One of the hardest parts of retirement is turning a pile of savings into a paycheck that lasts as long as you do. Social Security and, for some, a pension cover part of the gap. For the rest, many retirees look at annuities.

An annuity is a contract with an insurance company. You pay a lump sum or a series of premiums, and in return the insurer promises either a stream of income, a rate of growth, or both. But the word "annuity" covers products that behave very differently, from personal pensions to tax-deferred investment accounts.

Two jobs an annuity can do

Almost every annuity is built for one of two purposes:

• Income. You hand over money and receive payments, often for life. This shifts longevity risk (the risk of outliving your savings) to the insurer.
• Accumulation. Your money grows tax-deferred inside the contract, with growth based on a fixed rate, a market index, or underlying investment funds. Income is optional and comes later.

The main types of annuities

Single premium immediate annuity (SPIA). You pay a lump sum and income starts within a year, usually for life or a set period. It is the simplest way to create pension-like income. The trade-off is liquidity: once you annuitize, the money is generally no longer accessible as a lump sum, and fixed payments lose purchasing power to inflation unless you buy an inflation adjustment, which lowers the starting payment.

Deferred income annuity (DIA). Similar to a SPIA, but payments start years later. Because the insurer holds the money longer, each dollar can buy more future income. A DIA can serve as "longevity insurance" for your 80s and beyond, but you give up access to the premium and may receive little or nothing if you die early, unless you pay for a death benefit or refund feature.

Multi-year guaranteed annuity (MYGA). A fixed annuity that credits a declared interest rate for a set term, often three to ten years. It works somewhat like a CD issued by an insurer, with tax deferral. Withdrawals above a modest free amount during the term typically trigger surrender charges, and some contracts add a market value adjustment.

Fixed indexed annuity (FIA). Interest is linked to a market index, such as the S&P 500, but the account is designed not to lose value from index declines. In exchange, your upside is limited by caps, participation rates or spreads. For example, a 7% cap means a 12% index gain is credited as 7%. Insurers can often reset these terms over time, and surrender periods commonly run six to ten years.

Registered index-linked annuity (RILA). Also called a buffered annuity. Like an FIA, returns follow an index, but you accept some downside risk, through a buffer (the insurer absorbs, say, the first 10% of losses) or a floor (your loss is limited to a set percentage). Accepting that risk usually buys higher caps. RILAs are SEC-registered securities, and losses beyond the buffer are yours.

Variable annuity. Your money goes into subaccounts that resemble mutual funds, so the value rises and falls with markets. Optional riders can guarantee a minimum income or death benefit, but riders add cost, and total annual expenses on a fully loaded contract can be substantial.

Investment-only variable annuity (IOVA). A stripped-down variable annuity with no or few guarantee riders and lower costs. Its main purpose is tax deferral for investors who have already maxed out their 401(k) and IRA contributions and hold assets in taxable accounts. It offers no protection against market losses.

Costs, surrender periods and the fine print

Annuity costs are not always visible as a single number, so it helps to ask about each layer:

• Insurance charges. Variable annuities typically carry mortality and expense charges plus administrative fees on top of fund expenses.
• Rider fees. Income and death benefit guarantees are usually charged annually and may be calculated on a benefit base rather than your actual account value.
• Surrender charges. Most deferred annuities charge a declining penalty if you withdraw more than a set amount, often around 10% a year, during the first several years.
• Crediting limits. For FIAs and RILAs, caps, participation rates and spreads are the "price" of downside protection, even when no explicit fee is listed.

Note that a rider's "income base" or "roll-up rate" is not a return on your money; it only sets future withdrawals and usually cannot be taken as a lump sum.

Every guarantee in an annuity has a price, paid either in fees, in capped upside, or in money you cannot easily reach.

How annuities are taxed

Inside a non-qualified annuity (bought with after-tax money), growth is tax-deferred. When you withdraw, gains are taxed as ordinary income, not at lower capital gains rates, and withdrawals are generally treated as coming from earnings first. Heirs also do not receive a step-up in basis on annuity gains, which is an important difference from a taxable brokerage account.

Withdrawals from a deferred annuity before age 59½ may also face a 10% additional federal tax, with limited exceptions. Lifetime income payments from a SPIA are partly a tax-free return of your premium and partly taxable.

Annuities held inside an IRA or 401(k) are already tax-deferred, so the annuity adds no extra tax benefit there. One exception worth knowing is the qualifying longevity annuity contract (QLAC), a deferred income annuity bought with IRA or plan money. For 2026, up to $210,000 can go into a QLAC, and that amount is excluded from required minimum distribution (RMD) calculations until payments begin, which must be no later than age 85. With RMDs currently starting at age 73 for most retirees (rising to 75 for younger cohorts), a QLAC can help reduce taxable distributions in your 70s while building income for later years. Our tax planning work often starts by modeling whether that trade is worth it.

Inflation and insurer strength

Fixed income payments that look comfortable today will buy less in 15 or 20 years. Some insurers offer cost-of-living increases, but the starting payment is lower. Many retirees address inflation by annuitizing only part of their savings and keeping the rest invested for growth.

Every annuity guarantee depends on the claims-paying ability of the insurer that issues it. Before buying, review the company's financial strength ratings from independent agencies. State guaranty associations provide a backstop, but coverage limits vary by state and should not be the main reason for choosing a contract. Spreading larger purchases across more than one insurer is a common way to reduce concentration risk.

When an annuity may not be appropriate

• You may need the money soon. Surrender periods and limited liquidity make annuities a poor fit for an emergency fund or near-term goals.
• Your income is already covered. If Social Security and a pension, such as a FERS annuity for federal employees, already meet your essential expenses, more guaranteed income may add cost without much benefit.
• You are in poor health. Lifetime income is priced on average life expectancy; shorter expected longevity can reduce the value of a life annuity.
• Legacy is the priority. Ordinary income taxation of gains and the lack of a step-up can make annuities less efficient for leaving money to heirs.
• You do not fully understand the contract. If you cannot explain the caps, fees and surrender schedule, it is worth pausing before signing.

How we approach the decision

In our process, the annuity question comes after the income plan, not before. We start by mapping essential expenses against Social Security, pensions and other reliable income. If there is a gap, we compare covering it with an annuity against alternatives such as a Treasury or CD ladder, a bond portfolio, or a systematic withdrawal strategy within your investment portfolio. Often the answer is a combination, with only part of the savings committed to guaranteed income.

Frequently asked questions

Can I lose money in an annuity?

Yes, depending on the type. Variable annuities, IOVAs and RILAs can lose value with markets, and any deferred annuity can lose value to surrender charges if you exit early. Fixed products are designed to protect principal, subject to the insurer's claims-paying ability.

Is a fixed indexed annuity the same as investing in the stock market?

No. You do not own the index. Interest is credited based on index performance, limited by caps, participation rates or spreads, and dividends are generally not included.

Should I buy an annuity inside my IRA?

The IRA already provides tax deferral, so the case rests on the annuity's other features, such as lifetime income. A QLAC is the main IRA-specific use, because it can defer part of your RMDs.