Annuities as a Retirement Strategy

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on July 12, 2023

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What Is the Importance of Annuities to Retirement Strategy?

Annuities are crucial to retirement strategy because they provide a reliable, steady income stream in the retirement years, essentially functioning as a private pension plan.

When a retiree invests in an annuity, they receive periodic payments over a specified period of time, which can be for a few years or even for life. This can significantly reduce the risk of outliving one's savings, a concern prevalent among retirees.

Annuities also allow for tax-deferred growth, which means you don't pay taxes on the income and investment gains from your annuity until you withdraw the funds. This tax advantage can help retirees build up a larger nest egg over the long term.

Role of Annuities in Retirement Strategy

Annuities provides income security, tax-deferred growth, the potential for lifetime income, and beneficiary considerations.

Income Security

One of the main advantages of annuities is the security they provide. With an annuity, you have a guaranteed income for a certain period or for your entire life, depending on the type of annuity you choose.

Tax-Deferred Growth

The growth of the investment within an annuity is tax-deferred, meaning you won't pay taxes on the growth until you start taking withdrawals. This can be a significant advantage if you expect to be in a lower tax bracket in retirement.

Potential for Lifetime Income

One of the most attractive features of an annuity is the possibility of a lifetime income. This means that, regardless of how long you live, you will continue to receive payments.

Beneficiary Considerations

Annuities can also offer a death benefit. If you die before you start receiving payments, your beneficiary can receive a specified amount.

Role of Annuities in Retirement Strategy

Factors to Consider When Buying an Annuity

Before purchasing an annuity, consider your financial goals, risk tolerance, anticipated retirement income, and the costs associated with annuities.

Financial Goals

What are your financial goals for retirement? Do you need a steady stream of income, or are you looking for a potential return on investment? Understanding your goals can help you determine which type of annuity is right for you.

Risk Tolerance

Are you comfortable with risk, or do you prefer a guaranteed return? Variable annuities and indexed annuities carry more risk but potentially higher returns, while fixed annuities offer a guaranteed return but lower potential growth.

Anticipated Retirement Income

Consider your anticipated retirement income from all sources. Will you have income from a pension or Social Security? How does an annuity fit into your overall retirement income plan?

Costs Associated With Annuities

Annuities can have various costs, including mortality and expense risk charges, administrative fees, and surrender charges. Be sure to understand all the costs associated with an annuity before making a purchase.

Factors to Consider When Buying an Annuity

How Annuities Compare to Other Retirement Strategies

Annuities are just one piece of the retirement puzzle. They should be considered alongside other retirement strategies like 401(k)s, IRAs, Social Security benefits, and pensions.

Annuities vs 401(k) and IRA

Annuities can be a supplement to retirement savings in a 401(k) or IRA. Unlike these accounts, annuities provide a guaranteed income stream and do not have annual contribution limits.

Annuities vs Social Security Benefits

Social Security benefits alone may not provide enough income in retirement. Annuities can supplement these benefits by providing additional guaranteed income.

Annuities vs Pensions

Pensions are less common today, but if you have one, it functions similarly to an annuity by providing a guaranteed income. Annuities can provide additional income if your pension income isn't sufficient.

How Annuities Compare to Other Retirement Strategies

Pros and Cons of Annuities as a Retirement Strategy

Like any financial product, annuities have both advantages and disadvantages. It's essential to understand both sides to make an informed decision.

Pros of Annuities

Annuities provide stability, regular payments, and tax deferral. They can provide a steady income for life and can be a valuable tool for retirement planning. Additionally, the tax deferral feature allows your money to grow more efficiently than it would in a taxable investment.

Cons of Annuities

On the flip side, annuities can be complex and have potential fees and charges. They also lack liquidity, meaning they can be challenging to withdraw money from without incurring penalties. It's important to thoroughly understand these potential drawbacks before investing in an annuity.

Pros and Cons of Annuities as a Retirement Strategy

Regulations and Safeguards

It's important to understand the regulations and safeguards in place for annuities. These include insurance companies and state guaranty associations, the Financial Industry Regulatory Authority (FINRA), and the Securities and Exchange Commission (SEC).

Insurance Companies and State Guaranty Associations

Annuities are backed by the financial strength of the issuing insurance company. If the insurance company fails, state guaranty associations can provide a certain level of coverage, but it's important to choose a financially stable insurance company for your annuity.

Role of the Financial Industry Regulatory Authority (FINRA)

FINRA oversees the sales of variable annuities. They require brokers to provide full disclosures about the benefits and risks of variable annuities and ensure that the annuities sold are suitable for the investor based on their age, financial situation, risk tolerance, and financial objectives.

Role of the Securities and Exchange Commission (SEC)

The SEC oversees the sales of variable annuities and ensures that all information provided to potential investors is accurate and not misleading.


Annuities play a crucial role in retirement strategies by offering a steady stream of income, tax-deferred growth, and the potential for lifetime earnings.

They can provide income security, giving retirees peace of mind in their golden years. However, while these advantages can make annuities an appealing option, it's important to balance these benefits against the potential drawbacks.

Annuities can lack liquidity, may entail substantial fees, and their complexity can be daunting. Therefore, when contemplating annuities as a retirement strategy, consider your financial objectives, risk tolerance, and anticipated retirement income.

By doing so, you can make an informed decision that aligns with your retirement goals and expectations. In essence, annuities can be a robust tool in retirement planning, but their efficacy depends on your unique financial circumstances.

Annuities as a Retirement Strategy FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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