This is general information, not financial advice. Annuity suitability depends on your situation — consult a fee-only fiduciary.

For retirees who fear outliving their money, an annuity offers a tempting promise: a check that never stops. The fine print is where it gets complicated.

The basic idea

An annuity is a contract with an insurance company. You hand over a lump sum (or a series of payments), and the insurer pays you income — now or later, often for life, per the SEC's Investor.gov. The appeal is protection against longevity risk — outliving your savings. For someone without a pension, it can layer guaranteed income on top of Social Security.

When income starts: immediate vs. deferred

Immediate annuities (often SPIAs — single-premium immediate annuities) start paying within about a month of your deposit; they're the simplest, most transparent type. Deferred annuities are bought years ahead, growing tax-deferred during an accumulation phase before you turn on income (a step called annuitization).

How it grows: fixed, variable, indexed

  • Fixed: a guaranteed rate and a set payment — predictable, but vulnerable to inflation, FINRA notes.
  • Variable: payments depend on investment subaccounts — more upside, full downside, and heavy fees (a mortality-and-expense charge around 1.25%/yr, plus fund and rider costs, often totaling 2–3%+ a year).
  • Indexed (FIA): returns track a market index like the S&P 500 with a floor (won't go below zero) and a cap (you get only part of a big up year).

Why people buy them

Guaranteed lifetime income to supplement Social Security; tax-deferred growth with no contribution limits; longevity protection (the insurer bears the risk you live long); and optional riders (e.g. a guaranteed lifetime withdrawal benefit) that add income guarantees — at extra cost.

The serious drawbacks

  • Fees. Variable and indexed annuities are expensive; layered charges erode returns versus low-cost index funds.
  • Surrender charges. Deferred annuities typically lock your money for 7–10 years, with early-withdrawal penalties starting around 7–9%.
  • Complexity and hard selling. They're among the most aggressively commissioned products; ask exactly how a seller is paid.
  • Inflation. A fixed payment loses purchasing power; most contracts have no cost-of-living adjustment.
  • Liquidity. Once annuitized, the income stream generally can't be reversed.
  • Solvency. Annuities are not FDIC-insured — they're backed by the insurer, with state guaranty associations as a backstop (a floor of $250,000 in present value per person under the NAIC model act; some states set $300,000–$500,000). Check your state's limit.

Taxes

Money grows tax-deferred; withdrawals of gains are taxed as ordinary income (not the lower capital-gains rate), and taking money before age 59½ adds a 10% IRS penalty. Note: putting a deferred annuity inside an IRA adds no tax benefit — the account is already tax-deferred.

Is the guarantee worth the cost?

That's the central debate. Many fee-only advisers argue most people with a long horizon do better with low-cost index funds than with a fee-laden annuity. The counterpoint: no fund guarantees a monthly check for life. For someone with modest savings, no pension and real anxiety about longevity, a simple immediate fixed annuity (SPIA) can buy genuine peace of mind at relatively low cost.

The right question isn't whether annuities are "good" or "bad," but whether the guarantee is worth its price in your situation — weighing your other guaranteed income, assets, health and risk tolerance. Because the products are complex and often commission-driven, a fee-only fiduciary planner (one who doesn't earn product commissions) can model the trade-offs without a conflict of interest. This is an explainer, not a recommendation.