With traditional pensions largely a thing of the past and market volatility an ongoing reality, millions of Americans are searching for dependable income solutions—and annuities keep coming up as an answer.
The short answer: annuities can be an effective retirement income tool, but only for the right person, in the right financial situation, with the right product.
This guide breaks down everything you need to know—what annuities are, how they work, who benefits most, and what to watch out for before signing anything.
Understanding Annuities
An annuity is a contract between you and an insurance company. You make either a lump-sum payment or a series of payments, and in return, the insurer agrees to pay you a regular income—starting immediately or at a future date you choose.
That income can last for a set number of years or for the remainder of your life, depending on the terms of your contract.
What sets annuities apart from most other financial products is this guarantee of future income. While a stock portfolio may grow significantly over time, it comes with no promise of what it will deliver when you actually need it.
An annuity, by contrast, offers a contractual commitment. That distinction is what makes them attractive to people entering or approaching retirement—particularly now, when fewer workers have access to traditional employer pensions.
The numbers reflect this shift. According to LIMRA, U.S. retail annuity sales are projected to exceed $460 billion in 2025, marking the fourth consecutive year of record sales—roughly double the total recorded in 2020 (LIMRA, 2026).
More than 4 million Americans are turning 65 each year, and a growing share of them are arriving at retirement without guaranteed lifetime income from an employer. Annuities are stepping into that gap.
Types of Annuities to Consider
Not all annuities are built the same. The category spans a wide range of products, and understanding the differences is essential before making any decisions.
Fixed annuities offer a guaranteed interest rate for a specified period, making them the most predictable option. Your money grows at a set rate, and your future income payments are determined in advance.
For those who value certainty above all else, this straightforward structure is appealing—though returns may be modest compared to market-linked alternatives.
Variable annuities allow you to allocate your premium among investment sub-accounts—similar to mutual funds—which means your returns depend on market performance. The upside potential is greater, but so is the risk. In a down market, the value of your account can decline, which is an important consideration for anyone close to retirement.
Indexed annuities—specifically registered index-linked annuities (RILAs) and fixed indexed annuities (FIAs)—occupy a middle ground. They tie returns to a market index, such as the S&P 500, while offering some degree of protection against losses.
This hybrid approach has driven enormous growth in the category. LIMRA data shows that RILA sales surged more than 270% between 2020 and 2024, reaching $65 billion, with projections exceeding $75 billion in both 2025 and 2026 (LIMRA, 2026).
Immediate annuities begin paying income almost right away after a lump-sum purchase, making them practical for retirees who need income now. Deferred annuities, by contrast, allow your investment to grow over time before payouts begin—often years or even decades later.
The Real Benefits of Annuities
The core benefit of an annuity is straightforward: guaranteed income you cannot outlive. For retirees worried about spending down their savings too quickly, this is significant.
Research from Nationwide found that 76% of annuity owners between the ages of 45 and 75 expressed confidence about their ability to retire on time, compared with just 49% of non-owners (Nationwide Retirement Institute, as cited in PlanAdviser, 2025). That difference in confidence is meaningful—and it reflects the psychological as well as financial value of guaranteed income.
Beyond the income guarantee, annuities offer tax-deferred growth. Earnings inside the annuity are not taxed until you begin taking withdrawals, which allows your money to compound without an annual tax drag. For individuals who have already maxed out contributions to a 401(k) or IRA, this feature can provide an additional layer of tax-advantaged accumulation.
Some annuities also include death benefits, ensuring that a named beneficiary receives a payout if the annuity owner dies before payments begin or before a minimum guaranteed amount has been paid out.
Certain products also allow for inflation-adjusted payments—an increasingly popular feature. Standard Life reports that awareness of inflation-linked annuity options rose from 20% to 25% among over-50s in 2025 alone, with sales of escalating annuities climbing 10% during the same period (Standard Life, 2026).
