Entrepreneurs are used to betting on themselves. From the ground up, you’ve invested time, money, and energy. As well as being your biggest asset, your business is most likely the primary retirement plan you have.
However, tying your financial future solely to your business is risky. After all, as the State of Owner ReadinessTM Research by Exit Planning Institute reports, 70% to 80% of small businesses never sell.
So, what happens if your exit fails to yield the results you expected? Or, what if market conditions shift? You may also want a financial safety net that isn’t tied to your company’s performance.
It’s here that annuities come into play, an often-overlooked, but powerful tool for growing small business income.
Annuities deserve a place in your financial plan, and this post explains why and how to use them to make your long-term income plans work for you.
Why Entrepreneurs Need Income Diversification
Business owners often neglect their retirement accounts. As WealthRabbit’s 2025 Small Business Retirement Report indicates, one in five small business owners doesn’t have a retirement plan. Moreover, most have saved less than $50,000 — even those close to retirement.
Instead, they reinvest profits into the business and defer personal income to afford their lifestyle. However, that “someday” plan is vulnerable to;
- During the exit phase, there was a market downturn.
- Unplanned health issues.
- Business valuations are lower than expected.
- Deals that fail or take years to materialize.
Despite this, retirement still occurs. As such, even if your business is thriving or sellable, you still need a consistent, dependable income.
Unlike most business assets, annuities guarantee lifetime income that’s not subject to market volatility, customer behavior, or investor interest.
What Is an Annuity, in Entrepreneur Terms?
You can think of an annuity as a self-created pension. A lump sum or series of payments is paid to the insurance company. In return, they guarantee you a stream of income, either immediately or in the future.
However, you’ve probably heard mixed things about annuities. The reason for this is that not all are created equal. Many are overly complex, commission-heavy, or loaded with fees. Others, however, are transparent, flexible, and designed for people like you to be confident in their financial future.
So, let’s get to the bottom of how annuities can help you reach your goals and separate the signal from the noise.
The 3 Biggest Benefits of Annuities for Entrepreneurs
1. They provide an income that you can’t outlive.
Unlike your business, which may sell for a lump sum or fail, annuities provide lifetime income. If you don’t have a pension or defined benefit plan, this is especially important.
With annuity income, you can cover your baseline expenses, including mortgage, food, and healthcare. As a result, you no longer have to worry about how your company performs or whether the stock market will crash to maintain your lifestyle.
2. You’re less dependent on business liquidity.
Often, entrepreneurs delay personal savings, expecting a windfall when they sell their businesses. Sadly, converting an idea into cash can take a long time. Even worse, it may never happen at the price you want.
When you direct a portion of your profits into an annuity, you create personal liquidity that doesn’t depend on finding a buyer.
3. They provide psychological freedom.
When you know that some of your future income is locked in, you can take smarter risks. Among the possibilities are;
- Rushing the sale of your business.
- Finding your second act or passion project.
- Ensuring financial security while reducing your workload.
In short, annuities enable you to consider your business in a broader context.
Types of Annuities That Make Sense for Business Owners
It’s important to remember that not all annuities are created equal. Listed below are a few worth exploring:
Single premium immediate annuities (SPIAs).
As soon as you contribute a lump sum, you’ll be able to receive monthly payments. Ideally, you would do this if you are nearing retirement and want to convert a portion of your business profits into guaranteed income.
Use case: To cover basic living expenses, you sell part of your business and want to turn $150K into a monthly cash flow.
Deferred income annuities (DIAs).
Payments are made now, and income starts later, such as when you’re 70 or 75 years old. In comparison to immediate annuities, these are great for longevity planning.
Use case: You’re 55, but plan to work for another 10 years, and want to guarantee future income that kicks in after age 65.
Multi-year guaranteed annuities (MYGAs).
These are similar to fixed-income investments. It’s a way to lock in a fixed interest rate over a defined time period, like 3 or 5 years.
Use case: If you have excess cash from your business, you may want to park it in an account at a higher yield than a savings account, without having to worry about market risk.
Qualified longevity annuity contracts (QLACs).
This type of annuity is purchased with funds from a qualified retirement plan, such as a 401(k) or IRA. In QLACs, income payments can be deferred until you’re 85. In addition to deferring required minimum distributions (RMDs), this can potentially reduce your taxable income in retirement.
Use case: If you plan on living a long time, you don’t want to drain your retirement funds.
Common Objections—and Why They Don’t Always Hold Up
“Aren’t annuities expensive?”
Yes, some annuities have high fees. However, many low-fee, no-commission annuities are available directly or through fee-only advisors. As such, you need to be selective. Ideally, you shouldn’t buy products from commission-earning salespeople.
“I’d rather invest in real estate or the market.”
That’s great, but annuities aren’t a replacement. You can use them as a supplement to your risk-based investments, offering a safety net that the markets can’t match.
“What if I die early and don’t get my money’s worth?”
Annuities often come with beneficiary riders that provide a refund or a percentage of unused funds to your heirs. So, you’re not just throwing money away.
How Much Should You Allocate to an Annuity?
A financial advisor may recommend annuities to cover essential expenses like housing, food, and healthcare. By doing so, you won’t be concerned about investment returns or business cash flow when it comes to your basic lifestyle.
Here’s a simple strategy;
- Make a list of your non-negotiable expenses each month.
- If you receive Social Security or any other type of pension, subtract it.
- Cover the gap with an annuity.
To make this easier to understand, here’s an example;
- Essential expenses: $4,000/month
- Social Security: $2,200/month
- Annuity gap: $1,800/month
- Depending on your age, a fixed annuity could provide you with that amount with a lump sum of roughly $300,000.
In this way, the remaining assets (including business equity) can be used for growth, travel, legacy, or reinvestment purposes.
Tax Considerations for Entrepreneurs
- Deferred growth. Until withdrawn, non-qualified annuity earnings grow tax-deferred.
- IRA integration. If you have a SEP IRA or Solo 401(k), you can buy a qualified annuity with those funds.
- Exit strategy planning. Annuities are an excellent way to reduce risk and lock in income when selling a business.
This can’t be stressed enough. If you’re considering annuities as part of your broader wealth planning, work with a tax-savvy advisor.
Closing Thought: Your Business Is Not Your Retirement Plan
While you have built something valuable, you are not your business. You are more than your company’s cash flow or its sale price.
You won’t get rich from annuities. There’s nothing glamorous about them. However, they provide entrepreneurs with something they rarely get: peace of mind. It says, “Even if everything changes, I’m covered.”
If you’re optimizing payroll, inventory, or growth projections, consider asking yourself: How can I ensure my income remains strong long after the business closes?
The answer might be an annuity.
Image Credit: Craig Adderley; Pexels
