A retirement annuity can be a powerful tool. It’s one of the only products that can provide a guaranteed, predictable stream of monthly payments that you cannot outlive.
For many retirees, this is the key to true peace of mind.
If your Social Security and pension (if you have one) don’t cover all of your basic monthly bills, an annuity is designed to fill that gap.
But it is a major, irreversible financial decision. It’s a fantastic tool for some, and the wrong tool for others. As your trusted advocate, we’re here to help you understand the honest pros and cons.
Key Takeaways
- It’s a “Personal Pension”: An annuity’s #1 benefit is a guaranteed paycheck for life. It’s insurance against outliving your savings.
- The #1 Trade-Off is “Liquidity”: When you buy an annuity, you are “locking up” that lump sum. You cannot ask for it back in an emergency.
- Simple is Safest: For most retirees, the best option is a “Fixed Immediate Annuity.” It’s simple, predictable, and not tied to the stock market.
- Use Our Checklist: This guide includes a simple checklist to help you decide if an annuity is the right fit for your personal goals.
The Honest Pros vs. Cons of an Annuity
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The Pros (Why You'd Want It)
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The Cons (The "Trade-Offs")
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You Cannot Outlive Your Money: This is the superpower. It pays you for life, even if you live to 110. It solves the #1 fear of retirement.
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You Lose "Liquidity": This is the big one. You are trading your lump sum for the income. You can't ask for your $100,000 back.
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It's Safe: It's protected from your own bad decisions or unscrupulous advisors. Your core income is locked in.
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Fees: If you try to back out early, the "surrender charges" are very high. An annuity is a commitment.
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The Best Type of Annuity for Most Retirees
The annuity world is full of confusing options. For most retirees, the best and simplest choice is a Fixed Immediate Annuity.
- Fixed: This means your interest rate is guaranteed. It is not tied to the risky, up-and-down stock market. Your payment will never change.
- Immediate: This means your paychecks start right away (within one year).
You may hear salespeople mention “Variable” or “Indexed” annuities. These are complex, high-fee investment products, not simple income plans. For seniors who want peace of mind and a predictable check, a Fixed Annuity is almost always the right tool.
How Much Income Will I Get?
This depends on your age, gender, and the amount you put in. Because interest rates are higher now, payouts are better than they’ve been in years.
Here are simple, estimated monthly payouts for a $100,000 “Life-Only” annuity for a 65-year-old.
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Age / Status
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Sample Monthly Payout (for $100,000)
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Single Man (Age 65)
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~$530 per month, for life
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Couple (Both Age 65)
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~$438 per month (for both lives)
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The #1 Fear: "What if I die early?"
What if you put in $100,000 and die two years later? Does the insurance company “win” and keep all your money?
No. You can easily fix this.
When you buy, you can add features to protect your investment. The two most common are:
- “Period Certain”: This guarantees the policy will pay out for at least 10 or 20 years. If you die in year 5, your child (or other beneficiary) will keep getting the checks for the remaining 15 years.
- “Cash Refund”: This is the most popular option. It guarantees that if you die before you’ve received at least your original $100,000 in payments, the difference is paid to your beneficiary in a lump sum.
Adding these options will make your monthly check a little smaller, but for most people, the peace of mind is worth it.
Your 3-Question 'Is an Annuity Right for Me?' Checklist
This is a big decision, and it’s not for everyone. Use this simple 3-question guide to see if your financial goals align with what an annuity is built to do.
Read the two options for each question and check the box that best describes your goals for this specific portion of your savings.
- What is this money’s primary “job”?
- [ ] (A) Its job is to be an “Emergency Fund.” My #1 priority is keeping this money safe and accessible for a new roof, a medical bill, or to help my family.
- [ ] (B) Its job is to be a “Paycheck.” My #1 priority is to turn this lump sum into a guaranteed monthly income that I cannot outlive.
- What is your “Liquidity” (Access to Cash) preference?
- [ ] I am not comfortable locking up my money. I need to be able to get my full principal back at any time. I am not willing to pay a “surrender charge.”
- [ ] I am comfortable locking up this money. I am willing to trade access to my lump sum in exchange for a 100% guarantee that my paycheck will never run out.
- What is your core “Peace of Mind” goal?
- [ ] (A) My goal is to protect this lump sum and pass the full amount on to my children. I am worried about the stock market, so I want it in a CD or savings.
- [ ] (B) My goal is to protect my income. I am worried about outliving my savings and becoming a financial burden on my children.
How to Read Your Results
- If you checked one or more “(A)” answers: An annuity is likely NOT the right tool for this specific pot of money. Your goals are focused on liquidity and savings (which is what a high-yield savings account or a CD is for). You should not lock up your emergency fund in an annuity.
- If you checked all three “(B)” answers: An annuity is a very strong fit for your goals. You have the right mindset: you are “insuring” your income, not “investing” your savings. You are ready for the peace of mind that a guaranteed, lifelong paycheck provides.
How Your Payouts are Taxed
This is a critical question, and the answer is simpler than it looks. The tax treatment depends entirely on what kind of money you used to buy the annuity in the first place.
There are two main paths:
1. If You Use “Qualified” (Pre-Tax) Money
- What this is: This is money from a retirement account that you have not paid taxes on yet, such as a Traditional 401(k), Traditional IRA, or 403(b).
