Ultimate Guide To Buying Annuities for Retirement

Nearly two in three Americans—about 64%—say they worry more about running out of money in retirement than they do about death. Annuities are a financial product designed to help ease that fear, with some offering guaranteed income for the rest of your life.

But annuities are also famously complicated, and buying one for your retirement plan requires extensive due diligence. Here’s what you should know before you start shopping, including how they work, the different types available, and exactly how to go about comparing your options.

Understanding Annuities

Annuities are financial contracts between you and an insurance company designed to provide you with a reliable stream of income. In exchange for a lump-sum payment or a series of contributions, the insurer agrees to send you recurring payments that can last for a set number of years or the rest of your life.

Annuities are often primarily a tool for managing longevity risk, which is the danger that you’ll outlive your retirement savings. However, you can also use them to achieve greater stability in retirement, either as a supplement or substitute for other sources of fixed income.

“Annuities can be helpful when someone’s essential expenses aren’t fully covered by other sources like Social Security or pensions,” said Zach Swad, CFP, CWS, founder of Swad Wealth Management. “In those cases, an annuity can help fill the gap. Some clients find peace of mind in having guaranteed income—something traditional investment portfolios can’t provide.”

Types of Annuities

Immediate and Deferred Annuities

Immediate annuities begin paying out shortly after purchase, typically within one year. They’re designed for retirees or near-retirees who want to turn a portion of their savings into a predictable income stream that starts right away. Because of the short turnaround time, they’re often funded with a lump sum.

In contrast, deferred annuities delay payments until a future date that can be years down the line. The period between purchase and payout is known as the accumulation phase. During this time, you make contributions and allow the annuity’s value to grow tax-deferred. Deferred annuities can be a long-term retirement savings vehicle.

Fixed and Variable Annuities

For more conservative investors, fixed annuities offer guaranteed interest rates and predictable payouts. If your fixed annuity includes an accumulation phase, your money grows at a predetermined rate. Once payouts begin, you’ll receive fixed amounts, providing stable income regardless of market conditions.

Meanwhile, variable annuities invest your contributions into a portfolio of subsidiary accounts. Your annuity’s value and future payments will depend on its performance. While this introduces market risk, it also creates the potential for higher returns. As a result, variable annuities may appeal to investors with a longer time horizon or higher risk tolerance.

Indexed and Registered Index-Linked Annuities

Indexed annuities, or fixed indexed annuities (FIAs), are a middle ground between fixed and variable annuities. Their returns are tied to the performance of a specific market index, like the S&P 500. This offers the potential for higher returns—subject to limits—if the index performs well. However, your principal is protected. That means your returns may suffer if the index performs poorly, but you won’t suffer losses.

A variation on this structure is the registered index-linked annuity (RILA). Like FIAs, RILAs track a market index, but they only offer partial downside protection rather than a full principal guarantee. In exchange, they typically offer greater upside potential than traditional indexed annuities.

Buying Annuities: A Step-by-Step Guide

Evaluate Your Financial Situation and Goals

Before you go shopping for an annuity, take careful stock of your financial situation. The right type of annuity for you depends heavily on how it fits into your broader retirement plan. Here are some critical factors to consider:

• Time horizon: How far off is your expected retirement date? If it’s approaching soon, how quickly will you need guaranteed income? If retirement is farther away, how long can you give your assets to grow? 
• Risk tolerance: Are you comfortable with exposure to market fluctuations in exchange for potentially higher returns, or are you looking for predictability and guaranteed income? Take the current economic conditions and level of market volatility into account.
• Retirement savings and income sources: Think about how much you’ve saved, how much more you expect to set aside, and the mix of assets and income streams in your portfolio. Annuities can help stabilize your income, but may be less beneficial if you already have fixed income sources.
• Expected living costs in retirement: Estimating your future expenses can help clarify how much guaranteed income you’ll need to feel secure. Many retirees gain peace of mind from having enough to cover their essentials, regardless of market conditions.

Choose the Right Annuity

Armed with a clear picture of your finances, you can start narrowing down your annuity options based on your unique needs, risk tolerance, and retirement goals. For example, here are some scenarios in which you might consider the following annuity types: 

• Immediate fixed annuity: You’re retiring within the next few months at age 65 but don’t want to take Social Security until you’re 70 years old to maximize your benefits. In the meantime, you’d like to convert a portion of your savings into guaranteed income to cover essential expenses.
• Deferred variable annuity: You’re still several years away from retirement and already have your basic expenses covered by other reliable income sources. You want an annuity for their unlimited contributions and tax-deferred growth, and you’re comfortable with market risk in exchange for potentially higher returns. 
• Immediate FIA: You’re retiring this year and want a source of guaranteed income to help cover your essential expenses. You feel optimistic about market conditions, so you’re interested in tying your returns to an index’s performance, but you don’t want to risk losing your principal.

