- Annuities can provide guaranteed income in retirement, making them a valuable tool for covering essential expenses when paired with other retirement savings.
- There are several types of annuities—including fixed, variable, and indexed—each with different risk levels, payout structures, and fees to consider.
- Due diligence is critical: comparing providers, understanding contract terms, and speaking with a fiduciary can help avoid costly mistakes.
- Compare today’s annuity rates.
Why you should consider an annuity
John never thought he’d be the kind of person to worry about annuities. At 39, he had a steady job in IT, a decent 401(k), and a Roth IRA he occasionally contributed to when he remembered. For years, retirement planning felt like a foggy future problem, the kind of thing you’d think about when your knees started creaking and you stopped caring about new music. But life has a way of shifting priorities when you least expect it.
It started with a conversation over lunch with his coworker Laura. They’d worked together for years, but this was the first time retirement had come up. Her parents had recently downsized after their variable income streams started swinging wildly with market fluctuations. “They’re not broke,” she said, “but they stress about every dip in the S&P. My mom told me the unpredictability is worse than the bills.” Laura shared that her parents had started talking to a financial advisor about a fixed annuity that could help even out their income and offer a sense of stability. That stuck with John. Not because he was in the same situation, but because he realized how easily he could be.
Later that week, over dinner with his cousin Mike, the topic of retirement came up again. Mike had always been the “finance guy” in the family, and was big into stocks, early crypto adopter, that kind of thing. But now, in his 40s with two kids and a mortgage, Mike had shifted gears. He told John about a friend of his who had used an immediate annuity to fund their retirement starting at 65. “They bought themselves a paycheck,” Mike said. “They aren’t rich, but they don’t panic every time the market sneezes.” That was a new way of thinking for John. Not about maximizing gains, but about minimizing stress.
Then came the story that hit hardest. John’s neighbor, Diane, who had recently retired early due to health issues, opened up about her experience during a neighborhood get-together. Her husband had passed away two years prior, and she found herself navigating retirement alone. She told John about how an indexed annuity was helping her make ends meet while still giving her the chance for some growth. “I sleep better knowing that I won’t outlive this thing,” she said, with the kind of calm that made John pause. Diane had also recently purchased long-term care insurance to reduce her risk of running out of money if she needed to move into an assisted living facility. There was something powerful in her confidence.
Over the next few weeks, John found himself researching annuities. He initially started out of curiosity, and then out of something closer to urgency. The more he read, the more he realized that annuities weren’t just something for “old people”, they were a real strategy that could blend with his other investments and take the edge off the risk he was otherwise carrying.
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What is an annuity?
An annuity is a contract you make with an insurance company. You either pay a lump sum or make a series of payments, and in return, you receive regular income in the future, either for a set number of years or for the rest of your life. The idea is simple: turn your savings into a predictable stream of income.
There are several types of annuities:
- Fixed Annuities: Pay you a guaranteed amount regularly, regardless of how the market performs.
- Variable Annuities: Invest your money in sub-accounts, similar to mutual funds. Payments depend on how those investments perform.
- Indexed Annuities: Tie your returns to a market index (like the S&P 500) but typically include caps on gains and floors on losses.
- Immediate Annuities: Start paying out almost immediately after you buy them, often used by people close to or in retirement.
- Deferred Annuities: Grow your money over time and start paying out later, making them a fit for people like John who still have years before retirement.
Annuities as a viable retirement solution
John didn’t abandon his 401(k) or swear off market investments altogether. Instead, he started thinking in terms of balance. He began to view his portfolio as having two purposes: growth and stability. Annuities offered a way to shore up the stability side of that equation.
For John, it wasn’t about chasing returns; it was about making sure at least a portion of his future income would be predictable, no matter what the market was doing. He began by running the numbers to figure out what his essential expenses in retirement might look like for ongoing costs like housing, groceries, insurance, and utilities. That number became his baseline for guaranteed income.
From there, he looked at his future income sources: Social Security, his 401(k), and other savings. That exercise made it clear he could end up falling short, especially if the market underperformed or he lived longer than expected. That gap is where annuities started to make sense as a tool to lock in income that wouldn’t fluctuate or disappear. He wasn’t planning to pour all his money into an annuity, but he wanted the peace of mind of knowing that no matter what happened with the economy, he’d still be able to cover the basics.
Exploring fixed indexed annuities
At one point in his research, John considered a fixed indexed annuity as a middle-ground option. These annuities are tied to a market index like the S&P 500. They also include built-in protections. You can earn a portion of market gains, but you’re also shielded from significant losses through a guaranteed minimum return. For John, the idea of having some market exposure without the risk of losing principal was intriguing. He learned, however, that fixed indexed annuities come with more complexity. Those complexities include things like participation rates, caps on returns, and potential surrender charges. While it wasn’t his top choice, it remained on his radar as something to revisit down the line if he wanted a little more upside without fully stepping back into the market.
