Annuities have long been a staple of U.S. retirement planning, offering investors the promise of a guaranteed income stream.
Financial advisors and insurance agents often recommend them as a hedge against longevity risk, ensuring retirees do not outlive their savings. However, annuities are often criticized for high fees, commissions, and limited liquidity. With 2025 bringing evolving retirement strategies and higher interest rates, it’s essential to understand how annuities work, their advantages and drawbacks, and the alternatives available in the U.S. market.
How Annuities Work
An annuity is a contract between an individual and an insurance company. The investor contributes either a lump sum or periodic payments, and in return, the insurer promises to provide a regular income according to Investopedia.
Immediate annuities begin payments shortly after purchase, while deferred annuities start at a future date, often during retirement. Payouts can be structured for a fixed term, such as 10 or 20 years, or for the annuitant’s lifetime. Life-long annuities continue paying even if the annuitant surpasses average life expectancy, offering a buffer against outliving assets.
Annuities are also classified as fixed or variable. Fixed annuities provide a guaranteed return, while variable annuities invest in portfolios of mutual funds or subaccounts, meaning returns fluctuate with market performance.
Pros of Annuities
Guaranteed Income
The most prominent advantage of an annuity is certainty. Insurers commit to making payments, either for a specified term or for life. This predictability can ease retirement planning, particularly for retirees concerned about longevity. For example, a 65-year-old U.S. retiree with a $250,000 investment in a fixed immediate annuity could secure approximately $1,500 per month, depending on prevailing rates in 2025.
Customizable Features
Annuities can include features to meet personal needs. Death benefit riders can provide payouts to heirs, while guaranteed minimum income benefits protect against poor market performance in variable annuities. Joint and survivor options ensure continued payments for a spouse. These features increase cost but add flexibility and security.
Professional Money-Management Assistance
Variable annuities often come with optional portfolio management, including automated rebalancing and periodic fund adjustments. For investors who prefer professional oversight, these features can simplify retirement planning while maintaining investment growth potential.
Cons of Annuities
High Commissions and Fees
Annuities generally charge higher commissions than mutual funds or ETFs. A $500,000 401(k) rollover invested in mutual funds might result in a 2% advisor commission. The same rollover into an annuity could generate 6–8%, or $30,000–$40,000. Annual administrative fees and management charges can further erode returns. While some insurers now offer lower-cost annuities, investors should always review contract details carefully.
Surrender Charges
Accessing funds before the surrender period (often 6–8 years) incurs penalties. This reduces liquidity and can prevent investors from reallocating their capital when needed.
No Additional Tax Benefits Over IRAs
Annuities grow tax-deferred, similar to IRAs and 401(k)s. Investing already tax-advantaged retirement funds in an annuity can be redundant and costly due to fees. For many investors, traditional IRAs, Roth IRAs, 401(k)s, and taxable investment accounts may be more efficient.
Market and Insurer Risk
Fixed annuities are insulated from market fluctuations, but variable annuities expose investors to market volatility. Additionally, there is a small risk the insurance company could default, though state guaranty associations provide limited protections.
Visual breakdown of annuities and the key factors investors should consider when planning for retirement.
Alternatives to Annuities
401(k) or IRA Drawdown
U.S. retirees can maintain investments in IRAs or 401(k)s while withdrawing income gradually. This strategy offers flexibility and potential for growth, though market risk is present.
Lump Sum Withdrawals
Accessing retirement funds in a lump sum provides liquidity but requires disciplined planning to avoid depleting assets too quickly.
Dividend-Paying Stocks and ETFs
Dividend-paying equities and ETFs can provide steady income with lower fees than annuities. Combining these with a partial annuity purchase can offer guaranteed income while maintaining growth potential.
Deferred Income Annuities
For retirees wanting some security but minimizing fees, a deferred income annuity purchased later in life can complement other retirement assets, providing predictable payments without long-term commitment.
Making the Right Choice
The decision to buy an annuity depends on personal circumstances: retirement goals, health, and risk tolerance. A hybrid approach—investing in IRAs, 401(k)s, or ETFs during working years, then allocating a portion into a deferred annuity with income guarantees—can reduce costs while ensuring security according to Annuity.org. Consulting a licensed U.S. financial advisor ensures alignment with both short-term and long-term objectives.
People Also Ask
What are the current U.S. annuity rates in 2025?
A 65-year-old retiree could expect around $1,500 per month from a $250,000 fixed immediate annuity, depending on rates.
Are annuities suitable for everyone?
Annuities are ideal for those seeking guaranteed, predictable income but may not be suitable for investors prioritizing flexibility or low-cost growth.
Can annuities be combined with other retirement income strategies?
Yes. A partial annuity combined with IRA or 401(k) drawdowns can balance security with growth.
Do annuities provide better tax benefits than IRAs?
No. Both grow tax-deferred, so annuities do not offer additional U.S. tax advantages.
How can I reduce annuity costs?
Investing in retirement accounts or taxable assets first, then moving a portion into an annuity with optional riders, can reduce fees while guaranteeing some income.
Conclusion
Annuities are a long-standing option for guaranteed retirement income, offering security and predictability. However, their high fees, limited liquidity, and overlapping tax advantages make them unsuitable for every investor. Alternatives such as drawdown strategies, dividend-focused investments, and partial annuity purchases can provide flexibility, growth, and income security. In 2025, informed planning and careful selection remain critical to building a sustainable U.S. retirement strategy.
