No matter how carefully you plan for retirement, life always throws curveballs. Medical emergencies, market declines, or sudden changes in expenses can upend even the best-laid financial plans. Annuities are one way retirees can weather the unexpected, which is why they’re more popular than ever. In fact, total U.S. sales reached a record high of $434.1 billion in 2024, up 13% from 2023.
Unlike other investments, annuities don’t make much noise. Compared to tech stocks or real estate booms, they don’t make headlines. However, for retirees who value predictability, security, and peace of mind, they can serve as financial safety nets – enabling you to navigate the “what ifs” of retirement without being derailed.
In this article, we’ll explore how annuities work, the types available, and how they can help safeguard your lifestyle in the event of the unexpected.
Why the Unexpected Is Inevitable
Although retirement can be meticulously planned, there are always unknowns.
- Healthcare costs. Savings can be depleted quickly by a sudden illness or long-term care need. According to the national median monthly cost for nursing homes in 2024, a semi-private room costs approximately $9,277, a private room costs $10,646, and an assisted living facility costs roughly $5,900. Costs for in-home care are about $34 per hour for a home health aide and $33 per hour for a homemaker.
- Market volatility. As you begin withdrawing income early in retirement, a bear market can reduce your portfolio value.
- Longevity. Living longer than expected may be a blessing, but it can also drain your savings.
- Inflation. Rising costs can erode purchasing power quietly.
Annuities provide a buffer against these risks, offering stability and guaranteed income rather than traditional retirement tools such as 401(k) s, IRAs, and investment accounts.
How Annuities Work
In essence, annuities are insurance contracts. In exchange for a lump sum (or series of payments), the insurer guarantees income — either immediately or in the future.
You can think of it as creating a personal pension. You don’t have to worry about market swings or outliving your savings because you receive a predictable stream of income.
Annuities come in a variety of types based on your risk tolerance and goals.
You pay the insurer a lump sum and start receiving income immediately. These are ideal for retirees who’d like to receive a steady income as soon as possible.
Deferred income annuities.
Payments begin later, allowing your money to grow tax-deferred until you need it. During retirement, this can provide an additional source of income.
The returns provided by these investments are guaranteed and steady. The reason? They do not expose investors to market risks.
Variable annuities.
Investing in these options can lead to higher returns, but at a higher risk. In some cases, riders guarantee a minimum income regardless of the market’s performance.
A market index, such as the S&P 500, provides some upside potential while protecting against losses.
The “What If” Scenarios Annuities Can Help With
What if I outlive my savings?
Many retirees experience this fear, and for good reason. The life expectancy has increased dramatically, and retirees can live for 30+ years.
With a lifetime income annuity, your payments are guaranteed for life, regardless of how long you live. Even better, you can even structure them so that you and your spouse are both covered.
What if the market crashes?
An investment downturn can pose a serious financial threat, especially to retirees whose income is heavily reliant on investments. As a steady anchor while other investments recover, fixed or fixed-indexed annuities shield part of your portfolio from volatility.
What if inflation eats away at my income?
Some annuities offer inflation riders whose payments adjust over time to help you maintain your purchasing power. Although these typically incur an additional cost, they are essential for long-term retirement.
What if I need long-term care?
In certain annuities, long-term care riders increase payments if you need assistance with daily tasks. As a result, your emergency fund or family members will not be under as much pressure.
What if I want flexibility?
Modern annuities are far more customizable than traditional ones, which were often rigid. In addition to combining guaranteed income with partial liquidity, you can choose payout options for beneficiaries and ladder multiple annuities in different stages of retirement.
Why Annuities Provide Emotional as Well as Financial Security
Aside from the numbers, annuities can also provide peace of mind.
When retirees know that their essential expenses, like housing, healthcare, and groceries, are covered by guaranteed income, they can invest or spend their remaining assets more confidently.
In other words, annuities can help transform fear-based decision-making, think “What if I run out of money?”, into opportunity-based thinking, such as “What else can I enjoy or give?”
Innovative Ways to Integrate Annuities Into Your Plan
Here are a few practical ways to make annuities work for you;
- Cover your basics. You can use an annuity to guarantee non-negotiable expenses.
- Diversify income sources. For multiple income streams, combine annuities with Social Security, pensions, and investments.
- Use them strategically. For greater flexibility, ladder annuities can start at different ages, for example, one at 65 and another at 75.
- Protect your heirs. A death benefit can preserve the value of an annuity for the beneficiary.
- Review regularly. Just like any other investment, annuities should be reassessed as your life and goals evolve.
Common Drawbacks to Consider
Not everyone is a good fit for annuities. As such, before purchasing, ensure you understand;
- Liquidity limitations. If you withdraw from an annuity too early, you may be charged surrender fees.
- Costs and complexity. In many cases, riders and guarantees come at a price.
- Tax implications. Despite growth being tax-deferred, income payments are taxable.
- Inflation risk. Over time, fixed payments may lose their value if they do not include an inflation rider.
Rather than selling you one-size-fits-all products, a fiduciary financial advisor can use annuities to complement your broader strategy.
The Bottom Line
In retirement, you don’t just want to hit a savings target – you want to build resilience. Whenever unexpected events strike (and they will), annuities serve as a stabilizing force, protecting your financial independence and peace of mind.
By using them thoughtfully, you can convert uncertainty into confidence — creating a “what if” safety net that ensures you’re prepared for anything.
FAQs
Are annuities safe?
The answer is yes — especially fixed and indexed annuities. They’re backed by the issuing insurance company, not by market performance. It’s always a good idea to check the insurer’s financial strength rating.
Can I lose money in an annuity?
According to the type, it varies. A fixed annuity guarantees principal protection, whereas a variable annuity may fluctuate based on market conditions.
Are annuities only for older retirees?
Not necessarily. It’s common for people in their 50s or early 60s to use deferred annuities to build guaranteed income streams.
Can I access my money if I need it?
The majority of annuities allow partial withdrawals, but be aware of surrender charges and potential tax implications.
How do annuities compare to bonds?
In general, annuities provide higher guaranteed payouts and lifetime income, while bonds offer more liquidity, but no longevity protection.
Image Credit: Lukas; Pexels
