Pros and Cons of Annuities for Retirement Planning

Retirement Plan Options | by Jules Buxbaum | Thursday, January 23, 2025

Pros and cons of annuities for retirement planning is a topic that sparks many questions among those preparing for their future. If you’re aiming to avoid common retirement pitfalls, you’ll want to evaluate how an annuity could fit into your broader plan and avoid common mistakes to avoid.

Whether you’re a soon-to-be retiree or someone building a long-term wealth strategy, understanding annuities can help you feel more confident about creating a stable income stream. This article offers a balanced look at the benefits and drawbacks of annuities so you can make smarter retirement decisions.

What Are Annuities?

An **annuity** is often described as an insurance contract designed to provide a reliable income source. You pay either a lump sum or a series of contributions to an insurer, and in return, you receive **guaranteed income** payments at a specified future date or immediately.

Different types of annuities cater to various needs. Some aim for **tax-deferred growth**, while others prioritize steady payouts. For many retirees, annuities might complement Social Security or investment accounts, adding a predictable stream of cash over time.

Key Types of Annuities

There are several forms of **retirement annuities**, each with unique characteristics. Fixed annuities pay a stable interest rate on the money you invest, while variable annuities let you direct contributions into subaccounts that rise or fall with market performance.

Indexed annuities, sometimes called equity-indexed annuities, tie their returns to an external benchmark like the S&P 500. Meanwhile, immediate annuities pay out income right away, and deferred annuities postpone disbursements until a later date.

In 2024, annuity sales surpassed $432.4 billion, according to LIMRA (2025). This record volume indicates that more people are looking to annuities for **lifetime income** and retirement security.

Pros of Annuities

Below are core advantages of adding an annuity to your **retirement planning**:

• Guaranteed income: Most annuities feature structured payouts, lowering the risk of depleting your savings.
• Tax-deferred growth: Earnings accumulate without immediate taxation, which can potentially speed up growth.
• Protection from market swings: Fixed and indexed annuities sometimes shield you from steep losses.
• Customization: Options like riders or joint-and-survivor benefits tailor the annuity to your personal needs.

In a recent survey by LIMRA, seven in ten workers said they would consider an in-plan annuity if their employer offered it. This underscores a growing desire for steadier income throughout retirement.

Cons of Annuities

While they address certain retirement risks, annuities also come with potential drawbacks:

• High fees: **Variable annuities** may include mortality and expense fees, administrative fees, and fund expenses that drive total costs above 2% per year.
• Lack of liquidity: Large surrender charges often apply for early withdrawals, tying up your principal.
• Complexity: Multiple riders, fee tiers, and payout structures can be confusing for many investors.
• Potentially lower returns: While they offer predictability, some annuities fall short compared to higher-growth assets over time.

When comparing an annuity to straightforward investments, the difference in fees alone can substantially reduce long-term gains. This is particularly crucial for those with a higher risk tolerance who might prefer more equity exposure.

How Annuities Fit Into Your Retirement Strategy

For many retirees, an annuity can work as a hedge against outliving their money. It often blends well with Social Security, pensions, or any rental income streams you may have. However, a key insight from 2Pi Financial is that some individuals end up shifting too much into fixed products at the wrong time.

Future earning potential is essential when deciding on a strategy. The common notion that everyone should move heavily into bonds or annuities with age is not universal. Instead, weigh how many working years you have left, how much you’ve saved, and how much risk you can tolerate.

If you’re interested in evaluating how an annuity might impact your plan, consider using 2Pi’s Financial Planning Engine. This resource helps illustrate how specific choices—like adding an annuity—may shift your portfolio’s probability of success.

Why 2Pi Financial’s View Differs

Many in the industry advocate a strict “glide path” that lowers equity exposure as you age. 2Pi Financial’s stance is that such an approach may ignore your individual potential to earn more or adjust your spending. This is especially relevant if you plan to work part-time in retirement or you have other robust income sources.

Historical data shows **equities** generally outperform fixed-income products over the long run. A large allocation to conservative products like annuities or bonds could limit your portfolio’s ability to grow, particularly if you need higher returns to meet your spending needs.

Ultimately, your personal situation matters. If you have considerable wealth relative to your expenses, a low-volatility product might be all you need. If you’re behind on savings, a more balanced or higher-equity strategy might suit you better.

Balancing Annuity Income and Investment Growth

Some retirees worry about inflation diminishing the buying power of fixed payouts. For those seeking growth potential alongside safety, a partial annuity allocation might be a solution. The rest of the portfolio can be placed into equities or similar assets for capital appreciation.

To learn more about striking a balance between guaranteed income and strategic growth, read our insights on how to diversify your retirement portfolio. Evaluating multiple asset classes can safeguard your nest egg from inflation and market volatility.

Keep in mind that the time horizon of your retirement and your risk profile are pivotal in deciding how much of your total wealth should be in annuities. Those with decades left in retirement may want more growth-oriented investments to keep pace with inflation.

Evaluating Annuities in Light of Inflation

Inflation risk cannot be overlooked. If your annuity’s payments remain level for 20 or 30 years, rising costs can erode your real income. Annuities with inflation riders exist, but they typically come at a higher cost.

Given today’s rising prices, you might benefit from reading about inflation risk in retirement. By factoring inflation into your plan, you reduce the chance of failing to meet your day-to-day expenses down the line.

Remember that even a modest 3% annual inflation rate halves purchasing power in roughly 24 years. Balancing stable income with assets that can appreciate might be key to preserving your lifestyle.

Wrapping Up

Annuities can provide **guaranteed income**, tax benefits, and peace of mind, but they also pose high fees, limited liquidity, and possible inflation risks. Their usefulness varies widely based on individual needs, existing portfolio composition, and risk tolerance.

If you’re still assessing how annuities might fit into your retirement blueprint, consider your earning horizon, overall financial health, and any desire to maintain a growth component in your portfolio. To see if your timeline aligns with these considerations, explore the best age to retire based on your savings and lifestyle.

By weighing both the advantages and shortcomings, you’ll be in a better position to protect your future and keep your financial goals intact.

References

LIMRA. (2025). “2024 Retail Annuity Sales Power to a Record $432.4 Billion.” Available at: https://www.limra.com/en/newsroom/news-releases/2025/limra-2024-retail-annuity-sales-power-to-a-record-432.4-billion/

LIMRA. (2023). “Survey on In-Plan Annuity Options.” Available at: https://www.limra.com

Society of Actuaries. (2021). “Retirement Risk Survey Highlights.” Available at: https://www.soa.org