Should you buy an annuity?

By the RetireGauge Editorial Team · Updated June 2026 · Researched from authoritative sources. General information, not professional advice.

Annuities are among the most argued-about products in retirement planning. Some are praised by economists as the closest thing to a personal pension; others are criticized for high fees and aggressive sales tactics. The honest answer to "should you buy one?" is that it depends on what you need the annuity to do, and on which kind you are actually being offered.

This article provides general educational information only and is not financial, tax, insurance, or investment advice. Annuity contracts are complex and the right choice depends on your full financial situation, tax position, and the specific contract terms. Consult a licensed financial professional and read any contract carefully before purchasing.

What an annuity actually is

An annuity is an insurance contract. In its simplest form, you give an insurance company a sum of money and, in exchange, the company promises to pay you income — either right away or starting at a future date — usually for a set number of years or for the rest of your life. Because it is insurance, an annuity can do something a portfolio of stocks and bonds cannot do on its own: it can guarantee income you cannot outlive. That feature is called longevity insurance, and it is the central reason annuities exist.

The complication is that "annuity" covers a wide range of products that work very differently. A plain income annuity and a complex variable annuity share little besides the name, so blanket claims that annuities are "good" or "bad" are rarely useful. The useful question is which type, for which purpose.

The strong case for an annuity

Guaranteed income you can't outlive. The biggest financial risk in a long retirement is running out of money late in life. An income annuity pools that risk across many buyers, so the insurer can pay a higher rate than you could safely draw from your own portfolio while still covering the chance you live to 100.
Covering essential expenses. Many planners suggest using guaranteed income — Social Security, any pension, and possibly an annuity — to cover non-negotiable costs like housing, food, utilities, and insurance, so a market downturn never threatens your basic security.
Behavioral simplicity. A predictable monthly check is easier to live on than managing withdrawals from a volatile portfolio. For people who find investing stressful, that peace of mind has genuine value.

The real cautions

Fees and complexity. Variable and fixed indexed annuities can carry layered charges — mortality and expense fees, rider fees, and sub-account costs — that quietly reduce returns. The simplest products are inexpensive; the complex ones often are not.
Surrender charges and illiquidity. Many contracts lock your money up for years, with surrender charges (sometimes starting near 7% or higher and declining over several years) if you withdraw early. Once you annuitize a lump sum into lifetime income, that money is generally gone as a liquid asset.
Inflation erosion. A fixed payment that looks generous today buys less each year. You can add a cost-of-living adjustment (COLA) rider that increases payments over time, but it lowers your starting income substantially.
Credit risk of the insurer. Your guarantee is only as strong as the company behind it. An annuity is not federally insured the way a bank deposit is.
Sales pressure and commissions. Some annuities pay large commissions, which can motivate aggressive selling of complex products to people who would be better served by something simpler — or by nothing at all.

The main types, compared

The descriptions below are illustrative, not quotes. Always compare actual offers and read the contract.

Type	How it works	Cost / complexity	Best fit
Single-premium immediate annuity (SPIA)	Pay a lump sum; income starts within about a year and continues for life (or a set term).	Low cost, very simple. No ongoing investment fees.	Retirees who want maximum guaranteed income now to cover essentials.
Deferred income annuity / QLAC	Pay now; income begins years later (e.g., at age 80). A QLAC is a version held inside tax-deferred retirement accounts under IRS rules.	Low cost, simple. IRS premium limits and special required-minimum-distribution treatment apply to QLACs.	Pure longevity insurance against outliving savings late in life.
Fixed annuity	Insurer credits a set interest rate for a period; can later be converted into income.	Moderate. Surrender charges common; the rate may reset after the term.	Conservative savers wanting CD-like, tax-deferred accumulation.
Fixed indexed annuity	Returns tied to a market index with caps or participation rates; principal protected from index losses.	Higher complexity. Caps, spreads, and rider fees are hard to evaluate.	Those who want some upside with downside protection and understand the limits.
Variable annuity	Money is invested in market sub-accounts; value rises and falls, often with optional income riders.	Highest cost and complexity; multiple layered fees.	Niche cases; frequently over-sold relative to the value delivered.

