Retirement & Income

By the Retiree Report Editorial Team · Updated 2026-05-24 · 7 min read

This article is general information, not financial, tax, or legal advice. Consult a licensed professional before acting on it.

Annuities for retirees: the three situations where they make sense and the marketing pitches to ignore

Most of what gets pitched at retirees as an annuity — indexed contracts with caps and participation rates, variable annuities with seven-year surrender schedules, anything described as “guaranteed market gains without the risk” — is solving the salesperson’s problem, not yours. Strip the marketing away and only three uses really earn their keep: replacing a missing pension with a single premium immediate annuity, locking in income past age 85 with a QLAC, and parking near-term cash in a plain fixed-rate annuity when CD yields lag. Everything else deserves a hard second look before you sign.

Why most annuity pitches fail the smell test

Annuities are an insurance product, not an investment, and insurance commissions are paid up front. A variable annuity can pay a broker 5% to 7% of your check on day one, which is part of why the Financial Industry Regulatory Authority lists annuity sales among its top sources of investor complaints year after year. Surrender charges that lock you in for six to ten years exist for one reason: to let the insurer recover the commission it already paid out.

Indexed annuities are even harder to evaluate. The Securities and Exchange Commission’s investor bulletin on indexed annuities warns that participation rates, rate caps, and spreads each chip away at the index return you appear to be tracking — and the insurer can usually change those numbers after you’ve bought in. If a 12% S&P year hands you 6%, the gap isn’t a fee listed in the brochure; it’s a feature of the contract.

Here’s the test I use. If a sales presentation involves a free steak dinner, a downloadable “lifetime income calculator,” or any phrase like “stock market gains without the risk,” walk out. None of the three legitimate uses below need a hard sell.

Where a SPIA actually earns its keep

A single premium immediate annuity is the plainest product in the category. You hand the insurer a lump sum and they start sending you a fixed monthly check, usually within 30 days, for as long as you live. AARP’s primer on immediate annuities gives a useful benchmark: $100,000 from a 65-year-old California man buys roughly $613 a month for life; a 65-year-old married couple choosing joint coverage gets around $535. At current interest rates, that’s the strongest SPIA payout in over a decade.

So when does it make sense? Three situations come up over and over. The first is a retiree without a traditional pension who needs guaranteed income beyond Social Security to cover non-negotiable bills — property tax, Medigap premium, groceries. The second is a single retiree with longevity in the family, where outliving savings is the larger risk than dying with a smaller estate. The third is a couple using a five-year “period certain” SPIA as a bridge so the higher earner can delay Social Security to 70, where the Social Security Administration credits an extra 8% per year of permanent benefit growth.

A reasonable rule: annuitize enough to cover the income gap between Social Security and your essential spending, and no more. Most independent planners cap SPIA exposure at 25% to 50% of investable assets, because once you’ve handed the money over, it’s gone. There’s no surrender value, no inheritance from the principal, and no rescue fund if the roof needs replacing. (A few states give you a short “free look” window, but after that the decision is permanent.)

How does this compare to keeping the money in a bond ladder? Over a 20-year horizon at moderate inflation, a Treasury or TIPS ladder typically generates more total income than a SPIA, and you keep the principal. The SPIA tends to win past 30 years because of mortality credits — the insurer is essentially redistributing premiums from policyholders who die early to those who live long. If your honest answer to “will I live to 95” is “probably,” the math tilts toward the annuity.

Two caveats worth knowing. SPIA payments aren’t adjusted for inflation unless you buy an inflation rider, which typically cuts the starting payout by 25% to 30% — rarely a smart trade past age 70. And your check depends on the insurer staying solvent. State guaranty associations cover at least $250,000 of annuity benefits per person per insurer in most states, with a handful (Connecticut, New York, Washington, Utah, Minnesota) going to $500,000. Stay under those limits, or split the purchase across two highly-rated carriers.

What about indexed and variable annuities?

Skeptically. Both have a niche — variable annuities sometimes belong inside a workplace 403(b) for educators with no other tax-deferred space — but for a retiree drawing income, they’re usually the wrong shape.

