Types of Annuities to Consider for Retirement

Annuities can provide retirees with a guaranteed stream of income, but choosing the right type is key to making the most of your investment. First, however, you must be familiar with the key features of each annuity type so you can determine the best fit for your retirement planning. It’s also essential to assess your financial needs in retirement so you know what to look for. Finally, it is critical to assess key factors, such as fees, liquidity needs and the annuity company’s financial stability. 

Partner with a financial advisor to compare annuity choices and begin planning for your retirement.

Retirement Annuity Basics

An annuity is a contract you enter into with an insurance company. 

You buy an annuity by making either a single, lump-sum payment or through a series of smaller payments that typically last several years. In return, the insurer sends you fixed payments beginning either immediately or on a future date.

Payments can last for a certain number of years. When used for retirement, they can also last for the annuitant’s lifetime.

Annuities benefit from favorable tax treatment. When you use your savings to purchase an annuity, your savings grow tax-deferred. Upon withdrawal, you pay ordinary income tax on the portion representing earnings.

There is typically a 10% early withdrawal penalty for withdrawals before age 59 1⁄2. This is similar to 401(k) plans and other tax-advantaged retirement savings accounts.

In retirement planning, annuities are particularly useful for hedging against market risk and life expectancy risk. That’s because they can guarantee income for life, regardless of how long you live or how markets perform.

Some annuities even continue payouts to a surviving spouse. However, you give up control over the lump sum in exchange for this security.

Retirement Annuity Choices

Annuities have many different structures, each with its own pros and cons.

These three types of annuities can benefit your retirement planning in several ways.

Fixed Annuities

Fixed annuities offer a minimum guaranteed interest rate for a set period.

This typically ranges from one to 30 or more years. The insurer declares a new guaranteed rate at the beginning of a new year or other period.

Otherwise, fixed annuity payments remain the same over time.

Variable Annuities

Variable annuities invest your funds in different securities, such as stocks and bonds. Without a guaranteed rate of return, payouts fluctuate with the performance of the underlying investments. 

Because of this, variable annuities generally require a higher risk tolerance, as they carry greater exposure to market risk but offer potentially higher returns than fixed annuities.

Indexed Annuities

Indexed annuities are hybrid products providing a minimum guaranteed rate. They offer the potential for higher returns because they are linked to a market index like the S&P 500.

Even if the index declines, your account will never earn less than the minimum rate. However, caps limit the amount of positive index performance you can access. 

Immediate vs. Deferred Annuities

These types of annuities can vary in payout timing, depending on whether you choose immediate or deferred. 

• Immediate annuities. Immediate annuities begin payouts within 12 months of purchase.
• Deferred annuities. Deferred annuities have an accumulation stage where funds grow tax-deferred before their eventual distribution.

Making the Right Choice

To determine which type of retirement annuity is best for you, consider these points.

• What is your risk tolerance? Variable and indexed annuities carry some market risk, so more conservative investors may prefer fixed products that offer a safer investment.
• What are your income needs? Consider whether you require fixed payouts that never change or whether you can bear market fluctuations. This will help guide your choice between fixed vs. variable options.
• How long do you require income? Lifetime payout annuities often make sense for those with a longer life expectancy, helping protect against longevity risk.
• What are your liquidity needs? Assess whether you will require access to your lump sum in the future. Deferred annuities have longer lockup periods than immediate ones.
• How much can you afford to invest upfront? Larger lump sums ultimately result in bigger payouts later. However, some annuities accept smaller periodic contributions.
• What fees work best for your budget? Less affluent retirees may need to optimize their planning to accommodate lower-cost products.

The ideal product aligns with several factors, including:

• Risk appetite
• Age
• Life expectancy
• Income requirements
• Liquidity needs
• Investable assets
• Tolerance for fees 

Annuities also vary in terms of fees, withdrawal options and death benefits. It can be challenging to sort through all the options, but thoroughly investigating alternatives prevents making an expensive mistake.

Retirement Annuity Limitations

Along with benefits, annuities can also present notable downsides. 

High Fees

Insurers levy several annuity fees, which are usually less than 1% of the annuity’s value.

• Annual mortality fees
• Expense fees
• Administration charges

It is important to exercise caution so that the total cost of your annuity does not seriously erode any gains from its long-term performance.

