How annuities fit into retirement planning

A monthly check for the rest of your life? Many people would love that type of dependability in financing their post-working life.

Research shows that when people have guaranteed lifetime income, they feel more comfortable spending money in retirement, knowing they will easily be able to cover their basic expenses, said David Blanchett, Ph.D., who heads retirement research for Prudential Financial Inc. and is a portfolio manager at PGIM. Others may shortchange their quality of life out of fear that their investments won’t last.

“Let’s take that longevity risk off the table,” Blanchett said, referring to the fear of running out of money. “The more you know you have certainty covering expenses in life, it creates a sense of security that you cannot get from the market.”

But some financial advisers are more skeptical about annuities. “There is a place for them in some people’s plans, but there are risks and rewards,” said Sebrina Ivey, CPA/PFS, COO at GHP Investment Advisors Inc.

Below, Blanchett, Ivey, and Robert Westley, CPA/PFS, regional wealth adviser and senior vice president at Northern Trust in the New York City area, explain how annuities work and walk through those risks and rewards to help CPAs advise their clients.

How annuities work

Lifetime income annuities provide regular installments of income during retirement much as a pension would but vary widely in how they are structured and paid out. Typically purchased through insurance companies, they can be fixed, indexed, or variable. Broadly speaking, payouts can be predetermined (in the case of fixed annuities). Or they can be guaranteed with the option to share in investment growth in some manner (indexed annuities) or based on how the initial investment fares (variable annuities).

Payouts from an annuity can begin either immediately or at a designated future date. For more on the latter type, see “Longevity Annuities: Why Clients Should Consider Them,” JofA, May 30, 2023.

Because annuities pool longevity risk across many participants, they can provide income levels that may be difficult to replicate through bonds or other fixed-income investments alone.

“You’re exchanging the principal for a series of payments,” Westley said. “It’s a good way to ensure you have your base layer of spending met.” Otherwise, “if you have a lump sum, you have to invest it, and it could be subject to volatility, or you could have invested it too conservatively.”

Annuity purchasers should also consider inflation, as fixed payments may buy less over time.

Less common retirement tool

Annuities are not common in retirement planning. Just 12% of people with more than $100,000 in retirement savings have an annuity as part of their portfolio, according to a 2025 report from the National Bureau of Economic Research.

The low utilization, the authors concluded, stemmed from concerns such as being unable to pass on wealth to heirs or fear of scams.

Blanchett is a strong proponent of annuities and thinks that outdated understandings of them keep too many financial advisers from recommending them to clients who would benefit from knowing they had guaranteed income to cover basic expenses.

Who can benefit

Not everyone will benefit from an annuity, Westley said. He typically works with high-wealth individuals and rarely recommends them because those clients have less worry about running out of money.

But the reassurance of having guaranteed monthly income can be a major benefit for those who lack a robust retirement portfolio.

Annuities can also be a solid choice for those who are anxious about having enough money to live on. The knowledge that regular income will come their way can help ease those fears.

These products may also allow a person to be more aggressive with other investments, offering safety on a balance sheet while allowing risk in other areas.

For annuities held outside a retirement account, a portion of the payments is considered income and another portion is considered nontaxable return of the principal. Westley finds “it keeps you relatively smooth from a taxable income point of view over time.”

Regardless, no one should see an annuity as their sole answer to retirement but rather as a piece of the overall puzzle, Ivey said.

Timing for annuities

The ideal time to start looking for an annuity is in the immediate years before retirement when a person has a fuller sense of what their assets going into retirement will be, as well as a general sense of health and family needs, Blanchett said.

Westley concurs with this advice and recommends considering annuities five years before an expected retirement. They can be a sound solution as well for those who retire early and are seeking income certainty before Social Security or Medicare benefits kick in.

Risks and trade-offs

Annuities can vary greatly in quality, and a lot depends on the company offering the product.

Ivey suggests looking for products offered by established and well-respected insurance companies, so the client knows that the company will be there in the long term to deliver on the promised payments. “You need to know what your risks are and the stability of the provider,” she said. Choose products offered by insurers with high AM Best ratings. Having vetted providers or insurance brokers to refer clients to, just as with other professionals such as estate attorneys, can also go a long way.

A potential downside of buying an annuity is loss of flexibility. Once annuitized, assets are often irrevocably converted into income. However, Blanchett said, most lifetime income annuities offer access via some type of living-benefit riders.

Finally, it’s imperative to fully understand all the fees associated with the annuity, as some offered in the marketplace can have significant administrative fees or penalties for early withdrawals. “It can cost you a lot more than it can earn,” Ivey said. Specifically, complex contracts with multiple riders or surrender charges can significantly reduce net benefits.

Final thoughts

Although annuities may not be for every client, some can benefit from the reassurance that these products offer.

“For more moderate-income taxpayers, it’s a good solution and probably not as common as it should be,” Westley said. “There’s the ease of simplicity and peace of mind.”

— Sarah Ovaska is a freelance writer based in North Carolina. To comment on this article or to suggest an idea for another article, contact Dave Strausfeld at David.Strausfeld@aicpa-cima.com.