FINRA’s investor education on indexed annuities puts the issue plainly: “the variety and complexity of the methods used to credit investors can also make it difficult to compare one indexed annuity to another.” A 7% rate cap, a 75% participation rate, and a 3% spread can each turn a 10% market year into a 3% credit. Layer in surrender charges of 6% to 10% running through year 10, and the “no risk” claim looks different. Even loss protection comes with strings: a “buffer” contract that absorbs the first 10% of a market loss leaves you on the hook for everything below that.

Variable annuities have their own math problem. Total annual costs — mortality and expense charges plus investment management fees plus rider charges — routinely run 2% to 3% per year, eating into the same returns you’re paying the insurer to grow. If a broker is recommending you exchange one variable annuity for another, that’s the moment to ask in writing what the new surrender period is and what they’re being paid.

Why pay 3% a year in fees for tax deferral you could replicate, inside an IRA, for almost nothing?

The exception in this category — and the only annuity I’d call “safe and simple” — is the multi-year guaranteed annuity, often called a MYGA. It functions like a CD with a fixed rate for a set term, usually three to ten years, but the rate is set by an insurance company rather than a bank. When MYGA yields beat insured CDs of the same length, parking idle cash there can be a sensible move. The same early-withdrawal penalty caveat applies, so match the term to money you genuinely don’t need to touch.

One niche worth knowing: the QLAC

Most retirees haven’t heard of qualified longevity annuity contracts, but if you have a large traditional IRA and worry about both required minimum distributions and outliving your money, the math can be elegant. A QLAC is a deferred income annuity bought inside a qualified retirement account; payments can start as late as age 85, and the money you commit is excluded from the RMD calculation in the meantime. That’s the part that matters — it shrinks the IRA balance the IRS uses to compute your required withdrawals.

SECURE 2.0 rewrote the rules in 2023, removing the old 25%-of-account cap and setting a flat dollar ceiling adjusted for inflation. Per IRS Notice 2025-67, the QLAC premium limit for 2026 is $210,000 per person — up from $200,000 in 2024 and 2025. A couple could shelter $420,000 of pretax retirement money from required withdrawals and create a longevity insurance floor that kicks in at 80 or 85. The tradeoff: that money is locked away and won’t pay anything if you die before payouts begin (unless you add a return-of-premium rider, which cuts the eventual check).

This isn’t a tool for everyone. It works best for retirees with at least $1 million in traditional IRA assets, longer-than-average life expectancy, and enough liquid savings outside the QLAC to cover the years before payouts begin. For tighter portfolios, those dollars usually do more good in a bond ladder you can actually touch. The interaction with the broader required-withdrawal rules is worth reviewing alongside our walk-through of the 2026 RMD rules under the SECURE Act.

How to shop without getting steered

If you’ve decided an annuity belongs in your plan, the next decision is how to buy it. Start by getting quotes from at least three highly-rated insurers — AM Best rating of A or better is a reasonable floor. A $100,000 quote can vary by $50 a month across carriers for an identical contract, which compounds to real money over a 25-year retirement.

Ask the agent two questions in writing before you sign. First: what is your commission on this contract, and is there a lower-commission product in the same category I should also consider? Second: if I need access to this money in five years, what does it cost me? A clean SPIA quote has a clear answer to both — surrender of the contract isn’t possible, and commissions are baked into the payout rate (typically 1% to 4% of premium). Indexed and variable products often dodge these questions, which tells you something.

Coordinate the annuity decision with claiming strategy and tax planning. What you draw from an annuity affects IRMAA brackets, Roth conversion windows, and survivor benefits. For couples, the timing decisions around Social Security often matter more than the annuity itself, and the Consumer Financial Protection Bureau’s retirement planning hub has free worksheets that walk through the sequencing. This is also a place where a fee-only fiduciary planner, paid by the hour rather than by commission, is worth their fee. (None of this is personal financial advice — your situation is yours, and a few hundred dollars for an unbiased second opinion is cheap insurance against a six-figure mistake.)

What to remember

Three uses justify an annuity in retirement: a SPIA to fill the income gap above Social Security, a QLAC to shrink RMDs and insure against living past 85, and a multi-year guaranteed annuity as a CD alternative for money you can leave alone. Everything else — indexed, variable, hybrid, anything with caps and participation rates — should clear a higher bar than a steak-dinner pitch provides. Cap your total annuity exposure below state guaranty limits, get three quotes, and put the commission question in writing. The annuity that’s right for you will survive those questions; the one that isn’t, won’t.