When thinking about retirement planning, many people focus on building their nest egg. But there’s another side to the conversation: turning savings into steady, lasting income. That’s where annuities may be a fit.
Annuities are financial products designed to help manage longevity risk and generate income. While they’re not the right fit for everyone, some investors use them as a tool to supplement their retirement.
Let’s explore why someone might consider adding an annuity to their financial plan.
What Is an Annuity?
At its core, an annuity is a contract with an insurance company. You invest a sum of money either as a lump sum or through a series of payments, and in return, you receive income in the future, often for life or for a set period of time.
There are different types of annuities, including:
- Immediate annuities – Begin income payments right away
- Deferred annuities – Grow over time before paying income later
- Fixed annuities – Offer guaranteed interest and payments
- Variable annuities – Payments vary based on market performance
- Indexed annuities – Earnings linked to a market index, often with downside protection
Each type serves a different purpose and comes with different features, risks, and costs.
Common Reasons People Buy Annuities
- Lifetime Income
One of the most common reasons people buy annuities is to generate a source of income they can’t outlive. This can be especially appealing for retirees who want to supplement Social Security or pensions with predictable cash flow. - Principal Protection
Some annuities offer downside protection, which can be helpful for conservative investors who want to participate in market growth but are concerned about losses, particularly in retirement. - Tax-Deferred Growth
Funds in a deferred annuity grow tax-deferred, meaning you don’t pay taxes on gains until you withdraw them. This can be useful for people who’ve maxed out other tax-advantaged retirement accounts. - Estate or Legacy Planning
Certain annuities allow for beneficiary designations, and some include death benefit riders that can provide structured payments or guarantees to heirs. - Longevity Risk Management
People are living longer than ever, which is great news, but it also means retirement savings need to stretch further. An annuity can act as a hedge against the risk of outliving other resources.
Important Considerations
While annuities can serve specific planning needs, they’re not a one-size-fits-all solution. It’s important to consider:
- Fees and surrender charges – Some annuities come with higher costs or penalties for early withdrawals.
- Liquidity needs – Annuities may tie up funds for a period of time, so they’re best used as part of a broader plan.
- Complexity – The features and riders can be difficult to evaluate without guidance.
That’s why it’s crucial to align an annuity strategy with your goals, risk tolerance, and time horizon.
How They Fit into a Financial Plan
Annuities are often used to complement, not replace, other investments. For example:
- A retiree might use an annuity for essential expenses while keeping other assets invested for growth.
- A conservative investor may seek principal protection with some upside potential through a fixed or indexed annuity.
- Someone nearing retirement may use a deferred income annuity to lock in future payments starting at a certain age.
Like any financial tool, the key is in how it’s used and whether it supports your overall strategy.
Annuities aren’t for everyone, but for the right person and purpose, they may help add stability and structure to a retirement income plan.
If you’re exploring ways to generate income in retirement or protect your savings, we’re here to help you evaluate whether an annuity makes sense for your situation and to compare your options with transparency and care.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. Annuities are long-term investment vehicles designed for retirement purposes. Guarantees are based on the claims-paying ability of the issuing insurance company. Withdrawals prior to 59 ½ may result in an IRS penalty, and surrender charges may apply. Fixed and Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy. Guarantees are based on the claims-paying ability of the issuing insurance company.
