An annuity is a financial product that turns a lump sum of money into a guaranteed stream of income — either right away or at some point in the future. Think of it as a personal pension you create for yourself. Whether you need one depends on how much guaranteed income you'll have in retirement and how much risk you're comfortable carrying.

Key Takeaways

• An annuity converts your savings into a predictable income stream you can't outlive.
• There are several types — fixed, variable, and indexed — with very different risk profiles.
• Annuities are best suited for people who need more guaranteed income on top of Social Security.
• They come with tradeoffs: limited liquidity and sometimes complex fee structures.
• Working with an independent agent ensures you're comparing products across multiple companies.

Why People Buy Annuities

The biggest financial fear in retirement isn't losing money in the stock market — it's running out of money entirely. Living longer than your savings last is called “longevity risk,“ and it's a very real concern as Americans live well into their 80s and 90s.

Social Security provides some baseline guaranteed income, but for most retirees it's not enough to cover all their expenses. A pension from an employer used to fill that gap — but fewer and fewer workers have pensions today.

An annuity fills that role. You give an insurance company a sum of money, and they guarantee to pay you a set amount per month for the rest of your life — or for a specified number of years. That guarantee is backed by the financial strength of the insurance company.

The Three Main Types of Annuities

Fixed Annuity

A fixed annuity pays a guaranteed interest rate during the accumulation phase, and a guaranteed income amount during the payout phase. There's no market exposure — your money grows at a set rate regardless of what the stock market does.

Best for: People who want predictability and zero market risk. Think of it like a CD with insurance-company backing.

Variable Annuity

A variable annuity invests your money in sub-accounts that work like mutual funds. Your returns — and your eventual income — vary based on market performance. The upside is growth potential; the downside is that you can lose principal.

Best for: People with a higher risk tolerance and a long time horizon who want market participation inside a tax-deferred wrapper. Variable annuities also tend to have higher fees, so it's important to understand the full cost.

Fixed Indexed Annuity (FIA)

An indexed annuity ties your growth to a market index (like the S&P 500) but protects you from losses. You typically get a portion of the index's gains up to a cap, and your floor is 0% — meaning you won't lose money when the market drops.

Best for: People who want more growth potential than a fixed annuity offers, but don't want direct market risk. This is one of the most popular types right now, especially for pre-retirees in their late 50s and 60s.

When Should You Start an Annuity?

The right time to start an annuity depends on your goals:

Before retirement (accumulation phase): You fund the annuity now and let it grow, tax-deferred, until you're ready to start receiving income. The earlier you start, the more it can accumulate.

At retirement (immediate income): You can purchase a Single Premium Immediate Annuity (SPIA) and start receiving monthly income within 30 days of the purchase date.

As a bridge strategy: Some people use annuities to cover expenses between retirement and when they start Social Security at 70, maximizing their lifetime Social Security benefit.

A common strategy: convert a portion of your savings into a guaranteed income annuity, then let your remaining investments stay in the market for growth and flexibility.

The Tradeoffs You Should Know About

Annuities aren't perfect for everyone. Here's what to watch:

Liquidity limitations. Once you fund an annuity, your money is generally locked up for a period of time (the surrender period, often 5–10 years). Most annuities allow a 10% free withdrawal each year, but taking more triggers surrender charges.

Fees. Variable annuities in particular can carry annual fees of 2–3% or more once you add up the insurance charges, rider fees, and underlying investment costs. Always ask for a full fee breakdown before signing anything.

Inflation. A fixed monthly payment looks great today, but in 20 years, inflation will have eroded its purchasing power. Some annuities offer inflation-adjusted income riders (at extra cost), which can help.

Not a short-term play. Annuities are long-term products. If you think you'll need all of your money within a few years, this isn't the right vehicle.

How Much Should Go Into an Annuity?

There's no universal rule, but a common guideline is to annuitize enough of your savings to cover your essential monthly expenses — housing, food, healthcare, utilities — so those are always covered no matter what happens in the market. Then keep the rest in a diversified investment portfolio for growth and discretionary spending.

For example, if your essential expenses are $3,500/month and Social Security covers $2,000, you might want an annuity that generates $1,500/month — and invest the rest.

Working With an Independent Agent

Annuity products vary significantly between insurance companies. Surrender periods, caps on indexed strategies, income riders, and company ratings all differ. An independent agent who represents multiple carriers can compare options side by side and help you find the product that fits your situation — without steering you toward the one that pays the highest commission.

At Gruene Insurance Group, we take the time to understand your income needs, your timeline, and your risk tolerance before recommending anything. If an annuity is right for you, we'll show you why. If it's not, we'll tell you that too.

People Also Asked

Is my money safe in an annuity?

Annuities are backed by the financial strength of the issuing insurance company, not the federal government like a bank deposit. Most states have a guaranty association that provides some protection (up to a limit) if an insurer fails. Choosing a highly-rated insurance company (A or better from AM Best) is the most important safety measure.

Can I lose money in an annuity?

With a fixed or fixed indexed annuity, your principal is protected — you won't lose money to market downturns. Variable annuities invest in market sub-accounts and can lose value. Withdrawals before age 59½ may also trigger a 10% IRS penalty, similar to other retirement accounts.

Are annuities taxed?

Growth inside an annuity is tax-deferred, meaning you don't pay taxes while it's accumulating. When you start taking distributions, the earnings are taxed as ordinary income. If you funded the annuity with pre-tax dollars (inside an IRA or 401k), all withdrawals are taxed as income.