- How it’s taxed: This is very straightforward. Because you’ve never paid a dollar of tax on this money (it grew tax-deferred), 100% of every annuity check you receive is taxed as regular income.
- The Simple Way to Think About It: Treat your annuity check just like you would any other retirement withdrawal or a paycheck. The full amount is added to your income for the year.
2. If You Use “Non-Qualified” (Post-Tax) Money
- What this is: This is money from a regular savings account, a CD, an inheritance, or a brokerage account. It’s money you’ve already paid taxes on over the years.
- How it’s taxed: This is where the big benefit comes in. You will only pay taxes on the interest or earnings, not on the money you put in (your “principal”).
- How it Works in Practice (The “Exclusion Ratio”): You do not have to do the math. The insurance company calculates a simple “exclusion ratio” for you. A portion of every single check is a tax-free “return of your principal,” and the other portion is taxable “interest.”
- Example: You might get a $700 check, and the 1099 tax form from the insurer will show that $500 of it was your principal (tax-free) and $200 was interest (taxable). This makes a large part of your new paycheck tax-free.
- Example: You might get a $700 check, and the 1099 tax form from the insurer will show that $500 of it was your principal (tax-free) and $200 was interest (taxable). This makes a large part of your new paycheck tax-free.
A Powerful Bonus: Help With Your RMDs
Here is a major benefit for seniors using their “Qualified” (IRA/401k) money.
Once you are 73, you are forced to take “Required Minimum Distributions” (RMDs) from your IRA. These RMDs can be large, and they all count as taxable income, which can push you into a higher tax bracket.
When you use a portion of that IRA money (e.g., $100,000) to buy an annuity, that money is no longer part of your IRA balance for RMD calculations. This can be a powerful strategy to lower your RMDs, which in turn lowers your total taxable income in retirement.
As always, we are not tax advisors, and you should consult with your personal tax professional about your specific situation.
A Powerful Bonus: Help With Your RMDs
Here is a major benefit for seniors using their “Qualified” (IRA/401k) money.
Once you are 73, you are forced to take “Required Minimum Distributions” (RMDs) from your IRA. These RMDs can be large, and they all count as taxable income, which can push you into a higher tax bracket.
When you use a portion of that IRA money (e.g., $100,000) to buy an annuity, that money is no longer part of your IRA balance for RMD calculations. This can be a powerful strategy to lower your RMDs, which in turn lowers your total taxable income in retirement.
As always, we are not tax advisors, and you should consult with your personal tax professional about your specific situation.
How to Choose an Annuity (The Final, Critical Steps)
You’ve done the hard part. You’ve found your “income gap” and decided a fixed annuity is the right tool. Now, you must choose the company. This is a 30-year promise, and these final steps are the most important.
- Get 2–3 Quotes (The Smart Way) Payouts for the exact same $100,000 annuity can vary between companies. You must shop around.
- A “captive agent” (who works for one big company) can only sell you their one product.
- An independent broker (like Sagewise) works for you. Their job is to compare 10–15 top-rated companies at once to find the absolute best payout and features for your specific situation.
- Check Financial Strength (This is Non-Negotiable) An annuity is not FDIC-insured like a CD. It is backed only by the financial strength of the insurance company you choose.
- What to do: Look up the company’s “AM Best” rating. AM Best is an independent agency that grades insurers on their ability to pay their bills.
- Our Honest Advice: Do not settle for less than an “A” (Excellent) rating. A strong rating is the single best predictor that your paycheck will be safe for the next 30+ years.
- Understand Your State’s Protection As a “backup plan,” every state has a State Guaranty Association.
- How it works: If your insurer were to fail, this association steps in to protect your policy, up to a certain limit (usually $250,000 per person).
- The Strategy: This is why checking for an “A” rating is so important—you want to never have to use this backup plan. If your annuity is larger than your state’s limit (e.g., $500,000), a smart strategy is to split it between two different “A”-rated companies.
- Read the “Summary” Page of the Contract Annuity contracts are long and confusing. Before you sign, ask your advisor for the “summary” or “specifications” page.
- What to check: Look for the “Surrender Charge” schedule (e.g., “7% in Year 1, 6% in Year 2…”) and the “Cash Refund” or “Period Certain” feature. Make sure what you discussed is what is in the contract. A good advisor will walk you through this page by page.
Stop Wasting Money. Get the Right Quote.
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Frequently Asked Questions (FAQ)
his is the most important question. It is not an investment—it is insurance. You are not trying to “beat the market” or get rich. You are insuring yourself against the risk of running out of money. It’s a tool for safety.
No, almost never. An annuity is a tool to cover your essential bills (like housing, food, utilities). You should still have other money in a liquid savings account (for emergencies) and possibly in the market (for growth).
The “catch” is the main trade-off: liquidity. When you buy an annuity, you are giving up access to that lump sum. You cannot ask for it back. It is a permanent commitment in exchange for a permanent paycheck.
This is a real downside. A $500 check is great today, but its buying power will be less in 20 years. (You can buy an inflation-protection rider, but it makes your starting check much smaller.) Most experts suggest you cover this risk by having other investments and your inflation-adjusted Social Security.
A 401(k) is a “piggy bank” you save money in. Its job is to grow your money. An annuity is a “paycheck factory” you buy with your savings. Its job is to pay you a guaranteed income. You often use the money from your 401(k) to buy an annuity when you retire.
