Like many financial products, annuities often get mixed reviews — not necessarily because of how they work, but because of how they're sold. Understanding annuities in the context of your overall retirement income strategy can help you decide whether they deserve a place in your financial future.

What Is an Annuity?

Think of an annuity as a pension you buy upfront. You're essentially trading a lump sum today for guaranteed payments tomorrow. When you look at retirement income, your only truly guaranteed payment is typically Social Security. Annuities offer another way to create predictable retirement income.

How Annuities Work

When you buy an annuity, you're making a deal with an insurance company to transform your investment into future payments. These payments can work in different ways, depending on what type of annuity you choose.

Fixed annuities are the simpler option — they work like a traditional pension. Once you start receiving payments, you'll get the same amount each month, regardless of what's happening in the market. While this predictability feels safe, remember that you're typically trading higher potential returns for that certainty.

Variable annuities take a different approach. Instead of fixed payments, your money goes into investment options similar to mutual funds. Your future payments can go up or down based on how these investments perform. Think of it as keeping one foot in the market while still having some income guarantees.

The timing of your payments matters, too. Some people need income right away — that's where immediate annuities come in. Others want to let their money grow for a while first, using a deferred annuity. 

It's like the difference between starting Social Security at 62 and waiting until 70 — the longer you wait, the bigger your payments can be.

Taxes on Annuities 

You won't pay taxes on your earnings during the growth phase — they grow tax-deferred. When you start taking payments, they're usually taxed as regular income. The exact tax treatment depends on whether you used pre-tax retirement money (like from an IRA) or after-tax dollars to buy the annuity.

Before you jump into any annuity contract, there are some important catches to understand. 

Most annuities lock up your money for several years — if you try to take it out early, you'll face surrender charges. They also come with various fees for insurance features, administration, and investment management.

This is exactly why working with a fiduciary advisor instead of a commission-based salesperson makes such a difference. 

A fiduciary can help you understand whether an annuity truly fits your retirement strategy and, if so, find one without unnecessary costs. Remember: the insurance company's financial strength matters too — they're promising to pay you for potentially decades to come.

Pros of Annuities

• Guaranteed income stream for a specified period or over your lifetime
• Tax-deferred growth during the accumulation phase
• Protection against outliving your assets
• Complementing Social Security as another source of reliable income
• Various options to match different retirement timelines

Cons of Annuities

• Often come with high sales commissions and fees
• Less flexible than other investment options
• May offer lower returns compared to direct market investments
• Complex contracts with surrender charges for early withdrawal
• Salespeople might push products that aren't right for you

Are Annuities Right for Your Retirement?

The answer depends on your overall retirement strategy. Consider your income layers:

• Social Security (which pays more the longer you wait to claim these benefits)
• Required minimum distributions from 401(k)s and IRAs
• Investment portfolio income (dividends and appreciation)
• Potential business income
• Pension payments

Annuities can be powerful tools when used correctly — particularly if you work with a fiduciary who can recommend commission-free options that match your timeline. However, they shouldn't be your only strategy. The key is building diverse income streams that work together for your retirement security.

Build Retirement Income Your Way

While annuities have their place, modern retirement planning demands more flexible solutions. That's why we created Savvly — the world's first market-driven pension designed to provide financial security for life at a fraction of traditional annuity costs.

Unlike traditional annuities that require large upfront payments, Savvly lets you build your pension over time while enjoying market returns plus potential longevity bonuses. Ready to explore a more flexible approach to guaranteed retirement income? Join our waitlist and discover how Savvly can complement your retirement strategy.

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