Who Should Buy an Annuity?

Buying an annuity will not automatically make sense for everyone, but if you’re nearing retirement age, you may want to consider the benefits. Annuities can provide you with an additional revenue stream that kicks in after you retire, helping to ensure you never run out of money. If you expect to have a long retirement and can afford the payment, you’re a good candidate for buying an annuity.

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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  • Edited By
    Savannah Pittle
    Savannah Pittle, senior financial editor for RetireGuide

    Savannah Pittle

    Senior Financial Editor

    Savannah Pittle is a professional writer and content editor with over 16 years of professional experience across multiple industries. She has ghostwritten for entrepreneurs and industry leaders and been published in mediums such as The Huffington Post, Southern Living and Interior Appeal Magazine.

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  • Published: March 16, 2023
  • Updated: October 25, 2023
  • 7 min read time
  • This page features 4 Cited Research Articles
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APA Simmons, C. (2023, October 25). Who Should Buy an Annuity? RetireGuide.com. Retrieved May 17, 2024, from https://www.retireguide.com/annuities/buy/who-should-buy-annuities/

MLA Simmons, Christian. "Who Should Buy an Annuity?" RetireGuide.com, 25 Oct 2023, https://www.retireguide.com/annuities/buy/who-should-buy-annuities/.

Chicago Simmons, Christian. "Who Should Buy an Annuity?" RetireGuide.com. Last modified October 25, 2023. https://www.retireguide.com/annuities/buy/who-should-buy-annuities/.

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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.

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Key Takeaways:
  • Buying an annuity makes sense if you’re looking to set up a guaranteed stream of income in retirement.
  • An annuity can structure payments that last the rest of your life, helping ensure you won’t run out of money in retirement.
  • If you don’t expect to have a long retirement or have serious health issues, buying an annuity may not make sense for you.

Who Are Good Candidates for Buying Annuities?

If you’re approaching retirement age and worry that you’ll run out of money in retirement, you may be well-suited for buying an annuity.

When you purchase an annuity contract, you buy it with a lump sum payment or by making a series of payments over time, similar to how you pay into other types of retirement savings accounts over a period.

Once you retire (or later in your retirement years when you need it), the annuity converts into a steady stream of monthly payments that act as a source of income.

One major benefit of annuities is that these payments can last the rest of your life, even if the total amount that gets paid out to you eventually exceeds the amount you paid to purchase it. Because of this, annuities are a good way to ensure that you never completely run out of money in retirement, even if you exhaust retirement funds in a 401(k) or an individual retirement account (IRA).

It’s important to remember that annuities can make an excellent supplement to your retirement planning, but they are often paired with other strategies. For example, it may not make sense to use an annuity in place of a 401(k) or IRA. Annuities are typically used in addition to these products as a supplement to the rest of your retirement portfolio.

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Who Should Not Buy Annuities?

While annuities can be a source of additional income in retirement, they won’t make sense for everyone. There are certain groups of people who may not see much benefit from adding an annuity to their retirement plan.

You may not be a good candidate for purchasing an annuity if you already have enough money saved up for retirement. If there’s simply no risk that you’ll run out of cash in retirement, an annuity won’t provide much benefit, and it will only tie up your savings in the meantime.

On the other hand, you should only consider buying an annuity contract if you have enough money in your nest egg to comfortably do so.

You may not be the best fit for an annuity if:
  • Your savings are already on track to last throughout your retirement.
  • You have health concerns or otherwise don’t expect to have a long retirement.
  • You don’t have enough money to purchase an annuity contract.

Annuities are best used as part of a long-term strategy. Some people with annuities in their portfolios choose not to receive payments until they are many years into retirement. If you’re looking for short-term returns, an annuity probably isn’t for you.

Reasons To Buy Annuities

There are many prudent reasons to consider making an annuity a part of your retirement strategy. The first and most obvious reason is the ability of these types of insurance products to supply you with lifelong income. Even if you exhaust your main retirement savings, an annuity can continue to provide you with periodic payments for the rest of your life.

