Annuities, and whether one actually fits
Annuities have a mixed reputation, and some of it is earned. They're complex, they've been sold badly, and the versions differ enough that "annuity" on its own barely narrows anything down.
They also solve a problem nothing else solves quite as directly: the risk of outliving your money. Both things are true, which is why this needs a conversation rather than a brochure.
What they're actually for
A pension used to do this. You worked, you retired, and a cheque arrived every month until you died. Almost nobody has that now.
An annuity is a way to buy that arrangement yourself. You give an insurance company a sum, and it takes on the obligation to keep paying — including in the case where you live much longer than anyone expected. That last part is the whole product. It isn't an investment competing on returns; it's a transfer of risk.
The main kinds
Immediate. You hand over a sum and income starts almost straight away, usually for life. The simplest version to understand, and the easiest to compare between companies because there's little to compare beyond the payment.
Deferred fixed. Your money grows at a rate the company declares, and you convert it to income later. Predictable, modest, and closest to a CD in feel — though the tax treatment and the access rules are different.
Fixed indexed. Growth is linked to the movement of a market index, with a floor so a bad year doesn't reduce your principal, and a cap or participation rate limiting how much of a good year you receive. The floor is the point. The cap is the price of the floor.
Where they genuinely fit
- You have enough saved, but no reliable monthly income beyond Social Security, and the gap between what arrives and what you spend worries you.
- You're less concerned with growing your money than with knowing a specific amount will keep arriving no matter how long you live.
- A market drop early in retirement would force you to change your plans, and removing that possibility for part of your money is worth paying for.
- You have a spouse who would struggle if your income stopped.
Where they don't
- You need the money to stay accessible. Most annuities have a surrender period during which taking more than a set amount out costs you a penalty. If there's any real chance you'll need the lump sum, that's usually disqualifying on its own.
- All of your savings would go in. Nobody should annuitise everything. It's a component, not a plan.
- You already have plenty of guaranteed income relative to what you spend. Buying more certainty you don't need is just a lower return.
- You don't understand what you're being shown. That isn't a comment on you. Some of these contracts are genuinely hard to read, and "I'll explain it again" should always be available.
How I'd approach it with you
I'd rather start from what you're trying to solve than from a product. That means working out what income you already have coming in, what you actually spend, what would have to be true for you to run short, and how you'd feel if the market fell sharply the year after you retired.
Sometimes that conversation ends with an annuity being a sensible piece of the answer. Often it ends with "you don't need this" — and I'd rather tell you that than sell you a contract you'll regret being locked into. If we do go further, I'll tell you plainly what the surrender period is, what's guaranteed versus projected, and what I'd be paid.