Are Annuities Worth It? (Honest Comparison)
Annuities are insurance products that exchange a lump sum (or stream of payments) for a guaranteed income stream. They get oversold by commissioned salespeople, but they have legitimate use cases — primarily for retirees who want longevity insurance and predictable income. Here is when they make sense and when they do not.
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Annuity Calculator
Step-by-step
- 1
Identify which type of annuity
Four main categories: (1) Single Premium Immediate Annuity (SPIA) — give insurer lump sum, get monthly income for life starting now. Simple, low-fee, transparent. (2) Deferred Income Annuity — like SPIA but income starts years later. (3) Fixed annuity — accumulates at fixed rate, then pays out. (4) Variable annuity — accumulates based on market performance, sometimes with a guaranteed floor. The first two are usually fine; the last two are usually overpriced.
- 2
Skip variable annuities
Variable annuities typically charge 2.5–3.5% in annual fees (mortality and expense fee + administrative + sub-account fees + rider fees). Compared to a low-cost index fund (0.04–0.10% expense ratio), variable annuities lose to plain index investing by 2.5+ percentage points per year. Sometimes the "guarantee" features are worth paying for; usually they are not.
- 3
Evaluate SPIA for income floor
A SPIA can convert part of your retirement portfolio into a guaranteed income stream that mimics a pension. Useful when: (a) you want a baseline income floor above Social Security, (b) you fear running out of money in late retirement, (c) you want to simplify finances for an aging spouse who may eventually manage them alone. Typical 65-year-old buying SPIA gets 6–7% annual payout rate (so $100K = ~$6,500/year for life).
- 4
Compare SPIA to "buy stocks and withdraw"
A 4% withdrawal rate from a 60/40 portfolio has 95%+ historical success over 30 years. SPIA at 6.5% pays more than 4% but the principal is gone — your heirs inherit nothing from that portion. Stock portfolio at 4% leaves the principal at death (often grown). Trade-off: longevity protection vs estate transfer.
- 5
Consider laddered SPIAs in early retirement
Buying multiple smaller SPIAs at 65, 70, 75 (instead of one big one at 65) lets you adjust to higher payout rates as you age (older issue ages get higher annual percentages) and reduce regret if interest rates rise after your initial purchase.
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Avoid these annuity products
High-pressure sales of indexed annuities tied to stock market with capped upside and complicated participation rates. Multi-year guaranteed annuities (MYGAs) marketed as CD alternatives but with surrender penalties. Variable annuities sold inside an IRA or 401(k) (the tax deferral inside an annuity is wasted when wrapped in another tax-deferred account).
- 7
Get the rate from immediateannuities.com
Free quote engine that aggregates 30+ insurance carriers. Shows current SPIA rates by age and gender. As of mid-2026, a 65-year-old male sees roughly 6.5–7.0% annual payout for a single-life SPIA from top-rated carriers (A.M. Best A or higher).
💡 Tips
- Diversify carriers if buying $250K+ in annuities. State guaranty associations cover roughly $250K per insurer per state in case of insurer insolvency. Spreading across 2–3 highly-rated carriers reduces single-point-of-failure risk.
- For tax-deferred IRA money, take out as little as possible to fund annuities — IRA-to-SPIA conversions are taxable at ordinary income rates. Use taxable account money first when buying SPIAs.
- Avoid commission-driven annuity sales. Fee-only fiduciary financial planners (NAPFA, Garrett Network) can recommend annuities when appropriate without earning commission, removing the bias.
FAQ
What is the average return on an annuity?
Highly variable by type. SPIAs return what you put in plus mortality credits (people who die early subsidize people who live long) — typical effective return for someone living to average life expectancy is 4–5%. Variable annuities net of fees average 1–3% lower than the underlying market returns. Fixed annuities currently pay 4.5–5.5% guaranteed for 3–10 year terms.
Are annuities a good investment for retirement?
Yes for income protection in retirement; usually no during accumulation. The "annuity = guaranteed lifetime income" pitch matches how a pension or Social Security works — useful for the retirement phase. The "annuity for tax-deferred accumulation" pitch is almost always inferior to maxing 401(k) and IRA first.
What are the disadvantages of annuities?
High fees on variable products, surrender charges (often 7–10% in year 1, declining over 7 years), illiquidity (cannot easily access principal once converted), inflation risk (most pay fixed amounts forever), and complexity that obscures actual returns. Also, the principal is typically gone at death — no estate transfer.
Should I roll my 401(k) into an annuity?
Usually no, except for a small portion. Wrapping a 401(k) in a variable annuity (a sales tactic) wastes the tax deferral and adds 2.5%+ fees. Converting a portion of a 401(k) at retirement into a SPIA can be sensible — typically 20–40% of total retirement assets, leaving the rest in market-invested accounts for growth and inheritance.
How are annuities taxed?
Depends on funding source. Annuities funded with pre-tax IRA/401(k) money are fully taxable as ordinary income on each payout. Annuities funded with after-tax (taxable account) money have a portion of each payment tax-free (return of principal) and the rest taxed as ordinary income. The IRS Exclusion Ratio determines the split.