Exploring the Pros & Cons of Annuities for Retirees

Annuities are a great way to help secure guaranteed income as part of your retirement plan. Like any other retirement savings tool, annuities come with advantages and disadvantages. Let’s discuss how to weigh the pros and cons carefully before you invest.

As you approach retirement age, you should become more focused on securing your financial future. One tool that many retirees consider is an annuity.

An annuity is a financial product that pays out a fixed sum of money to the investor at regular intervals, usually monthly or annually. Below we will explore the benefits and drawbacks of annuities so you can make the best decision for your retirement goals.

Pros of Annuities

Despite the criticisms, annuities do offer some advantages for investors who are looking toward retirement.

Guaranteed Income Stream

One of the biggest benefits of annuities is the guaranteed income stream they provide. Unlike investments that fluctuate in value, annuities offer a steady, predictable income. This can be especially beneficial for retirees who are worried about outliving their savings. With an annuity, you know exactly how much income you’ll receive each month or year, which can help you budget and plan for your retirement expenses.

There are many kinds of annuities and some even offer the option to include a guaranteed lifetime income. This benefit provides a guaranteed income stream for the rest of your life, no matter how long you live. Annuities can be an extremely valuable tool for those who want to ensure that they have a source of income throughout their retirement. Here’s a look at some of the different kinds of annuities and their benefits:

Income AnnuitiesFixed AnnuitiesVariable Annuities
Used ForSecuring incomeBuilding WealthBuilding Wealth
Similar ToPensionCDFund Investment
BenefitsLife IncomeFixed Interest RateTax-deferred growth potential

It’s important to note that annuities may not be for everyone, but a financial advisor can assist in seeing if it’s a good fit for you. By providing a steady, predictable income stream, annuities can help retirees feel more confident in their financial future and provide peace of mind throughout their retirement years.

Tax-Deferred Growth

An additional benefit of annuities is tax-deferred growth, which can help retirees keep more of their money working for them. With tax-deferred annuities, you don’t have to pay taxes on your earnings until you begin receiving payments. This means that you can potentially reduce your tax burden, especially if you’re in a high tax bracket.

When you invest in a tax-deferred annuity, you can take advantage of compounding growth, which means that your earnings are reinvested and can generate additional returns over time. This can help your retirement savings grow more quickly than they would with a taxable investment.

By deferring taxes, you can potentially reduce your taxable income during your working years when you’re in a higher tax bracket. Then, when you begin receiving annuity payments in retirement, you may be in a lower tax bracket, which can help reduce your overall tax burden.

It’s important to note that while tax-deferred annuities can provide significant tax benefits, there are also fees and expenses associated with these products. It’s important to work with a financial advisor to determine if a tax-deferred annuity is right for your individual needs and circumstances.

Protection Against Market Volatility

One of the advantages of annuities is their ability to provide protection against market volatility. Unlike other investments, annuities offer a fixed income stream that is not affected by the stock market or interest rates. This can be particularly beneficial for retirees who are concerned about the impact of market downturns on their retirement savings.

With an annuity, you can enjoy a fixed income stream that is not impacted by market conditions. This means that even if the stock market experiences a downturn, your annuity payments will remain the same. This can provide peace of mind and stability, as you know you’ll be able to rely on a steady income stream throughout your retirement.

In addition, some annuities offer additional protection against market volatility, such as guaranteed minimum income benefits or other guarantees that protect your principal. These features can help you further reduce your exposure to market risk and provide even more security for your retirement income.

Flexibility in Payment Options

Annuities offer a range of payment options that can be tailored to your specific needs. For example, you can choose to receive payments for a set number of years or for the rest of your life. You can also choose between fixed payments or payments that are adjusted for inflation. 

This flexibility can help you create a retirement income plan that fits your individual needs and goals. For example, if you’re concerned about outliving your savings, you may want to choose a lifetime payment option. If you’re more focused on meeting a specific financial goal, such as paying off a mortgage, a fixed period payment option may be more appropriate.

Estate Planning Benefits

Annuities can be an effective estate planning tool, as they offer beneficiaries the chance to receive the remaining balance of the annuity after the policyholder passes away. This allows retirees to transfer wealth to their heirs while minimizing estate taxes, which can be a major concern for many people.

When you name a beneficiary for your annuity, you are creating a designated recipient for the funds, which can bypass the probate process. This means that the funds can be distributed to your heirs more quickly and with fewer legal fees. Additionally, because the annuity’s death benefit is typically paid out as a lump sum, it can be used to cover any outstanding debts or expenses that the policyholder may have had at the time of their passing.

It’s important to note that annuities can be complex financial products, and there are often fees and expenses associated with them. That’s why it’s crucial to work with a financial advisor to determine if an annuity is the right choice for your estate planning needs.

Cons of Annuities

Annuities are considered poor investments for many reasons. Depending on the annuity, these include a variety of high fees, little to no interest earned, inability to keep up with inflation, and limited liquidity.

