Planning for retirement is rarely as simple as choosing the right investments. For high-net-worth retirees and pre-retirees, the bigger question is often how to generate reliable income, manage taxes, preserve flexibility, and coordinate decisions across multiple accounts.
Annuities may be one option to consider, but they should not be evaluated in isolation. The better question is not simply, “Are annuities good or bad?” It is, “Does this contract help address a specific need within your broader retirement income plan?”
If you are unsure how annuities work or whether one may fit your situation, you are not alone. Let’s start with the basics.
An annuity is a contract, typically issued by an insurance company, that provides payments to the person entitled to receive them. The IRS defines an annuity as a contract that requires regular payments for more than one full year to the recipient.
In retirement planning, annuities are often used to create a stream of income for a specified period or, depending on the contract, for the rest of the annuity owner’s life.
In the simplest terms, an annuity is a contract between an individual and an insurance company. The purchaser contributes money, either as a lump sum or through a series of payments over time. In return, the insurer promises a regular stream of income under the terms of the contract.
Those payments may last for a set number of years, such as 10 or 20, or for the rest of the annuity owner’s life.
Each insurance company has its own contract terms, features, fees, and payout options. Many annuity contracts are highly customizable, which is one reason they can feel confusing. Riders may add benefits or protections, but they can also increase the contract’s complexity and cost.
Some annuities are immediate, meaning payments can begin shortly after the premium is paid. These may also be called immediate annuities, single-premium immediate annuities, or income annuities.
By contrast, deferred annuities begin payments at a future date, often during retirement, as outlined in the contract.
There are three basic types of deferred annuities:
Variable annuities are based on the performance of the underlying investment options chosen by the annuity owner. Because their value can fluctuate with investment performance, variable annuities may involve market risk, contract expenses, and surrender charges. According to the SEC’s Investor.gov, variable annuities may include surrender charges if funds are withdrawn within a certain period after purchase.
Fixed annuities generally offer a stated rate of return or payout. FINRA explains that with a fixed annuity, the insurance company guarantees both the rate of return and the payout to the investor, although the interest rate may change over time depending on the contract.
Indexed annuities offer returns linked to the performance of a market index, such as the S&P 500. FINRA notes that indexed annuities generally carry more risk and potential return than fixed annuities but less risk and potential return than variable annuities.
| Type of Annuity | Basic Idea | Potential Role | Key Tradeoff |
| Immediate annuity | Income begins soon after purchase | May provide near-term retirement income | Less flexibility once funded |
| Deferred annuity | Income begins later | May support future income needs | Contract terms and liquidity matter |
| Fixed annuity | Provides a stated rate or payout | May appeal to retirees seeking predictability | Growth potential may be limited |
| Variable annuity | Value depends on underlying investment options | May offer market participation with optional features | Fees, market risk, and complexity can be higher |
| Indexed annuity | Return is tied partly to a market index | May offer some market-linked growth potential | Caps, participation rates, and contract rules matter |
The key is not which type sounds most appealing on the surface. The key is whether the annuity’s structure, cost, income features, liquidity limits, and tax treatment align with the rest of your retirement income plan.
Like other financial products, annuities can be a tool within a broader retirement planning strategy. Depending on the contract and the client’s situation, they may offer several advantages.
One of the primary reasons retirees consider annuities is the ability to create a stream of income that may last for life, depending on the contract. For some retirees, this can help address the concern about outliving their assets.
While no one can predict their exact life expectancy, longevity risk is a real planning concern. Some annuities are designed to transfer a portion of that risk to the insurer by providing income for as long as the annuity owner lives.
Certain annuities can provide an income stream that is not directly tied to day-to-day market performance. For some retirees, this may help reduce pressure on investment accounts during periods of market volatility, including the risk of needing to sell portfolio assets during a downturn.
Growth within certain annuity contracts may be tax-deferred until withdrawals begin. The IRS explains that the tax treatment of pension and annuity income depends on the type of payment and how the annuity was funded.
Annuities often include optional features or riders that can be tailored to specific needs. However, customization should be evaluated carefully, as additional features may increase costs or impose restrictions.
Annuities also have meaningful trade-offs. These should be understood before any contract is purchased.
Annuities can be complex financial products. Contract terms, fees, payout formulas, riders, surrender periods, death benefits, and tax treatment can vary significantly. It is important to understand what the contract does and does not provide.
Some annuities carry costs such as administrative fees, mortality and expense charges, investment-related expenses, rider costs, and sales charges. These costs can affect long-term value.
Annuities are generally less liquid than many other investment options. If you need access to the funds earlier than expected, withdrawals may be limited or costly.
An annuity guarantee is backed by the insurance company issuing the contract. While insurer defaults are uncommon, it is still important to review an insurer's financial solvency before purchasing an annuity.