“Each annuity type serves a different purpose,” said Jordan Gilberti, CFP, founder of Sage Wealth Group. “Immediate for instant income, deferred for future planning, fixed for stability, and variable or indexed for growth potential.”

Compare Annuity Providers

Once you’ve figured out which annuity fits your retirement plan, the next step is to choose a provider. Annuities are complex, often illiquid, long-term contracts, so it’s essential to purchase them from an insurance company you trust.

When assessing an insurer, start by considering its financial strength. Independent agencies, like AM Best and Moody’s Corporation, issue ratings that reflect an insurer’s ability to meet its financial obligations—including the ones it makes to you. 

“It’s critical to assess the financial strength and history of the insurer—especially with long surrender periods or lifetime commitments involved,” said Swad. “You’re counting on that company to be there for the long haul.”

Beyond financial ratings, look into the company’s reputation with its customers. Review platforms like the Better Business Bureau (BBB) can offer insight into customer service quality and policyholder satisfaction.

It’s also essential to do your own research into the specific annuity products a provider offers, including their costs and features. Some insurers may stand out for their transparent fee structures and flexible riders—which can offer specialized add-ons like long-term care (LTC) benefits—or the opposite.

“Fees and service matter,” said Swad. “Annuities that are advertised as having ‘no fees’ usually carry costs in the form of lower crediting rates or returns. A common mistake is chasing the highest interest rate or payout, without considering the trade-offs. Understand how the insurer is being compensated.”

Fund Your Annuity

Since annuities are insurance products, the payments you make to fund them are referred to as premiums.

A single premium annuity requires you to fund the contract with one lump-sum payment. Once funded, you can’t make additional contributions.

In contrast, a multiple premium annuity allows you to make a number of payments over time. These contracts come in two forms:

• Flexible premium annuities let you decide how much and when to contribute, within limits
• Scheduled premium annuities set a fixed payment amount and contribution schedule

In addition to paying premiums with cash, you may be able to fund them with an existing retirement account—such as an individual retirement account (IRA) or 401(k) plan—by rolling your retirement funds into the annuity. However, rollovers can have significant tax implications, so it’s essential to execute them according to Internal Revenue Service (IRS) guidelines.

Annuity Costs and Fees

Annuities often carry complex fees that are essential to understand before entering into a contract. While these charges vary between products and may go by different names depending on the provider, here are some common annuity costs:

• Commissions: You typically buy annuities through insurance agents, who earn a commission that’s often baked into the product’s pricing.
• Percent of premium charges: Sometimes called a “load,” insurers may deduct this fee from each premium payment before applying any interest or gains.
• Contract fees: This is a flat dollar amount you typically pay either once or annually to cover the administrative costs of maintaining the annuity.
• Transaction fees: These are fixed charges for specific actions, such as making a premium payment or a withdrawal.
• Rider fees: Optional features like enhanced death benefits usually come with additional annual costs.
• Market value adjustments (MVA): If your annuity includes an MVA provision, the amount you receive when withdrawing funds may go up or down depending on interest rate movements since your purchase.
• Surrender fees: If you withdraw your money before the surrender period ends, you typically forfeit a percentage of the contract value.

Tax Implications of Annuities

One of the key benefits of annuities is that they offer tax-deferred growth. You won’t owe taxes on any investment earnings until you begin taking withdrawals. However, the tax treatment of your contributions and withdrawals depends on how you fund the annuity.

• Qualified annuities: These are funded with pre-tax dollars, meaning you get a tax benefit for your contributions. However, withdrawals in retirement are subject to ordinary income taxes.
• Non-qualified annuities: These are funded with post-tax dollars, so you don’t get a deduction upfront, but your withdrawals in retirement are tax-free.

Working With Financial Advisors and Agents

Annuities are complex products—so much so that only 19% of Americans can define them correctly. As a result, a trusted financial advisor can be invaluable when comparing your options.

“Advisors serve as essential partners in the annuity selection process, helping clients navigate product features, fees, and suitability,” said Gilberti. “Their guidance ensures that annuity choices are well-informed and tailored to individual needs.”

Insurance agents also play a significant role in the process, as they’re licensed to sell annuities and can help guide you through the application and purchase. However, keep in mind that many agents—and some financial advisors—earn a commission for each annuity they sell, which could influence how they present products.

It’s essential to understand how your advisor or agent is compensated and what products they’re allowed to offer. “Understanding the difference between captive and independent agents is vital,” said Gilberti. “The former may have limited product offerings, while the latter can provide a broader range of options.”

The Bottom Line

Annuities can provide reliable income in retirement, but their structures, fees, and restrictions are notoriously complex. Before committing, evaluate your finances, compare products and providers carefully, and consider partnering with a financial advisor who can ensure you choose a contract that fits your retirement strategy.