The senior citizen population is large, growing, and by some estimates, hold two-thirds of the individual wealth in the United States. In 2050, there will likely be almost twice as many seniors as there were in 2012. Elderly people are often more likely to be scammed than younger people who don’t have savings because they have more time to think about their money.
Insurance companies may pay up to 10% commission to agents who sell products like long-term deferred annuities to seniors. They do this because they want to make billions of dollars in sales. In this environment, consumers should arm themselves with information to protect their interests. The Attorney General provides the following tips to consider before purchasing an annuity:
With today’s uncertain economy, it’s getting harder and harder to plan for retirement. Concerns about inflation, market volatility, and the future of Social Security have led many retirees to look at annuities as a possible solution. So, should everyone who is retired buy an annuity right away? The short answer is that it depends on your life.
What Exactly Is an Annuity?
Before we dive into who should or shouldn’t buy an annuity, let’s clarify what we’re talking about.
An annuity is an insurance product designed to provide a steady income stream during retirement. It’s essentially a contract between you and an insurance company where you make a lump sum payment (or series of payments), and in return, the insurer promises to pay you regularly for a specified period or for the rest of your life.
There are several types of annuities
- Income annuities – Designed to provide steady, guaranteed income for life
- Accumulation annuities – Help you save for retirement and grow your money
- Fixed annuities – Offer a guaranteed interest rate
- Variable annuities – Allow for market-based investments with some risk
- Fixed indexed annuities – Tied to market indexes with downside protection
Who SHOULD Consider Buying Annuities
1. Near-Retirees Who Want to Lock in Current High Rates
Interest rates are higher now than they’ve been in years, which makes annuity payouts more appealing. If you’re getting close to retirement, locking in these rates could give you hundreds more in monthly income than if you bought when rates were at all-time lows. A lot of economists think that rates will go down in the next few months, which could make now a good time to buy.
2. Those Without Traditional Pension Plans
As pensions become increasingly rare, many retirees lack that steady monthly “paycheck” in retirement. An annuity can function as your personal pension, providing predictable income that won’t run out during your lifetime. This is particularly beneficial if Social Security and your other retirement savings won’t cover your basic expenses.
3. Risk-Averse Seniors Who Prioritize Certainty
I’ve worked with a lot of clients who can’t stand seeing their 401(k) balances go up and down with the market. If the volatile market keeps you up at night, an annuity could give you the peace of mind you need. One type of guaranteed return that is not affected by changes in the market is fixed annuities.
One of my clients recently told me, “I’d rather know I’ll always get $2,000 a month than risk having $3,000 that could go down to $1,000 if the market crashes.” “.
4. Those Concerned About Outliving Their Money
With longer lifespans, the risk of depleting retirement savings has increased significantly. Lifetime annuities transfer this “longevity risk” to the insurance company, guaranteeing income no matter how long you live. This can be especially valuable for those with family histories of longevity.
Who Should NOT Buy Annuities
1. Those in Poor Health
If you have serious health concerns or a shortened life expectancy, an income annuity might not make financial sense for you. While some annuities include death benefits or period-certain guarantees for beneficiaries, there are typically better options for those in poor health.
2. People with Adequate Guaranteed Income Already
If you’re fortunate enough to have a pension plus Social Security that covers your income needs, adding an annuity might be unnecessary. Your financial resources might be better deployed elsewhere with potentially higher returns or more flexibility.
3. Those Lacking Adequate Emergency Savings
One of the biggest downsides of annuities is their illiquidity. Early withdrawals often come with steep surrender charges and tax penalties. If buying an annuity would leave you without sufficient savings for unexpected expenses, it’s probably not the right choice right now.
As the Northwestern Mutual article points out: “If buying an annuity would leave you without enough savings to cover unexpected expenses, then an annuity may not be the right choice for you.”
4. Younger Investors with Long Time Horizons
If you’re still decades away from retirement, annuities probably aren’t your best bet. Younger investors usually benefit more from focusing on tax-advantaged retirement accounts like 401(k)s and IRAs, where they can invest more aggressively and benefit from compound growth over time.
5. Those Carrying High-Interest Debt
Before locking money into an annuity, it makes more financial sense to pay off high-interest debt like credit cards or personal loans. The guaranteed return from eliminating 20% interest rate debt will almost always outperform what you’d earn from an annuity.
Common Annuity Myths Debunked
There’s a lot of misinformation about annuities floating around. Let’s clear up some common misconceptions:
Myth 1: Annuities have lower growth potential
Reality: Some annuities can grow just as competitively as a regularly managed portfolio.
Myth 2: An income annuity will run out of money
Reality: While an annuity account can deplete, the income payments continue for life – that’s the insurance component.
Myth 3: Annuities are too expensive
Reality: Some annuities can be expensive with riders and fees, but others have minimal or no fees at all.
Myth 4: The stock market performs well enough to make annuity guarantees unnecessary
Reality: Sequence of return risk (when withdrawals happen during market downturns) can devastate a retirement portfolio, regardless of average returns over time.
