Are annuities a good investment?

At its core, an annuity is a financial contract between you and an insurance company. You pay a lump sum or make a series of payments, and in return, the company promises to provide guaranteed income, either immediately or in the future.

There are different types of annuities, including:

• Fixed annuities: These offer a predictable, fixed return.

• Variable annuities: Returns on these vary based on the performance of underlying investments, like mutual funds.

• Indexed annuities: Tied to a stock market index, these offer potential growth with some downside protection.

• Immediate or deferred annuities: You can choose to start receiving income right away or at a later date with this kind of investment.

Annuities are designed primarily to create retirement income, often for life, which is why some people consider them an investment in their long-term financial security.

So, is an annuity a good investment? The answer isn’t one-size-fits-all. It depends on your goals, your tolerance for risk, and your broader retirement strategy. For many retirees, the benefits can be appealing:

Many people are drawn to the guaranteed lifetime income that you can set up with a payout option like a lifetime annuitization or lifetime income rider. Knowing you’ll receive a check every month — even if you live to 100 — can offer peace of mind, especially as Social Security alone may not cover all your expenses.

Until you start withdrawing funds, your annuity earnings grow tax-deferred. That means more of your money can compound over time without being reduced by annual tax bills.

Unlike the stock market, a fixed annuity offers stable returns, which can help balance more volatile parts of your portfolio.

Annuities act as insurance against outliving your savings. Financial longevity can be a serious concern for retirees who need their retirement income to last for decades.

Unlike IRAs or 401(k)s, there's often no cap on how much you can contribute to an annuity, making them attractive for high earners looking to stash away more for retirement.

While annuities come with several benefits, they also have significant downsides that make some investors cautious.

Variable annuities, in particular, can carry steep fees, including administrative charges, mortality and expense risk fees, and investment management costs. These can eat into your returns over time.

Annuities can be difficult to understand. Riders, surrender charges, and performance caps can complicate things, making it hard to compare products or know what you're really getting.

Once you commit your funds to an annuity, it’s not always easy (or cheap) to get them back. Early withdrawals often come with penalties and tax implications.

Compared to other investment vehicles like mutual funds, annuities may offer lower growth potential, especially after fees.

Some annuities don’t adjust for inflation, which means your monthly payments could lose purchasing power over time.

Generally, an annuity might make sense if:

• You’re close to retirement and want to lock in guaranteed income.

• You're concerned about running out of money in old age.

• You’ve maxed out other savings vehicles and still want tax-deferred growth.

• You value predictability over potentially higher (but riskier) returns.

Annuities can also help if you don’t have a traditional pension and want to supplement Social Security with another steady stream of retirement income.

Let’s compare annuities to other financial products:

So, are annuities worth it compared to other options? For guaranteed income, they might be the right option for some. To maintain access to funds, retirement savers might consider a savings account or a certificate of deposit (CD). At Raisin, you can explore CD accounts with a variety of terms and competitive rates, and there are no fees.

Before purchasing an annuity, consider the following:

• Know your goals. Are you looking for steady retirement income or aggressive growth?

• Understand the fees. Ask the company or your advisor to break down every cost.

• Review the annuity type. Fixed, indexed, or variable annuities — each has different risks and returns.

• Check the insurer’s reputation. Since the guaranteed income depends on their ability to pay, it is worth checking the rating of insurance companies.

• Watch the fine print. Look for surrender fees, withdrawal restrictions, and tax implications.

• Talking to a financial advisor can help clarify if an annuity fits into your overall strategy and help you come to a decision about whether they’re the right kind of investment for you.

With so many opinions around — some praising their guaranteed income, others warning about high fees — you might be wondering: Are annuities a good investment? It depends. If you're looking for a safe, guaranteed source of retirement income and can accept the tradeoffs — like limited liquidity and potential fees — an annuity could be one aspect of your retirement plan.

But if you're still in the growth phase or your financial planning, or prefer more control and flexibility over your funds, other investment vehicles may be better suited to your needs.

If you’re wondering whether an annuity fits into your financial picture, now’s the time to take a closer look. Comparing savings and other investment tools can help you build a strategy that supports your long-term goals.

Need help evaluating your options? You might consider working with a qualified financial advisor who can guide you through the pros, cons, and what’s best for your unique situation.

To complement your retirement savings, compare high-yield savings accounts, CD accounts, and money market deposit accounts at Raisin. Once you’ve chosen an account that suits you, simply create your free Raisin login and deposit your money.

Yes, annuity earnings are taxable as ordinary income when withdrawn; contributions made with pre-tax dollars are fully taxable.

This will depend on the individual. Annuities can be worth it for those seeking guaranteed income, but high fees often reduce overall returns.

Yes, but early withdrawals may face surrender charges and a 10% IRS penalty if taken before the age of 59½.¹

It depends on the contract — some pass remaining value to a beneficiary, others may end payments entirely.

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

Sources

¹https://www.irs.gov/publications/p575#en_US_2024_publink1000226952