Liquidity Risk

If you withdraw funds early, you are likely to be charged surrender fees. These typically start at around 7% when you cash out your annuity within the first year.

Therefore, it is important to ensure your withdrawal plan aligns with your future needs.

Issuer Instability

If the insurer or insurance company has financial troubles, your payouts may decrease or cease completely.

Take the time to review your insurance company before purchasing an annuity. Be sure to carefully assess issuer ratings and financials beforehand.

Tax Burdens

While funds grow tax-deferred, payouts face ordinary income tax rates.

In 2026, these rates go up to 37%. Taxes this high can significantly eat into your net proceeds.

How to Determine If an Annuity Is a Fit for Your Retirement 

Annuities can play a useful role in retirement planning for retirees seeking steady income independent of the stock market. 

When you buy an annuity, you exchange part of your savings for guaranteed payments lasting either a set number of years or your lifetime. This can help cover your basic expenses and reduce the worry of running out of money in retirement.

An annuity may make sense if you already have savings in accounts like a 401(k) or IRA and now want to turn some of that money into income. It’s especially worth considering if you don’t have a pension or if most of your savings are invested in the market and you want to add something more predictable.

The security of an annuity can complement other sources of income, such as Social Security or investment withdrawals.

When You Should Not Buy an Annuity

That said, there are some cases where you may not want to buy an annuity.

Annuities usually come with fees, and once you commit funds, it can be hard to access the money if you need it for other purposes. It’s also important to compare the financial strength of different insurance companies.

If you’re thinking about adding an annuity to your portfolio, first decide how much guaranteed retirement income you want and how much flexibility you need. Then compare different types of annuities, including fixed, variable and indexed, to see which one best fits your goals. 

Be sure to review the annuity terms carefully to ensure you understand exactly what you’re paying for. Different annuities can vary significantly in cost and features.

Talking through the options with a financial advisor can help you decide how an annuity might work with the rest of your retirement plan.

How Annuities Fit With Your Other Retirement Income Sources

An annuity does not exist in isolation. Its value largely depends on the other income sources you already have in place and what gaps remain in your retirement plan.

Guaranteed Income

Start with your guaranteed income.

Social Security provides a baseline for most retirees. However, if you also have a pension, you may already have enough predictable monthly income to cover essential expenses. In this case, adding an annuity may not provide meaningful additional security, and the fees and illiquidity may outweigh the benefit.

If Social Security is your only guaranteed income and most of your savings are invested in accounts subject to market fluctuations, an annuity can provide a second floor of income that is not dependent on market performance.

Savings

How much of your savings to commit also matters.

Annuitizing too large a portion can leave you without enough liquidity to cover unexpected expenses, healthcare costs or opportunities that arise later in retirement.

A common approach is to match guaranteed income sources to essential expenses, housing, food, utilities and healthcare. You can then leave discretionary spending to be funded by investment withdrawals.

An annuity fits most naturally into the essential expenses column.

Withdrawals

Mandatory withdrawals from traditional retirement accounts add another layer of complexity.

If those withdrawals already generate more taxable income than you need each year, adding an annuity funded with pre-tax dollars can push additional ordinary income on top of that. This can potentially move you into a higher tax bracket.

In this scenario, repositioning assets before withdrawals become mandatory may be more valuable than purchasing an annuity.

Social Security

Social Security timing also interacts with annuity decisions.

If you delay Social Security past full retirement age, you can increase your monthly benefit meaningfully for each year you wait, up to age 70. For some retirees, using an immediate annuity to bridge the income gap between retirement and age 70 can make that delay financially feasible. This effectively buys you a larger, inflation-adjusted guaranteed income stream for life.

The goal is not to maximize any single product but to make a retirement income plan where each source covers a specific need. An annuity works best when it fills a gap that nothing else in your plan already addresses.

Bottom Line

The right annuity product can significantly enhance retirement security through guaranteed lifetime income. However, annuities lack a one-size-fits-all approach, as they are available in many types.

To pick the right annuity for you, research your options thoroughly before integrating annuities into your overall financial plan. Be wary of pitfalls such as high fees, and make sure the insurance company is financially sound before making your investment.

Tips for Retirement Planning

• Consider meeting with a financial advisor to discuss whether annuities fit into your retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Use SmartAsset’s Retirement Calculator to measure your progress toward funding retirement.

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