With retirement on the horizon or already underway, creating a reliable, long-term income strategy is essential. One financial product often at the center of this discussion is the annuity. While some see annuities as a reliable source of guaranteed income, others view them as complex and restrictive. So what’s the real story? Are annuities in retirement a smart move or a financial misstep?
At TruNorth Advisors, we evaluate whether annuities align with your overall retirement plan. In this guide, we break down the different types of annuities, weigh their benefits and drawbacks, and help you determine if they have a place in your financial future.
What Is an Annuity?
An annuity is a financial contract typically issued by an insurance company. In exchange for a lump sum or series of payments, the insurer provides a stream of income either for a set period or the rest of your life.
Primary Types of Annuities:
- Fixed Annuities: Offer predictable, guaranteed payments.
- Variable Annuities: Payments vary based on the performance of underlying investment options.
- Income Annuities: Focused on providing steady payouts and include immediate and deferred income options.
Each annuity type serves different goals and risk tolerances.
Fixed Annuities: Stability and Predictability
A fixed annuity provides a guaranteed interest rate and regular payments over a specified term.
Pros:
- Guaranteed income for life or a specified term
- Low risk and simple structure
- Fixed annuities can serve as a conservative option for those seeking predictable income
Cons:
- Lower potential returns than investments in the market
- Limited access to funds (surrender charges)
- May not keep up with inflation over time
Designed For:
- Retirees seeking stability and predictability
- Those who value principal protection and guaranteed income
Variable Annuities: Market Exposure with Income Potential
Variable annuities allow you to invest in a selection of funds (similar to mutual funds), and your payout will fluctuate based on performance.
Pros:
- Potential for higher returns
- Option to add riders for income or death benefits
- Tax-deferred growth
Cons:
- Higher fees (mortality charges, fund expenses, rider costs)
- Involves complexity and a range of risks — not limited to market volatility
- Value may drop during market downturns
Designed For:
- Retirees with a higher risk tolerance
- Those seeking tax-deferred growth with market exposure
Income Annuities: Immediate or Deferred Paychecks
An income annuity is designed to provide guaranteed income and can be structured to start immediately or at a future date.
Immediate Annuities:
- Begin payouts almost immediately after investment
- Used to convert a lump sum into an income stream
Deferred Income Annuities:
- Purchased today with payouts starting later (e.g., at age 80)
- Provides longevity insurance against outliving savings
Cons:
- Irrevocable; limited liquidity
- Inflation may reduce purchasing power
Designed For:
- Retirees concerned about outliving their money
- Those without pensions or other guaranteed income sources
Features to Evaluate Before Buying an Annuity
Contract Guarantees
- What income or death benefits are included?
Fees and Expenses
- Look for management fees, surrender charges, rider costs, and administrative fees
Payout Options
- Life only, joint life (with surviving spouse), period certain
Tax Implications
- Earnings may grow tax-deferred, but withdrawals are taxed as ordinary income
Note: Annuities are long-term contracts—evaluate they fit within your broader financial planning strategy.
Risks and Drawbacks of Annuities in Retirement
Liquidity Risk:
Annuities may restrict access to funds within the first 5-10 years (surrender period).
Inflation Risk:
Without cost-of-living adjustments, fixed payments may lose purchasing power.
Complexity:
Contracts are often dense, with varying terms that can be hard to interpret.
Strategy Tip: Work with a financial advisor who can explain how annuities work and help you assess if you’re sacrificing too much flexibility.
Are Annuities a Good Fit for Your Retirement Plan?
Annuities in retirement are best evaluated in the context of your total income needs, life expectancy, risk tolerance, and other income sources like Social Security and retirement savings.
Annuities Might Be Right If:
- You’re concerned about running out of money
- You want predictable monthly income
- You have limited risk appetite
Annuities Might Not Be Right If:
- You need liquidity or flexibility
- You already have multiple guaranteed income sources
- You’re looking for higher long-term growth
How TruNorth Advisors Can Help
At TruNorth Advisors, we help you:
- Understand the role of annuities within a retirement plan
- Compare contract types, riders, and payout options
- Evaluate insurers and product ratings
- Integrate annuities with investments, Roth IRAs, and tax planning
Conclusion: Annuities Are a Tool, Not a One-Size-Fits-All Solution
Annuities in retirement can be powerful tools for income security and peace of mind—when used correctly. The key is understanding the features, costs, and suitability for your situation.
With guidance and a personalized plan, you can determine if an annuity enhances your retirement income or introduces unnecessary risk.
Take the Next Step
Thinking about adding annuities to your retirement plan? Schedule a complimentary consultation with TruNorth Advisors and make the most informed decision for your future. taxes in retirement? Schedule a complimentary consultation with TruNorth Advisors today and take control of your financial future.