retirement 2026-04-12
Annuities: Pros, Cons, and When They Fit
Annuities promise guaranteed income but carry costs and complexity.
Annuities are insurance products that exchange a lump sum for a stream of payments.
Types
- Immediate fixed — pay lump sum, receive monthly payments now
- Deferred fixed — like a CD with longer term and tax deferral
- Variable — payments vary with underlying investments
- Indexed — returns linked to market index with cap and floor
When They Make Sense
- Longevity insurance (outliving savings)
- Income flooring (essential expense coverage)
- Behavioral protection against panic-selling
When They Don't
- Emergency fund replacement
- Investment growth
- Estate planning for heirs
- Younger ages
The Fee Problem
Variable annuities can charge 2-3%+ annually layered through mortality and expense charges, admin fees, subaccount fees, rider fees.
Surrender Charges
5-10 year surrender periods with early withdrawal penalties.
SPIA: The Simple One
Single Premium Immediate Annuity is the cleanest. Pay $X today, receive fixed payments for life.
Red Flags
- High "guaranteed" returns
- Indexed products with adjustable caps
- Pressure to act quickly
- "Tax-free" claims (most are tax-deferred)