Why This Matters Now
Annuities sit at the intersection of two pressures that are becoming harder to ignore: longevity risk and sequencing risk. For retirees, the core problem is not maximizing returns. It is converting a finite pool of savings into durable cash flow without being forced to sell assets at the wrong time. Annuities were built for that job. They are insurance contracts designed to convert premiums into an income stream that can start immediately or in the future.
At the same time, access is expanding through workplace plans. The SECURE Act of 2019 created a fiduciary safe harbor intended to make it easier for plan sponsors to include lifetime income options in 401(k) and 403(b) plans, while also improving portability in certain situations.
Regulation and advice standards are also in flux. Annuities are sold under state insurance frameworks, and suitability and best-interest expectations increasingly shape product recommendations. In parallel, the U.S. Department of Labor’s “Retirement Security Rule” has been tied up in litigation and, as of late November 2025, the Fifth Circuit dismissed the DOL’s appeal after the agency moved to withdraw it, effectively ending that appellate chapter.
What an Annuity Is
An annuity is a contract issued by an insurance company in which an individual pays premiums (either lump sum or over time) in exchange for a fixed or variable stream of income that begins immediately or at a future date.
The practical trade is straightforward: liquidity and optionality are exchanged for insurance-backed income design. That is why annuities are primarily positioned as retirement income tools, not general purpose investment accounts.
How Annuities Work: Accumulation vs. Payout
Most annuities can be understood in two phases:
- Accumulation phase: The period when premiums are paid in and the value grows, often with tax deferral depending on structure and account type.
- Payout phase (annuitization): The period when the contract begins distributing income, either for a set term or for life, based on contract elections and pricing factors.
Two timing formats matter:
- Immediate annuities: Start paying shortly after a lump-sum premium is deposited.
- Deferred annuities: Accumulate value first, then begin income later on a schedule the owner selects.
The Main Types: Fixed, Variable, and Indexed
Annuities are commonly categorized by how returns and payments are determined:
- Fixed annuities: Provide guaranteed minimum interest and typically fixed periodic payments.
- Variable annuities: Payments vary based on the performance of underlying investment subaccounts; these products are regulated as securities and involve additional layers of fees and risk.
- Indexed annuities: Typically credit interest based on an index formula (often linked to an equity index), with contractual limits and participation mechanics defined by the insurer.
Separately, payout design choices can materially change outcomes:
- Single-life vs. joint-life: Whether payments stop at the first death or continue until the second annuitant dies.
- Period certain (term) options: Income guaranteed for a specified number of years, regardless of lifespan, which can protect heirs at the cost of lower lifetime payout rates.
Where Value Comes From: The “Insurance” Return
The economic engine of a lifetime annuity is not market alpha. It is risk pooling and underwriting. The insurer can offer higher lifetime income than a self-managed withdrawal plan for some retirees because it pools longevity outcomes across many policyholders and prices based on actuarial assumptions. The payout level is influenced by contract terms and factors used in pricing, including age and life expectancy assumptions.
This is why annuities can be most compelling when the investor’s primary goal is income certainty, not maximizing estate value or maintaining liquidity.
Key Benefits Investors Actually Buy
Guaranteed income design:
Many annuities are structured to produce predictable cash flow for a set period or for life, addressing the risk of outliving assets.
Retirement utility:
They are purpose-built for decumulation planning rather than accumulation-only investing.
Optionality through riders:
Some contracts offer income riders or death benefit features, typically for additional cost, that reshape the cash flow profile.
The Tradeoffs: Why Annuities Get Criticized
The critiques are not abstract. They usually come down to three practical issues:
Liquidity constraints and surrender charges:
Many annuities include surrender periods during which withdrawals can trigger fees, and those fees often decline over time.
Complexity and fee drag:
Product designs can be difficult to compare, and layered fees can reduce net outcomes, particularly in variable structures.
Inflation risk:
A fixed nominal income stream can lose purchasing power over long retirements unless inflation adjustments are explicitly built in, often at a cost.
Regulation and “Best Interest” Standards
The regulatory map matters because annuities straddle insurance and securities rules depending on the product type. Variable annuities fall under SEC oversight along with state insurance regulation, while fixed annuities are generally state regulated.
On sales and recommendations, the NAIC’s updated Suitability in Annuity Transactions Model Regulation incorporates a “best interest” standard that requires recommendations to be made in the consumer’s best interest under the circumstances known at the time.
Where Annuities Fit in a Portfolio
Annuities are easiest to evaluate as a retirement-income building block rather than an asset class competing with equities or private credit. In a portfolio context, they can be used to:
- Floor essential spending: Cover baseline expenses with guaranteed income, allowing the rest of the portfolio to remain invested with a longer horizon.
- Reduce sequence-of-returns stress: Stabilize withdrawals during drawdown periods so investors are not forced sellers of risk assets.
- Simplify longevity planning: Convert an uncertain lifespan into a structured cash flow plan.
The key is sizing. If too much capital is annuitized, flexibility disappears. If too little is annuitized, the income objective is not meaningfully met.
Takeaway
Annuities are not universally good or bad. They are a specific trade: give up liquidity and some upside to purchase contractual income design and longevity protection. The investor question is not “Should I buy an annuity?” It is “Which retirement risks am I trying to transfer, and what is the all-in cost of transferring them?”
