When Are Annuities a Good Investment?

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Annuities can be a good way to invest your money if you are buying them for reasons that fit with your money goals. You can buy annuities for reasons that include safety, long-term growth, or income. For instance, a fixed annuity might be a good low-risk option instead of a CD that offers low interest rates. You might get a variable annuity for long-term growth that is tax-deferred. You may opt for an annuity that will bring you income in the future.

In each of these cases, the insurer that issues the annuity will guarantee some portion of the outcome. In many cases, they will guarantee the amount of income you can take from the annuity in the future.

The only real way to decide if an annuity is a good choice for you is to have a plan. Your plan should dictate what your money goals are and should lead you to make choices that will help you meet those goals. If you want to ensure the outcome of how you invest your money, at least in part, an annuity could be a good choice.

Key Takeaways

  • Annuities are insurance products people can buy to guarantee a certain amount of income received when they retire.
  • They can be a good thing to buy when you know where they fit with the rest of your retirement goals.
  • Before buying an annuity, make sure you know the fees you'll pay and the amount of money you'll get back from it.

When an Annuity Is a Good Investment

An annuity is an insurance product. That means you buy it to reduce some of the risks that come with investing money. Some annuities, such as the ones that are variable, offer a choice of stock and bond portfolios offered as investment choices inside the insurance contract. Others are true insurance and not investments.

While it might sound strange, there is one thing an annuity can do well. It can provide a hedge against longevity risk, which is the risk of living far longer than you thought you would. If you are buying it for that reason, an annuity can be a good investment.

An annuity might be a good choice for you if you know your retirement goals. You should also be able to see how the annuity helps you meet those goals and what fees and restrictions come with the product you're considering. You should understand how the annuity income is taxed when payout begins, what investment options are available, and how the annuity goes along with other investments you have.


Annuities must be sold by a licensed agent and are regulated by the SEC. Agents receive payment for selling their clients these products.

When an Annuity Is Not a Good Investment

If you're being sold an annuity without having the chance to look at your entire financial picture, proceed with care. Some people selling them mean well, but they might not have a complete notion of the products they are selling. They might not have a good grasp of the tax issues. Plus, if they haven't done any planning for you, they can't see how that product would fit into your retirement picture.

You also want to be aware of the fees that come with the annuity. High fees will lower your returns. High fees in some annuities mean that, in most markets, your purchase will earn low returns.

Don't buy an annuity unless you have crafted a plan and know how it fits in with that plan. Annuities are not going away, so you should not feel pressure or a sense of urgency to buy one until you've done your research. Some sales agents will tell you that an annuity product will only be on sale for a short time. This could be true because insurers will stop selling some of their products from time to time. Still, don't let this fact pressure you into making a choice before you are ready. You will likely be able to buy a product with similar features to the previous one.

All Annuities Are Not Alike

There are many types of annuities, and each has its own pros and cons. Once you know the types that are for sale, you'll know which questions to ask about the annuity you might be thinking of getting.

Compare annuities sold by brokers to the no-load ones before you buy. Broker-sold annuities are sold by a person who carries an insurance license and maybe a securities license, too. You buy no-load annuities from a firm that sells them. They have lower fees, but you must do your research and ask questions. If you want to pay lower fees, you should be ready to do some legwork. Some financial advisors who charge a fee will also help you select the right no-load annuity if it fits in with your plan.

Do some digging and read up on other ways to invest for your future before making your choice. You'll also want to feel comfortable asking about annuity fees. You should also be satisfied with the answers you get before moving forward.

Any sincere advisor who wants to find the best product for you should explain all costs to you before you buy. If an agent is too rushed or unable to take the time to explain the fees in their product or to disclose to you how they are paid for the sale of that product, then don't buy from them.

The Balance does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal. Investors should consider engaging a financial professional to determine a suitable retirement savings, tax, and investment strategy.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. U.S. Securities and Exchange Commission. "Annuities."

  2. Texas Department of Insurance. "Understanding Annuities."

  3. Washington State Office of the Insurance Commissioner. "Annuity Payout Options."

  4. FINRA. "Your Guide to Annuities: An Introduction."

  5. National Association of Insurance Commissioners. "Annuities."

  6. Charles Schwab. "Annuities Overview."

  7. National Association of Personal Financial Advisors. "What Is Fee-Only Financial Planning?"

  8. FINRA. "NASD Notice to Members 99-103."

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