Not All are Created Equal

Many investors view annuities — mainly fixed annuities — as being a good solution to most of their retirement needs for guaranteed income. However, other annuity products do not have a great reputation. Some advisors see them as an unnecessary and expensive product. It is very important that you understand the various features and terms that are applied to annuities.


Annuities are complicated and personalized. If you’re not familiar with all the stipulations of your specific annuity contract, you may face unwelcome surprises in retirement.

Lower Returns

Annuities can be an excellent planning tool to reduce your risk of running out of money in retirement, however, you forgo the opportunity to make bigger returns by investing your money in assets that fluctuate in value, like stocks. A fixed annuity is considered to be a safe and conservative investment but this means that you will not see the possible gains (and losses) of a riskier investment.


Most annuities do not assess sales charges upfront. That may make them look like no-load investments, but it doesn’t mean they don’t have plenty of fees and expenses.

Many annuities have fees attached to them that can minimize the return you earn on your investment. Common ones include …

  • Surrender charges, if you withdraw your money during the surrender period
  • Administrative fees
  • Mortality and expense fees for variable annuities (typically around 1.25%)
  • Additional fees if you choose to purchase optional features, like riders
  • You could also be subject to a federal tax penalty of 10% if you make a withdrawal before you’re 59½.

There are a variety of options that are better than an annuity for retirement depending on your financial situation and goals. These could include deferred plans, such as a 401(k), individual retirement accounts, dividend-paying stocks, and retirement income funds.

Our Top Pick: Indexed Annuities

An indexed annuity, also known as a fixed-index or equity-indexed annuity, is a tax-deferred, long-term savings option that provides principal protection in a down market and opportunity for growth. Indexed annuities offer a minimum guaranteed interest rate combined with an interest rate tied to a broad stock market index, such as the S&P 500 or the Dow Jones Industrial Average.

People often refer to indexed annuities as hybrids of fixed and variable annuities. This unique hybrid design can offer protection against stock market losses, as well as the potential to profit from the market’s gains. Benefits of indexed annuities include:

  1. Guaranteed minimum interest rate: Indexed annuities offer a minimum guaranteed interest rate, which means that the investor is guaranteed to earn a certain rate of return, regardless of how the underlying index performs.
  2. Potential for higher returns: In addition to the guaranteed minimum interest rate, indexed annuities also offer the potential for higher returns. This is because the interest rate is tied to the performance of a market index, such as the S&P 500.
  3. Protection against market downturns: Indexed annuities can also provide protection against market downturns. If the index that the annuity is tied to performs poorly, the investor’s principal is protected and will not decline in value.
  4. Tax-deferred growth: Like other annuities, indexed annuities offer tax-deferred growth. This means that the investor does not pay taxes on the earnings until they withdraw the money.
  5. Lifetime income: Indexed annuities can also provide a guaranteed income stream for life, which can be an attractive feature for retirees who are looking for a steady source of income.

It’s important to note that indexed annuities are not without risks, and investors should carefully consider the terms and conditions of the annuity before investing. Your trusted financial advisor can go over every annuity type with you to determine the best strategy for your unique circumstances.

Final Thoughts

Retirees who want to secure their financial future may find annuities to be a valuable tool. With their fixed income stream, payment flexibility, and estate planning advantages, annuities provide several benefits that can help retirees achieve their retirement objectives.

It’s crucial to seek the assistance of a financial advisor to decide if an annuity is appropriate for your specific needs and situation. At APO Financial, we can provide guidance on annuities and retirement planning.

If you want to know more about our services and how we can help you with your retirement, get in touch with us today. Schedule an appointment with us here to get started.

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Information relating to annuities is intended for educational purposes only and should not be construed as comprehensive or all-inclusive. Therefore, it should not be regarded as a complete analysis of the subjects discussed and should not be used to make an investment decision.

Annuities can be an important part of an overall portfolio but may not be appropriate for everyone. Before purchasing an annuity, it is important to understand the details of the product. Certain products may not be available in your state. The terms of each indexed annuity varies. It is always important to speak to a financial professional. about an annuity’s features, benefits and fees, and whether an annuity is appropriate for you, based on your financial situation and objectives. Participation rates, cap rates and/or index spreads may be subject to change by the insurance company according to the annuity contract provisions. If the insurance company makes such changes, this could adversely affect the return. Guarantees of an indexed annuity are backed by the claims-paying ability of the underwriting insurance company. The surrender charge period for a product may be longer, and the surrender charges may be higher than other annuity products. Indexed annuities are long-term investments. If the annuity contract is surrendered early, there is the possibility of a surrender charge being imposed and/or the funds may be subject to income taxes. The IRS may also impose a 10% penalty on withdrawals prior to age 59 ½, depending on the circumstances. With indexed annuities, there is the potential to lose money, depending on the product charges and minimum guarantee contract provisions. For additional information on annuities, reference the following websites: The FINRA (www.FINRA.org), the Securities and Exchange Commission (www.SEC.gov), Insured Retirement Institute (www.irionline.org), the National Association of Insurance Commissioners (www.NAIC.org) or your state's insurance department.