Some annuity payments may lose purchasing power over time if they do not keep pace with inflation. This can be an important consideration for retirees who may need income to last for several decades.
Depending on your goals, risk tolerance, and overall plan, other investment or income strategies may offer greater flexibility or growth potential than certain annuity contracts.
An annuity may be worth considering when a retiree seeks a more predictable income stream, wants to reduce concerns about outliving assets, or aims to coordinate guaranteed income with Social Security, pensions, portfolio withdrawals, and other retirement resources.
That does not mean an annuity is the right answer for every retiree. For high-net-worth households, the decision often depends on the broader plan: how much liquidity you need, how your assets are titled, your tax situation, your estate goals, your health and longevity assumptions, and how much income risk you are comfortable retaining.
An annuity may be less appropriate if you need significant liquidity, want maximum investment flexibility, are uncomfortable with contract restrictions, or already have other income sources that cover your essential retirement expenses.
It may also be less compelling if the costs, surrender period, rider fees, or tax treatment outweigh the benefit the annuity is intended to provide.
Before purchasing an annuity, it may help to ask:
For high-net-worth retirees and pre-retirees, the decision becomes more nuanced. The goal is not simply to add another income product. Rather, the goal is to determine whether the annuity improves the overall retirement income plan after considering taxes, investments, cash flow, estate planning, and flexibility.
Annuities can supplement income in retirement. Like other savings, investment, and insurance-based tools, they carry both potential benefits and meaningful tradeoffs.
For some retirees, an annuity may help create predictable income and reduce longevity risk. For others, the costs, complexity, liquidity limits, or contract restrictions may make a different approach more appropriate.
The most important step is to avoid evaluating an annuity in isolation. Before signing a contract, make sure you understand the terms, payout structure, fees, surrender charges, tax implications, death benefit provisions, and how the annuity fits into the rest of your financial life.
Annuities may be useful for some retirees, particularly those seeking a more predictable income stream. They are not right for everyone. The decision depends on income needs, liquidity, taxes, fees, estate goals, and the rest of the retirement plan.
Common concerns include complexity, fees, surrender charges, limited liquidity, the tax treatment of withdrawals, inflation risk, and the financial strength of the issuing insurance company.
Fixed annuities typically offer a stated rate or payout. Variable annuities depend on the performance of the underlying investment options. Indexed annuities tie returns partly to a market index, typically with a cap or floor. Each type carries different risks, costs, and contract terms.
It depends on the type of annuity and the contract terms. Variable annuities carry market risk. Fixed and indexed annuities may offer certain guarantees, but fees, surrender charges, inflation, and contract limitations can still affect outcomes.
In many cases, annuity earnings are taxed upon withdrawal. If annuity payments are received before age 59½, they may also be subject to an additional 10% tax unless an exception applies.
Some high-net-worth retirees may benefit from evaluating annuities as part of a broader retirement income strategy. However, the decision should be made in coordination with tax considerations, estate planning, portfolio management, liquidity needs, and long-term income goals.
Annuities can be useful in the right situation, but they should not be evaluated in isolation. Before purchasing one, it is important to understand how it fits with your income needs, tax situation, investment strategy, estate goals, and liquidity needs.
At Spaugh Dameron Tenny, we help retirees and pre-retirees evaluate retirement income decisions in the context of their broader financial lives. If you are considering an annuity or want a second look at how it may fit into your plan, our team can help you weigh the trade-offs before you make a long-term commitment.
This material is provided for general informational and educational purposes only and is not intended to provide individualized investment, tax, or legal advice. The information discussed may not be applicable to all individuals or situations.
Guarantees are based on the claims-paying ability of the issuing insurance company and do not apply to the performance of underlying investment options.
Variable annuities are sold by prospectus only. They involve investment risk, including possible loss of principal. Contract owners may incur mortality and expense charges, administrative fees, underlying investment expenses, and surrender charges. Investors should carefully consider the contract's objectives, risks, charges, and expenses before investing. The prospectus contains this and other important information.
Tax treatment of annuities can be complex and varies based on individual circumstances. Investors should consult qualified tax professionals regarding their specific situation.
CRN202907-11616537
David Belinkie, CFP®, is a partner and financial advisor at Spaugh Dameron Tenny, where he specializes in helping business owners, executives, doctors, and successful retirees navigate complex financial decisions. With nearly two decades of experience and a CERTIFIED FINANCIAL PLANNER® designation earned in 2006, David is known for his thorough, client-first approach, guiding high-net-worth professionals through personalized planning, implementation, and long-term oversight. Based in Charlotte, he serves as a trusted resource for clients seeking clarity, coordination, and confidence in their financial lives.
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