Important Considerations Before Buying
If you’re thinking about purchasing an annuity, here are some crucial factors to consider:
- Financial strength of the insurer: Check ratings from independent agencies like A.M. Best Company
- Fee structure: Understand all costs including surrender charges, administrative fees, mortality and expense charges
- Tax implications: Annuity distributions are generally subject to ordinary income tax
- Inflation protection: Consider whether the annuity has features to help payments keep pace with inflation
- Liquidity needs: Evaluate how much access you’ll need to your money
A Balanced Approach
In my experience advising clients, I’ve found that a balanced approach often works best. Instead of an “all or nothing” decision with annuities, consider using them as one component of a diversified retirement strategy.
Many successful retirees create a “three-bucket” approach:
- Guaranteed income (Social Security, pensions, and possibly annuities) to cover essential expenses
- Conservative investments for medium-term needs and inflation protection
- Growth investments for long-term needs and legacy goals
The Bottom Line
Annuities can be a helpful part of retirement planning for many people, but they aren’t a one-size-fits-all solution. Though they provide a reliable and predictable income that can last the rest of your lifetime, they also come with substantial costs. They can make it difficult to access more money in an emergency.
The decision about whether to buy an annuity shouldn’t be based solely on market trends or what a salesperson recommends. It should be based on your personal financial situation, goals, and preferences.
We recommend working with a fiduciary financial advisor who doesn’t just sell annuities but can objectively evaluate whether they make sense for your specific retirement plan. A good advisor will help you understand the tradeoffs and identify which type of annuity, if any, might be appropriate for your situation.
Remember that retirement planning isn’t just about maximizing returns—it’s about creating financial security and peace of mind. For some retirees, the certainty an annuity provides is worth more than the potential for higher but uncertain returns elsewhere.
Have you considered an annuity as part of your retirement strategy? What questions do you still have about how they work? I’d love to hear your thoughts in the comments below!
Beware of High Surrender Charges
The most significant fee associated with annuities is often the surrender charge. This is the percentage that a consumer is charged if he or she withdraws funds early. One insurance company that the Attorney General’s Office sued charged a retired farmer on a fixed income $6,800 in surrender fees when he needed to get his $24,000 in annuities, which was most of his net worth. Another woman from Minnesota was sold an annuity that had surrender charges that would last for 16 years, or until she was 95 years old. The penalty for giving up the annuity was 17% of her investment.
Annuities May not Protect Your Investment
Sellers may aggressively market annuities as a way to defer taxes in a “safe” investment. That might not be the case! The SEC says that people who buy an annuity linked to a 401(k) or IRA don’t get any tax breaks. The SEC notes that those who withdraw funds from a variable annuity before the age of 59 1/2 may be charged a 10 percent federal tax. Consumers may wish to consult a tax consultant before investing in an annuity. Furthermore, the “safety” of the investment depends on the annuity. Beware of agents who aggressively market annuities as being as safe as or better than CDs.
The BEST Annuity to Buy in 2025 (and One to NEVER Buy!)
FAQ
Are annuities a good idea for retirees?
Annuities, on the other hand, can be very important for making sure you have a steady income in retirement. Specifically, annuities can give you a steady income for life, which makes them a good choice for creating a stable retirement income and improving your long-term financial security.
How much will a $100,000 annuity pay monthly?
What does Suze Orman say about fixed annuities?
Suze Orman’s Preference: The CD-Type Annuity Guaranteed Interest for the Entire Term: Unlike traditional fixed annuities that may have fluctuating interest rates, a CD-type annuity guarantees the same interest rate for the entire length of the surrender period.
Should a 70 year old buy an annuity?
Financial advisors recommend starting annuity payments between the ages of 70 and 75.
Should you buy an annuity early in retirement?
If you’re in good health and have a history of living a long time, buying an annuity might be a good idea. Locking in an annuity early in retirement can provide a guaranteed income stream for life, even if you end up outliving your retirement savings. Who Should Avoid Buying an Annuity?.
Should I buy an annuity for retirement?
Before deciding to buy an annuity for retirement, consider whether your finances allow you to purchase one. 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.
Should you invest in a retirement annuity?
By adding this type of annuity to your retirement portfolio, you’re essentially purchasing the pension you never had, a move that can be especially beneficial for singles or couples who don’t have heirs to leave assets to, or those who want the security of knowing their basic expenses will always be covered.
Should I add an annuity to my retirement plan?
You may not be a good candidate for purchasing an annuity if you already have enough money saved up for retirement. There are certain groups of people who may not see much benefit from adding an annuity to their retirement plan (RetireGuide).
What should I know before buying an annuity?
Understanding personal financial goals is crucial before deciding on an annuity. An annuity is a lifetime income plan. In exchange for paying premiums, individuals are guaranteed a fixed or variable income stream either immediately or in the future. Generally, there are two different ways to purchase annuities.
Why should a retirement planner consider an annuity?
One of the primary reasons retirement planners may consider an annuity is for guaranteed monthly income. Especially with a fixed annuity, you’ll know exactly what your monthly income will be, so you can carefully plan your budget. This is a great option for anyone who feels they may not be able to manage their retirement portfolio effectively.