.gov/ltc/basic-needs/who-needs-care
  3. SSA. (n.d.). Fact Sheet. Retrieved from https://www.ssa.gov/n/press/factsheets/basicfact-alt.pdf