You’re not alone if you worry about the possibility of running out of money in retirement. According to an Allspring Global Investments study, only 31% of retirees feel very confident that their savings will last them all the way through their retirement years.

Annuities also provide certain tax benefits. Unlike a 401(k) or IRA, annuities aren’t capped at a maximum contribution amount, so you can put as much money into it as you’d like (and can afford).

The payments you make to purchase an annuity are also tax-deferred, which helps to lower your taxable income and lets you potentially take advantage of a lower tax bracket when you retire.

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Annuities vs. Retirement Investments

It’s important to make the distinction that annuities are not financial investments like an IRA or 401(k), though they offer the benefit of tax-deferral.

An IRA or 401(k) is a collection of investments and assets that can build up value, while an annuity is a type of insurance product. While a 401(k) plan can benefit from employer-matching contributions, an annuity is something you purchase on your own.

Traditional investment options like IRAs and 401(k)s typically include contribution limits, but there is no limit to the amount you can put into an annuity.

And, notably, 401(k) funds aren’t guaranteed to last through your retirement years. You can exhaust them like any other financial account funds. This differs from annuity payments, which can be structured to continue paying out for the rest of your life.

How to roll your IRA or 401(k) into an annuity

Questions To Ask Yourself When Considering an Annuity

Buying an annuity won’t make sense for every retirement plan. If you’re wondering if you should buy an annuity for retirement, there are important questions you should ask yourself first.

First, does your health and projected lifespan match the benefits of an annuity? Since annuities can pay out until the end of your life, the value of an annuity increases the longer you live.

If you don’t expect to have a long retirement, it may not make sense to set aside a significant chunk of your retirement savings in order to get an extended period of long-term payments.

Next, do you have a plan in place to ensure you don’t run out of money in retirement? If you’re not sure that your savings will last you through retirement, an annuity could help lessen that risk.

It’s also important to consider whether your finances will allow you to purchase an annuity in the first place. It may not make sense to purchase one if you think you’ll need the annuity payments to start sooner than later.

Finally, you’ll need to decide how you want to purchase the annuity. Do you want to pay into an annuity contract over time, or purchase one with a lump sum payment? There are distinct advantages to each buying strategy.

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FAQs About Who Should Buy an Annuity

What is the best age to buy an annuity?
The best age to buy an annuity varies dramatically depending on the style of annuity you purchase and your financial situation. You might choose to buy an annuity when you are younger and pay into it over many years, or you can purchase one with a lump sum and begin receiving annuity payments immediately.
Why do some financial advisors not like annuities?
Annuities can carry risk as a retirement strategy, as they are not FDIC-insured like traditional retirement accounts. While it’s not accurate to say that financial advisors dislike annuities across the board, your advisor may have concerns about these risks.
Are annuities good investments for retirement?
Remember that annuities are a type of insurance product, not an investment. You can use annuities alongside your traditional investments to provide a guaranteed source of income in retirement and ensure you never run out of money.

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Last Modified: October 25, 2023

4 Cited Research Articles

  1. Guido, E. (2023, February 20). Thinking About Annuities? It Can Be a High Price to Pay for Certainty. Retrieved from https://www.heraldtribune.com/story/business/2023/02/20/evan-guido-for-investors-craving-certainty-annuities-offer-an-option/69876286007/
  2. Coy, P. (2023, February 17). The Perfect Retirement Investment Nobody Wants. Retrieved from https://www.nytimes.com/2023/02/17/opinion/retirement-annuity-long-term-care-insurance.html
  3. Bernard, T.S. (2023, February 7). For More Certainty in Your Retirement Portfolio, Consider Annuities. Retrieved from https://www.nytimes.com/2023/02/07/your-money/retirement-annuities-investments.html
  4. Allspring Global Investments Holdings. (2022, January). Look Around the Corners: A New Perspective For Tomorrow’s Retirees. Retrieved from https://www.allspringglobal.com/globalassets/assets/public/pdf/insights/investing/2021-annual-retirement-study.pdf