Potential Drawbacks and Risks
Annuities carry real limitations that must be weighed carefully. Liquidity is perhaps the most significant concern. Once money is placed into an annuity, accessing it before the surrender period ends—typically six to ten years—often triggers steep surrender charges.
If your financial situation changes unexpectedly and you need access to those funds, your options may be limited and costly.
Fees are another critical consideration. Variable annuities in particular can carry a layered fee structure, including administrative charges, mortality and expense risk charges, and optional rider fees. These costs compound over time and can meaningfully reduce net returns.
Before purchasing any annuity, request a full disclosure of all fees and calculate their impact on your projected income.
Inflation risk affects fixed annuities specifically. If you lock in a set monthly payment today, that same nominal amount may purchase considerably less in purchasing power fifteen or twenty years from now. Inflation-adjusted riders can address this, but they typically come at a higher cost or lower initial payout.
Finally, the complexity of annuity contracts can be a barrier. The terminology, payout structures, and optional features vary widely across products and providers.
Research from Standard Life found that despite growing awareness among over-50s, only 22% understand that pre-existing health conditions can actually improve the rate they receive through enhanced annuities—a provision that could meaningfully increase income for eligible individuals (Standard Life, 2026).
Who Should Consider an Annuity?
Annuities are most suitable for a specific type of investor. Those who have already maximized contributions to tax-advantaged retirement accounts—401(k)s, IRAs, and similar vehicles—and are seeking additional guaranteed income make a strong candidate.
If the thought of outliving your savings is a primary concern, and you value financial predictability over investment growth potential, an annuity may be a logical addition to your retirement plan.
Individuals with a lower risk tolerance, particularly those approaching or in retirement, often find that fixed or indexed annuities align well with their priorities. The appeal is the floor, not the ceiling—knowing that income will continue regardless of what markets do.
On the other hand, younger investors with decades until retirement and a high capacity for risk are generally better served by growth-oriented investments during their accumulation years.
An annuity’s real value emerges in the distribution phase, not the accumulation phase. Similarly, individuals who already receive significant guaranteed income through pensions or Social Security may find less need for additional annuitization.
Key Considerations Before Investing
Before committing to any annuity product, a careful and honest evaluation of your full financial picture is essential. Start with your retirement income needs.
Calculate what your expected monthly expenses will be, subtract guaranteed income sources like Social Security, and determine how large an income gap you need to fill. That number should guide the scale of any annuity purchase.
Assess your need for liquidity. If you have limited emergency savings or anticipate major expenses—healthcare costs, home repairs, supporting family members—tying up a large portion of assets in an annuity with surrender penalties could create financial strain.
Scrutinize fees thoroughly. Ask the insurer or your financial adviser to walk through every cost associated with the contract, including optional riders you may not need. Compare net returns across multiple providers and product types.
Evaluate the financial strength of the insurance company. An annuity is only as reliable as the company behind it. Independent ratings from agencies such as AM Best, Moody’s, or Standard & Poor’s offer a starting point for assessing insurer stability. This is a long-term contractual relationship—company health matters.
Finally, consult a qualified, fee-only financial adviser who is not compensated by commissions from annuity sales. Annuities can be sold aggressively, and their complexity makes objective guidance particularly valuable.
A good adviser will help you determine whether an annuity serves your retirement plan—or whether other tools are better suited to your situation.
Making the Right Choice for Your Retirement
Annuities are not a universal solution, but for the right person, they can provide something genuinely valuable: the certainty that income will continue no matter how long retirement lasts.
The record demand for annuities recently is not coincidental. It reflects a retirement landscape in which fewer people have pensions, market volatility remains a real concern, and longevity risk—the risk of outliving your money—has never been more salient.
Approach the decision with the same care you would apply to any major financial commitment. Understand the product, understand the costs, and understand how it fits—or doesn’t fit—within your broader financial plan.
With clear-eyed analysis and the right professional guidance, you will be well-positioned to make a choice that supports lasting financial security.
other related articles of interest:
How To Split Your Savings And Investments For Maximum Growth
Image Credit: are annuities right for you by envato.com
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