Annuities provide a recurring revenue stream in retirement, offering security and peace of mind. Thanks in part to the SECURE Act 2.0, which allows annuities to be included in 401(k)s, this investment vehicle has gained popularity among savers.
A recent survey of non-retired workers conducted by LIMRA, the insurance and financial services industry trade association, found seven in ten non-retired workers were 'very likely' or 'somewhat likely' to select an in-plan annuity option if it was available. They pointed to the ability to create a lifetime guaranteed income stream as a main reason to add it to their retirement accounts.
That desire for lifetime income was evident in annuity sales for all of 2024, which increased 12% year-over-year to $432.4 billion, according to LIMRA. It marked the third-year in a row of record-high annuity sales.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
With more plan sponsors gearing up to include an annuity component in their offerings, you may be wondering if you should follow suit. The answer: it depends.
Should you buy an annuity in 2025?
If any of this sounds familiar an annuity may be right for you.
1. You're worried about running out of money in retirement. If you are losing sleep fretting over your nest egg, an annuity can give you peace of mind and a good night’s sleep. With an annuity you enter into a contract with an insurance company and make payments over a period of time. That money is invested and paid out to you at a later date either as a lump sum, monthly or annual payments over your lifetime.
Annuities that guarantee income for your lifetime are either immediate or deferred. “Guaranteed income annuities (immediate or deferred) are the only financial products that can do this,” says Ken Nuss, founder and CEO of AnnuityAdvantage, an online provider of fixed-rate, fixed-indexed, and lifetime income. “We sometimes call this creating your own personal pension.”
An immediate annuity is typically purchased with a lump sum and you then begin receiving payments within 12 months or less. An immediate annuity can be fixed or variable. A deferred annuity is designed to grow on a tax-deferred basis, providing guaranteed income to the annuitant starting on a particular date they choose. The savings period for deferred annuities can last from a few years to decades, and the money grows over time.
2. You want to play it safe but with a better return than bank CDs. Fixed annuities tend to outperform bank CDs because they are held longer, giving the insurance company more time to invest and grow the money. Also known as multi-year guaranteed annuities, these annuities have guaranteed interest rates and grow on a tax-deferred basis. Nuss says they are best for savers seeking higher yielding alternatives to bank CDs and bonds, but still want their interest rate and principal to be guaranteed.
3. You've maxed out your qualified retirement plan contributions. If you’ve maxed out all of your tax-advantaged investment accounts including a 401(k) and IRA and still want to save more for retirement, an annuity can be a tax-smart way. The money in the annuity grows tax free, enabling it to compound at a greater rate. If you contribute with after-tax dollars, those contributions are not subject to any additional income tax upon withdrawal.
4. You want stock market exposure and principal protection. Fixed indexed annuities are a safe way to get exposure to the stock market and diversify a retirement portfolio. With a fixed indexed annuity you’re apt to produce higher returns than other fixed-income investments but lower returns than equities.
This type of annuity is particularly attractive to people who are in the preservation phase of retirement savings. “If you want to participate in the stock market upside, but simultaneously guarantee your principal against downside risk, take a look at fixed indexed annuities," says Nuss. “Most people are aware, as we age...portfolio risk reduction should be a serious consideration.”
5. Your saving sources aren’t diversified. A good rule of thumb for retirement savers, according to Jeffrey Mellone, a wealth advisor at TIAA, is to structure your expected retirement income in thirds: one-third from Social Security, one-third from portfolio distributions, and one-third from lifetime guaranteed income.
Without the guaranteed income you end up with too much risk. “The stocks and bonds portion is susceptible to market fluctuations,” says Mellone. “Lifetime income adds more stability.”
Are there any downsides to annuities?
Annuities have a place in retirement savings but there are downsides that should be considered.
For starters, your money is tied up with annuities. You invest now for a payout later. If you need the money before 59-1/2, that money is taxed as ordinary income and you could get hit with a 10% federal income tax penalty.
There are also fees and commissions. Some annuities may charge fees, such as surrender charges, mortality and expense risk fees, sales and commissions and administration fees. In some cases, coupled with fees and commissions, a rider could further dilute your investment.
Annuities growing role in retirement
Annuities are finding a place in American retirement portfolios thanks to their ability to provide guaranteed income for life. An annuity is protected, can grow tax deferred and provides peace of mind. As a result, annuities are becoming a sought-after component of a diversified retirement plan.
Related content
-
Stock Market Today: UnitedHealth Drags on Dow After CEO SplitsUNH created headwinds for the price-weighted Dow on news that its embattled CEO, Andrew Witty, is stepping down.
-
Here's How the Child Tax Credit Could Increase Under TrumpTax Credits House Republicans released details on President Trump’s ‘one big, beautiful bill,’ including an increased child tax credit.
-
I'm 60 with $4 Million — Can I Have a Luxury Retirement?With inflation and volatility, how careful should I be?
-
How to Turn Education Planning Into Retirement PlanningNervous about investing in a 529 plan? If college doesn't pan out, the money can now be rolled over into a Roth IRA, which will grow tax-free until retirement.
-
How Financial Advisers Can Help Clients Navigate the SSFAThe Social Security Fairness Act's big changes and new opportunities could require adjustments in tax strategy for some Social Security recipients.
-
The Surprising Way to Reduce Your Dementia RiskLower your dementia risk with this one hack.
-
Baby Boomers vs. Gen X: How They Approach Retirement DifferentlyOne generation is nearing retirement, while one is already there. How they approach this important life transition is very different.
-
Americans to Trump: Help Us Save for RetirementWith a Social Security shortfall looming and many workers struggling to save for retirement, most Americans agree: It's time for the government to step in.
-
My Five-Step Estate Planning Guide to Protect Your FamilyA wealth adviser notes that an estate plan that covers everything from guardianship to digital assets and taxes — and is discussed openly — will give you and your family peace of mind.
-
Could a Golden Visa Be Your Ticket to Retiring Abroad?Trump and DOGE are weighing a U.S. "Gold Card" that would let the wealthy emigrate to the U.S. for a fee. But golden visas have been around for years worldwide. Here's how they work.
