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This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that you consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.
In an era of economic uncertainty and evolving retirement landscapes, annuities have emerged as a cornerstone of financial planning for millions of Americans. In fact, according to Investopedia, annuities surged in popularity in recent years, with total U.S. sales reaching a record-high $434.1 billion in 2024—a 13% increase from 2023.
While these financial instruments often face criticism for their complexity and fees, they offer unique advantages that make them invaluable tools for specific types of investors and life situations. Understanding when and why annuities excel can help you determine whether they belong in your retirement strategy.
Annuities (in a nutshell)
An annuity is essentially a contract between you and an insurance company where you make either a lump-sum payment or series of payments in exchange for regular disbursements beginning either immediately or at a future date. Think of it as creating your own personal pension system, providing a structured approach to converting your savings into reliable income during retirement.
Now let’s take a closer look at seven reasons why having an annuity can benefit you:
Guaranteed income stream
The most compelling advantage of annuities is their ability to provide guaranteed income for life. Unlike other retirement investments that fluctuate with market conditions, certain types of annuities offer predictable payments that continue regardless of how long you live. This feature addresses one of the most significant fears among retirees: outliving their money.
For individuals who lack traditional pension plans or whose Social Security benefits won’t cover their living expenses, annuities can fill this critical income gap. The psychological peace of mind that comes from knowing you’ll receive a check every month, regardless of market performance, cannot be overstated for many retirees.
Protection against longevity risk
Americans are living longer than ever before, with many retirees spending 20-30 years in retirement. This longevity presents a financial challenge: ensuring your money lasts as long as you do. Annuities transfer this longevity risk from you to the insurance company. Even if you live to 100 and receive payments far exceeding your initial investment, the insurance company remains obligated to continue payments.
This protection is particularly valuable for individuals with family histories of longevity or those in excellent health who expect to live well beyond average life expectancy. The insurance company pools this risk across thousands of annuitants, making it mathematically feasible to provide lifetime guarantees.
Tax-deferred growth
Annuities offer significant tax advantages during the accumulation phase. Unlike taxable investment accounts, the money inside an annuity grows without immediate tax consequences. You won’t pay taxes on interest, dividends, or capital gains until you begin receiving payments. This tax deferral allows your investments to compound more effectively over time.
For high-income earners who have maximized their contributions to 401(k)s and IRAs, annuities provide an additional vehicle for tax-advantaged savings without contribution limits. This feature makes them particularly attractive to individuals in high tax brackets who want to defer income to potentially lower-tax retirement years.
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Inflation protection options
Many modern annuities offer inflation protection features, either through cost-of-living adjustments or by linking payments to inflation indices. While these features typically reduce initial payment amounts, they help preserve purchasing power over long retirement periods. This protection is crucial given that even modest inflation rates can significantly erode the value of fixed payments over decades.
Creditor protection
In many states, annuities offer substantial protection from creditors. This feature can be particularly valuable for business owners, professionals in liability-prone careers, or individuals concerned about potential lawsuits. The specific protections vary by state, but annuities often provide a level of asset protection that other investment vehicles cannot match.
Elimination of investment management burden
For retirees who prefer not to actively manage investments or make complex financial decisions, annuities can eliminate this responsibility. Once you purchase an annuity, the insurance company handles investment management and assumes market risk (in the case of fixed annuities). This arrangement can be particularly appealing to individuals who lack investment expertise or simply want to simplify their financial lives.
Spousal and beneficiary benefits
Many annuities offer joint-life options, ensuring that payments continue for the surviving spouse’s lifetime. Some also provide death benefits that guarantee beneficiaries will receive at least the original investment amount, even if the annuitant dies early in the payout phase. These features provide valuable protection for married couples and can ensure that surviving family members maintain financial security.
Who benefits most from annuities?
Sure, annuities can be great, but they’re not intended for everyone. Let’s break down the types of people they can help the most:
- Conservative investors: Individuals with low risk tolerance who prioritize capital preservation over growth potential often find annuities align well with their investment philosophy. Fixed annuities, in particular, offer principal protection while providing returns that typically exceed traditional savings accounts or CDs.
- Those without employer pensions: With the decline of traditional pension plans, many workers face retirement without guaranteed income sources beyond Social Security. Annuities can effectively replace employer pensions, providing the stable income that previous generations took for granted.
- High-income earners seeking tax deferral: Professionals and business owners in high tax brackets can benefit from the unlimited contribution potential and tax-deferred growth that annuities provide. This is especially valuable for individuals who have maximized other tax-advantaged retirement accounts.
- Individuals with longevity concerns: People with family histories of longevity or excellent personal health may find that annuities provide valuable insurance against outliving their assets. The guaranteed lifetime income feature becomes more valuable as life expectancy increases.
- Retirees seeking simplification: Individuals who want to reduce the complexity of their financial lives often appreciate the “set it and forget it” nature of annuities. Rather than constantly monitoring market conditions and making investment decisions, they can rely on guaranteed payments.
- Couples concerned about survivor income: Married couples worried about maintaining adequate income for the surviving spouse often find joint-life annuities provide essential protection. These products can ensure that both spouses maintain their standard of living regardless of who dies first.
Understanding the potential drawbacks
While this article focuses on advantages, it’s important to acknowledge that annuities aren’t perfect for everyone.
- They typically come with higher fees than many other investment options
- Can be complex to understand
- Often provide limited liquidity
- Surrender charges can be substantial if you need to access your money early
- Inflation can erode the purchasing power of fixed payments over time
Additionally, annuities may not be suitable for individuals who need immediate access to their principal, those who can achieve better returns through other investments, or people with shorter life expectancies who might not fully benefit from lifetime income guarantees.
Making the decision
The key to determining whether an annuity makes sense for your situation lies in honest assessment of your priorities, risk tolerance, and financial circumstances. If guaranteed income, principal protection, and simplification rank high on your list of retirement goals, annuities deserve serious consideration. However, they should typically be just one component of a diversified retirement strategy rather than your sole retirement vehicle.
Consider working with a fee-only financial advisor who can provide objective analysis of how annuities might fit within your broader financial plan. The right advisor can help you navigate the complexity of different annuity types and ensure that any annuity purchase aligns with your specific needs and circumstances.
The takeaway
Annuities represent a unique financial tool that can provide valuable benefits for the right individuals in the right circumstances. Their ability to guarantee lifetime income, protect against longevity risk, and provide tax-deferred growth makes them particularly valuable in today’s uncertain economic environment. While they’re not appropriate for everyone, understanding their advantages can help you make informed decisions about whether they belong in your retirement planning strategy.
The peace of mind that comes from knowing you’ll receive guaranteed income throughout retirement can be invaluable, particularly for individuals who prioritize security over growth potential. As you evaluate your retirement planning options, consider whether the unique benefits that annuities provide align with your personal financial goals and risk tolerance.
SOURCES CITED
Gallo, N., “Interest in Annuities Is Soaring: Understanding the 2025 Trend.” Investopedia. June 10, 2025.
This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that you consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.
