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Despite cooling inflation, market volatility and increasing lifespans have left many older Americans worried about their retirement security. As seniors face the reality that their savings may not last as long as they’ll live, more are turning to annuities for guaranteed income. These insurance contracts convert a lump sum investment into steady income payments — sometimes for life.
But choosing among the various types requires understanding how they work and what fits your needs. We asked financial experts about the annuities that make the most sense for seniors in today’s economic environment. Below, they highlight the top options, explaining the pros and cons of each and how they fit into a well-rounded retirement strategy.
Find out more about the benefits of annuities here.
What types of annuities should seniors consider now?
There are four annuity types seniors should consider now, experts say:
Immediate annuities
“A Single Premium Immediate Annuity (SPIA) offers a guaranteed stream of income for your lifetime, a set number of years or both,” Mary Stork, senior vice president and general manager at USAA Retirement and Investment Solutions, explains. “You pay once, and the income starts right away — usually within 12 months.” Many retirees use these payments to cover essential expenses, including housing and healthcare. Financial experts highlight these key immediate annuity advantages:
- Longevity insurance: Predictable payments ensure you don’t run out of money in your golden years.
- Market protection: Annuity payments stay stable regardless of stock market crashes or economic downturns.
But these annuities come with limitations:
- No liquidity: “Once you [buy an immediate annuity], you [can’t access] the money any longer,” cautions Jonathan Viscounte, CFP, CLU, ChFC, a financial planner at Prudential Advisors.
- Limited earning potential: Immediate annuities may have lower yields than other retirement income sources, such as bonds or stocks.
Explore your immediate annuity options online to learn more.
Fixed indexed annuities
“A Fixed Indexed Annuity (FIA) is a deferred annuity that offers more opportunity for protected growth than a traditional fixed annuity,” said Stork. “Its growth is tied to an index such as the S&P 500, but without the risk of market losses.”
These annuities serve a strategic purpose in retirement planning. “[You can use them] to offset portfolio risk while still following equities,” Viscounte notes. Christopher L. Stroup, a certified financial planner and founder of Silicon Beach Financial, adds that they’re particularly valuable for risk-averse retirees. With a fixed indexed annuity, you enjoy the following benefits:
- Principal protection: Your initial investment stays safe even when markets decline.
- Growth potential: These products may outperform traditional fixed annuities during strong market years.
FIAs come with some drawbacks, though:
- Capped returns: There’s a ceiling on how much annuity income you can earn, even in bull markets, Viscounte points out.
- Surrender charges: You’ll face penalties for early withdrawals, typically for up to 10 years of the contract.
Deferred income annuities
“A Deferred Income Annuity (DIA) starts paying income at a future date — usually several years after purchase,” Stork explains. It essentially lets you create your pension down the road. These annuities work best as a longevity hedge in your retirement strategy. “They [suit] retirees [seeking] guaranteed base income to [complement] their Social Security checks,” says Viscounte. Annuity advisors point to these reasons to consider deferred income annuities:
- Higher payouts: “The longer you wait, the higher the payout,” notes Stroup.
- Longevity planning: These products provide excellent protection against outliving your other retirement assets.
At the same time, DIA buyers should be aware of these cons:
- No liquidity: “You give up liquidity and control of [these] assets [during the deferral period],” Stroup cautions.
- Inflation concerns: DIA payments generally don’t adjust for inflation. This can weaken your buying power over time.
Variable annuities
“Variable annuities invest in mutual fund-like subaccounts, offering market exposure and optional income or death benefit riders,” explains Stroup.
These products are ideal for specific retirement scenarios. Stork recommends them for people with higher risk tolerance and longer time horizons. They work well as a supplemental growth tool with optional lifetime income, especially if you already have other guaranteed income sources. Industry professionals note a couple of variable annuity pros:
- Unlimited upside: “They don’t cap the upside to growth like fixed indexed annuities do,” says Viscounte.
- Tax benefits: Earnings grow tax-deferred until you withdraw them.
However, be wary about these tradeoffs:
- Market risk: “The investment part works [like] regular investing,” emphasizes Viscounte. “There are no guarantees as far as the results go … you [don’t get] downside protection.”
- High fees: “[Annual] fees often exceed 2%,” cautions Stroup. Other costs, such as sales charges, management fees and surrender penalties, may eat into your annuity returns.
The bottom line
Annuities can be vital for retirement planning, but each type serves a different purpose. Before signing any contracts, consult a financial advisor. They can help you understand the use cases and tradeoffs. Pay special attention to liquidity restrictions, as annuities often limit access to your money. The right annuity could provide peace of mind — if it fits within your broader financial plan.