What economists tend to favor

When academics and consumer advocates discuss annuities favorably, they usually mean the plain single-premium immediate annuity (SPIA) and its cousin the deferred income annuity — not the complex, fee-heavy products. A SPIA is easy to compare across insurers because it does essentially one thing: turn a lump sum into lifetime income. The more bells, whistles, and riders a product has, the harder it is to know whether you are getting fair value, and the more room there is for commissions to be buried in the contract.

QLACs (qualified longevity annuity contracts) and other longevity annuities deserve a special mention. By starting payments late in life, they buy a lot of late-life protection for a relatively small premium, addressing the specific fear of being very old and out of money. They are a targeted tool rather than a place to put most of your savings.

A practical framework

A common, sensible approach is "cover essentials with guaranteed income, invest the rest." The steps look like this:

Total up your essential annual expenses.
Subtract guaranteed income you already have, especially Social Security and any pension.
If a gap remains on the essentials, consider a simple income annuity (often a SPIA) sized to fill just that gap.
Keep the remaining savings invested for growth, flexibility, and discretionary spending.

Under this framework you are not betting everything on an annuity, and you are not exposed to the market for your basic survival. You buy only as much guaranteed income as you actually need, and no more.

Safety nets, ratings, and who is selling

Because an annuity is a promise from an insurer, the insurer's strength matters. There is no FDIC for annuities, but every state has a guaranty association that provides a limited backstop if an insurer fails. Coverage caps vary by state and are not unlimited, so spreading large purchases across more than one highly rated insurer can be prudent. Check the financial-strength ratings of any insurer from the independent rating agencies, and confirm the company is licensed through your state insurance department and covered by your state guaranty association.

Pay close attention to who is selling. Some advisers act as fiduciaries, legally required to put your interests first. Others operate under a sales standard. For securities such as variable annuities, the U.S. Securities and Exchange Commission's Regulation Best Interest (Reg BI) requires broker-dealers to act in your best interest at the time of a recommendation and to disclose conflicts — but that is not identical to a full fiduciary duty. Knowing whether your seller is paid by commission, and whether they are a fiduciary, helps you weigh their advice.

Before buying, read the unbiased material from authoritative sources. The SEC's Investor.gov and the Financial Industry Regulatory Authority (FINRA) both publish plain-language explainers on annuity types, fees, surrender charges, and the questions to ask a seller. These cost nothing and can save you from an expensive mistake.

So, should you?

An annuity is a tool, not a verdict. If you have a gap between essential expenses and guaranteed income, dislike managing a portfolio, and worry about outliving your money, a simple income annuity may be one of the better purchases you make. If you are being steered toward a complex, high-fee product you do not understand, or you would have to surrender liquidity you genuinely need, slow down and get an independent second opinion before signing anything.

Frequently asked questions

Are annuities a good idea for everyone?

No. They suit people who need more guaranteed income to cover essentials and who value predictability over liquidity. People who already have ample guaranteed income, or who need access to their money, often do not need one at all.

What is the simplest annuity to understand?

The single-premium immediate annuity (SPIA): you pay a lump sum and receive lifetime income. It has no investment sub-accounts and few moving parts, which makes offers easy to compare across insurers.

Is my annuity protected if the insurer fails?

There is no FDIC coverage, but your state guaranty association provides a limited backstop up to caps that vary by state. Choosing highly rated insurers and not over-concentrating with one company reduces the risk.

How do I avoid being oversold a product?

Ask whether the seller is a fiduciary and exactly how they are paid. Read the SEC's Investor.gov and FINRA annuity guides first, get all fees and surrender charges in writing, and be especially cautious with complex variable or fixed indexed products.

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