Why John chose a fixed annuity
As John dug deeper, one option stood out as the most straightforward: a fixed annuity. Unlike variable or indexed annuities, which depend on market performance, a fixed annuity guarantees a specific payout amount over a set period. That predictability appealed to John, especially when thinking about covering essential monthly expenses like housing and groceries. He saw it as a way to lock in a portion of his income, almost like giving himself a future paycheck. While it wouldn’t necessarily grow with inflation unless specifically structured to do so, the reliability of a fixed annuity made it a strong candidate for the stability portion of his retirement portfolio.
How to move forward with annuities
John’s approach was deliberate. He didn’t just Google “best annuity” and sign up. He took a few key steps in his research to find the right option for him.
John started his annuity journey by getting clear on what he wanted from one. He asked himself practical questions: Was he looking for income right away, or later in life? Did he want something rock-solid with guaranteed payouts, or was he open to a little more risk in exchange for growth potential? These questions helped him define the role an annuity might play in his broader retirement strategy. Once he had that clarity, he began researching providers. He focused on insurance companies with strong financial ratings from agencies like A.M. Best and Moody’s. John wanted to make sure the company backing his annuity would still be financially sound decades from now.
From there, he dove into the different types of annuities, comparing fixed, indexed, and variable options. After weighing his comfort level with risk and market exposure, he found himself leaning toward a deferred fixed annuity for its balance of simplicity and reliability. But he didn’t stop there. Knowing the financial industry can be full of commissions and hidden fees, John met with a fiduciary because he wanted someone legally required to act in his best interest.
That conversation opened his eyes to things he hadn’t considered, like how income riders worked or how steep surrender fees could be if he ever needed to withdraw early. He read the fine print carefully, realizing that seemingly small contract details could have a significant impact on his future security.
Using annuity calculators to compare options
One of the most helpful tools John came across was an annuity calculator. These online calculators allowed him to plug in his age, savings, payout preferences, and desired start date to get a sense of how much income he could realistically expect from some of the best annuities. It helped him visualize scenarios like: “If I invest $100,000 now, how much would I receive monthly starting at age 65?” Annuity calculators also let him compare options side by side so he could make decisions based on real numbers instead of guesswork. While the results were just estimates, they gave him a clearer picture of how an annuity might fit into his broader retirement puzzle.
Annuity risks
No financial product is perfect, and John made it a point to understand the potential drawbacks before making any commitments. One of the first things he noticed was the lack of flexibility. Once you put money into an annuity, it can be difficult or costly to access it early. Many contracts come with steep surrender charges if you withdraw funds within the first several years. He also took a hard look at fees. Some annuities, especially those with optional features like income or death benefit riders, can come with layers of administrative costs that quietly eat into your returns over time.
Inflation was another concern. A fixed monthly payout might seem sufficient now, but without an inflation-adjustment rider, its purchasing power could shrink dramatically over a 20- or 30-year retirement. Then there was the issue of complexity. Some of the annuity contracts he reviewed were packed with jargon, fine print, and conditions that made it hard to understand precisely what he was getting. For John, that was a red flag.
Ultimately, John set a personal rule: if he couldn’t explain how the product worked in plain language to someone else, he wasn’t ready to sign on. That simple test helped him filter out options that were more confusing than helpful.
Where can you get an annuity
John looked into several places during his research:
- Direct from insurance companies: For no-frills fixed annuities, this was often the most straightforward path.
- Online marketplaces: These let him compare products and rates across different providers.
- Financial advisors: Especially those who were independent and didn’t earn commissions from insurance companies.
- Employer-sponsored plans: Some workplaces offer annuity options within retirement accounts, like 403(b) plans.
For John, the sweet spot was finding a provider with low fees, strong customer service, and plain-language documentation.
Conclusion: Why an annuity might be right for you
John didn’t set out to become an annuity expert. But after a handful of honest conversations with people who’d lived through retirement, he realized he needed a backup plan that wasn’t tied to Wall Street.
Annuities aren’t flashy. They don’t make headlines or trend on TikTok. But for John, they represent peace of mind. And as he puts it now, “If I can lock in enough to cover the basics, I’ll feel a whole lot freer taking risks with the rest.”
In the end, it’s not about putting all your eggs in one basket. It’s about making sure at least a few of those eggs don’t crack, no matter what life throws your way.
Frequently Asked Questions
We answer the questions that matter most about getting an annuity.
Yes, annuities can be a good option for someone in their 30s, especially deferred annuities, which allow money to grow tax-deferred over time. They can serve as a long-term strategy for creating guaranteed income later in life while complementing other investments like 401(k)s or IRAs.
Unlike Social Security, which is fixed and government-managed, annuities can be tailored to specific needs and offer private income guarantees. Compared to investments, annuities offer less growth potential but more stability, reducing market exposure in retirement.
The most significant risks of buying an annuity include a lack of liquidity, high fees, and underestimating the impact of inflation. Once you commit funds, they can be hard to access, so it’s crucial to ensure you won’t need that money for emergencies.
Yes, you can buy an annuity inside of an eligible 401 (k) or IRA. Some employers offer annuity options within 401(k) plans, and you can purchase annuities within IRAs. However, the tax advantages may overlap, so it’s essential to understand how annuities fit into your overall retirement tax strategy.
