Most people heading into retirement just want one thing: enough income to last. Not flashy, not risky, just enough. The idea of running out of money at 82, or living to 95 and barely scraping by, terrifies folks more than anything. That’s where annuities come into the conversation.
Annuities are often pitched as a reliable, even guaranteed, source of retirement income. You give a lump sum to an insurance company and they promise to pay you monthly, for a set period or even the rest of your life. For people who crave predictability, especially in the face of stock market roller coasters, this can sound pretty appealing. That’s why many people look into fixed annuity rates when trying to lock in consistent income.
But do annuities really offer sustainable income? Or are they too rigid, too expensive, or just not flexible enough for today’s retiree?
What annuities actually are
Let’s start simple. An annuity is a financial contract, typically with an insurance company. You give them money upfront, and they promise to pay you on a schedule. Some start paying immediately. Others wait a few years. Some are fixed, some are variable. Some come with bells and whistles, others are pretty bare-bones.
You can think of it kind of like a reverse life insurance policy. Instead of you paying for a death benefit, you’re paying for income while you’re alive.
There are different types, too. A fixed annuity pays the same amount every month. A variable one depends on market performance, so your income could go up or down. Then there are indexed annuities that track things like the S&P 500, but with limits on gains and losses.
That’s where it gets tricky. There’s not one “annuity” product. There’s hundreds, and they all have slightly different terms, fees, and features.
Why retirees even consider annuities
Retirees like annuities for a few reasons, the biggest one being simplicity. When you retire, your paychecks stop. Your bills don’t. If you don’t have a pension, and you’re worried about social security drying up or not being enough, you’ve got to build your own income plan.
Annuities help you do that. They take some of your savings and turn it into a paycheck. You don’t have to worry about what the market did last week or if your portfolio will last another 25 years.
People also like that it takes away temptation. With a 401(k), you could blow a chunk on a new car or an impulsive investment. An annuity makes the money less accessible, which for some people is actually a good thing.
So, is the income really sustainable?
That depends. In a narrow sense, yes, annuities are designed to offer income that lasts—some for a fixed number of years, others for your whole life. If you live a long time, you could end up receiving more than you paid in. The insurance company pools risk across thousands of people, so they can afford to keep paying the ones who live longer.
But here’s the part people forget: sustainability isn’t just about how long the income lasts. It’s also about whether that income keeps up with the cost of living.
A fixed annuity might pay you $2,000 a month starting at age 65. That’s great now. But at age 80, will that still cover groceries, rent, and medicine? If inflation runs hot, probably not.
Some annuities offer inflation protection, but you’ll usually start with smaller payments. You’re trading higher payments now for ones that grow over time.
Not everyone is a good fit
Annuities can work well for some folks. If you’re healthy, live a long time, and don’t want to worry about managing money in your 80s, they make sense. Same if you don’t have a pension or if you’ve got a partner who might need income after you’re gone.
But they’re not for everyone. If you’re someone who wants flexibility, control, or access to your principal, you might not like having your money locked up. Early withdrawals usually come with penalties. Some products charge annual fees, sometimes more than 2%, especially for variable annuities with add-ons.
Also, the idea of giving a big chunk of money to a company and hoping they do the right thing? That just doesn’t sit well with everyone.
Where annuities shine
There are certain cases where annuities shine, no question. These include:
- Covering essential monthly expenses like housing, food, or insurance
- Creating a reliable income stream alongside social security
- Helping someone who isn’t comfortable managing investments
- Protecting a spouse or dependent with guaranteed lifetime payments
One strategy that’s caught on is using an annuity to cover basic needs, and then using your 401(k), IRA, or brokerage accounts for extras like travel, hobbies, and unexpected stuff. That way, your essentials are always paid, no matter what the market’s doing.
Some people also buy deferred annuities in their 60s that don’t kick in until their 80s. These “longevity annuities” help with the fear of outliving your money. They’re cheaper up front, but you have to live long enough to benefit.
A few downsides to chew on
Let’s not sugarcoat it. Annuities have their flaws.
- They’re often complex. The fine print is dense. You might not realize what fees are hiding in there.
- Liquidity is a problem. Most of the time, you can’t just take your money back.
- They don’t pass wealth easily. If you die early, your heirs may not get much, unless you bought a rider or certain type of contract.
- Some are aggressively sold by people earning commissions, not necessarily giving the best advice.
Always ask: “What’s in it for the person selling me this?”
Can annuities be part of a smart retirement plan?
They can, absolutely. But they work best when they’re not your only tool.
A good financial plan is like a table with four legs. Social security, personal savings, investments, and maybe an annuity. Take one away, it still stands, but not as strong. Relying 100% on an annuity, or avoiding them entirely, might not be smart. Balance matters.
If you’re considering one, work with a fee-only advisor who doesn’t get paid to sell it. They can help you compare options, check company strength, and make sure it fits your needs.
Final thoughts
Do annuities offer sustainable income after retirement? Yes, they can. But it’s not a blanket yes. The product has to match the person. Some retirees swear by them. Others avoid them completely.
The key is to understand what you’re buying, what it costs, what it gives you, and what it takes away.
Peace of mind is worth something. So is flexibility. Figure out which one matters more to you, and make your decision from there.