Are Income Annuities Worth It?
Income annuities can offer great value, particularly for retirees looking for guaranteed, lifelong income. But if you are asking the broader question—are annuities worth it as a general investment strategy—you need to look at more than just income products. These annuities provide stable payouts that often exceed traditional safe withdrawal rates. They are contractually guaranteed, meaning you don’t have to worry about market volatility or outliving your money. Plus, some annuities can be structured to adjust for inflation, helping protect your purchasing power over time.
However, if you’re more interested in growth and flexibility, income annuities may not be the best fit. These products are designed to provide security, not investment opportunities. Once your funds are committed, your options for growth are limited. It’s essential to weigh your need for income stability against your desire for potential investment growth.
Immediate Income Annuities (SPIAs) — Paychecks That Start Now
How it works:
A Single Premium Immediate Annuity (SPIA) converts a lump sum into guaranteed income for life or a set period, with payments beginning within 30–60 days.
Key Stat:
A $100,000 SPIA typically pays $6,000 to $7,000 annually starting at age 65.
Pros:
✔ Predictable monthly income
✔ Simple to understand and set up
✔ Can cover both spouses
Cons:
✘ Principal is gone once the contract is issued
✘ No liquidity or flexibility
✘ Inflation reduces buying power unless you add an expensive COLA option
Who Needs It:
- Retirees needing immediate income they cannot outlive
- Single individuals without pensions who want lifetime guarantees
Who Doesn’t:
- People who want access to their money later
- Investors seeking growth opportunities or inflation protection
Helpful Add-on:
Purchasing a small term or whole life insurance policy to replace the value of the lump sum in case of early death.
Deferred Income Annuities (DIAs) — Bigger Checks Later
How it works:
You invest today, but payments don’t begin for 5–20 years. The delay boosts your future income significantly.
Key Stat:
Delaying payments for 10 years could nearly double your lifetime income.
Pros:
✔ Maximizes income for later retirement
✔ Useful to guard against outliving your money
✔ Can be tax-efficient in nonqualified accounts
Cons:
✘ No access to your principal during the deferral period
✘ Risk of passing away before collecting full benefits
✘ Inflation protection costs extra
Who Needs It:
- People in their 50s and early 60s planning for guaranteed income starting at 70 or beyond
- Individuals with longevity concerns
Who Doesn’t:
- Those needing liquidity before retirement
- Retirees already needing income within a few years
Helpful Add-on:
Use a Qualified Longevity Annuity Contract (QLAC) to defer Required Minimum Distributions (RMDs) and reduce taxable income after age 73.
Fixed Index Annuities With Guaranteed Lifetime Withdrawal Benefits (GLWB) — Flexibility and Guarantees
How it works:
You invest in a fixed indexed annuity. It tracks market gains (without losses) and offers lifetime income you can turn on when needed—all while keeping access to your money.
Key Stat:
Current withdrawal rates are about 5% to 7% annually, depending on your age at withdrawal.
Pros:
✔ Income for life without giving up control of your money
✔ Principal protected from market losses
✔ Future growth potential from index-linked credits
✔ Optional rising income riders for inflation protection
Cons:
✘ Annual fees for income riders (typically 0.9%–1.5%)
✘ Caps and spreads limit upside growth
Who Needs It:
- Pre-retirees and retirees wanting guaranteed lifetime income with flexibility
- People who want emergency access to their funds if needed later
Who Doesn’t:
- Investors who prefer full exposure to the stock market
- Younger individuals decades away from needing income
Helpful Add-on:
A fixed indexed annuity with GLWB is one of the safest personal pension strategies available today, often outperforming the traditional 4% retirement withdrawal rule.
Annuity Laddering — Build Income Over Time
How it works:
You divide your money among several annuities purchased at different times or ages. This approach creates multiple guaranteed income streams spaced out over time.
Key Stat:
Proper laddering can increase overall income by 10%–20% compared to buying a single annuity all at once.
Pros:
✔ Reduces interest rate and inflation risk
✔ Creates flexibility in starting income at different times
✔ Allows adjustment to future needs
Cons:
✘ More planning and management required
✘ Complexity if not properly coordinated
Who Needs It:
- Retirees who want to gradually increase their income as they age
- High-net-worth individuals spreading out risk across time
Who Doesn’t:
- Those wanting a simple one-time income solution
- People uncomfortable managing multiple contracts
Helpful Add-on:
Combining laddered annuities with a GLWB rider can provide both predictable income and growth potential over time.
Reasons Why Income Annuities Are Worth It
1. Lifetime Income You Can’t Outlive
They protect against longevity risk—the possibility of living longer than your money lasts.
2. Simplicity and Peace of Mind
No investment management required. You know exactly how much you’ll get, and when.
3. Spousal Protection Options
Joint annuity contracts can ensure income continues for a surviving spouse.
4. Hedge Against Sequence of Return Risk
They shield your income from stock market downturns early in retirement.
5. Can Supplement Social Security and Pensions
You create your own “pension” if one doesn’t exist.
Reasons Why Income Annuities Might Not Be Worth It
1. Loss of Liquidity (SPIAs and DIAs only)
With Single Premium Immediate Annuities (SPIAs) and Deferred Income Annuities (DIAs), your original premium is gone once the contract is issued. You receive guaranteed income but can’t access the remaining balance—even if your financial situation changes.
However, a Fixed Index Annuity with a Guaranteed Lifetime Withdrawal Benefit (GLWB) does preserve access to your account value. You can withdraw more than the guaranteed income (subject to terms), surrender the contract, or pass the remaining balance to beneficiaries if you pass away early.
2. Poor Inflation Protection
Most income annuities pay a fixed monthly amount. Unless you pay extra for an inflation rider or choose an increasing payout option (if available), your purchasing power shrinks over time.
3. Irrevocability
With SPIAs and DIAs, once the annuity is issued, it can’t be reversed or changed. Even changing payout options after purchase is not allowed.
4. Lack of Growth
Traditional income annuities are not designed to grow your money. They provide stability—not investment returns. Indexed annuities with GLWBs offer moderate growth potential tied to market indexes but cap your upside.
5. Early Death Risk (SPIAs and DIAs)
If you die early in a life-only annuity contract without a refund or period-certain option, the remaining value is forfeited to the insurance company. This risk can be avoided by adding life insurance or refund options but at the cost of lower income.
The Bottom Line: Are Income Annuities Worth It?
They are worth it if you value guaranteed income you cannot outlive more than liquidity and investment growth. They’re ideal for people looking to simplify retirement planning and avoid market risk.
They are not worth it if you want full control over your assets, prefer growth investing, or need access to your money for future opportunities or emergencies.
Choosing the right income annuity—and when to start it—is crucial to long-term success.
Contact The Annuity Expert’s financial advisors and insurance agents for free quotes and personalized comparisons.
Our agents will walk you through the pros and cons, help you decide if it’s right for you, and find the best-paying contracts available.
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Questions From Our Readers
Are annuities worth it?
Annuities can be worth it if your goal is secure, contractually guaranteed retirement income, tax-deferred growth, or protection against outliving your savings. They are especially valuable for conservative investors and retirees who want predictable income.
When are annuities not worth it?
They may not be worth it if you need high liquidity, want stock-level growth, or dislike long Variable annuities, in particular, can be expensive and complex.
Who should consider annuities?
They’re best for people nearing or in retirement who want a steady income, principal protection, or a supplement to Social Security and pensions.
Who might not need annuities?
You may not need an annuity if you already have high guaranteed income (like a pension), substantial assets, or prefer to invest directly in the market for higher growth potential.