U.S. retirees and near-retirees are increasingly buying annuities for lifetime income, but many are still treating them like growth investments instead of insurance products, financial advisors say. That misunderstanding matters now because higher interest rates, longer life spans and volatile markets have made guaranteed income more appealing, while the wrong expectations can lead to buyer regret, costly withdrawals and mismatched retirement plans.
Why the confusion persists
Annuities are often sold in the same conversations that cover portfolios, mutual funds and retirement withdrawals, so many buyers mentally place them in the investment bucket. That framing is incomplete. At their core, annuities are contracts with an insurer that exchange a premium for a stream of payments later, often for life.
That structure makes them closer to longevity insurance than to a stock or bond fund. The buyer is not mainly trying to beat the market. The buyer is trying to reduce the risk of outliving savings.
Advisors say that distinction is frequently lost when retirees compare an annuity’s quoted payout to the returns they think they might have earned in the market. The product can look disappointing if the yardstick is capital appreciation. It can look sensible if the goal is predictable income at age 80 or 90.
What annuities actually do
Most annuities fall into a few broad categories, including fixed, fixed indexed, variable and immediate income annuities. Each works differently, but the common thread is that the contract is designed to pay income under a set formula rather than to function like an everyday investment account.
Immediate income annuities begin payments soon after purchase. Deferred annuities allow money to grow first, then turn into income later. Some contracts offer riders that promise minimum income or death benefits, but those features can add cost and complexity.
That complexity is one reason advisors urge retirees to focus on the role the annuity is meant to play. If the purpose is to cover essentials such as housing, food and insurance premiums, then a guaranteed payment may help stabilize the household budget. If the purpose is to chase returns, the buyer may be using the wrong product.
Where the risks show up
One common mistake is assuming annuities are fully liquid or easy to reverse. Many contracts impose surrender periods that can last years, and withdrawals above set limits can trigger charges. That can be a serious problem for retirees who may need access to cash for medical bills, caregiving or a housing move.
Another issue is fees. Variable annuities, in particular, can carry mortality and expense charges, underlying fund expenses and optional rider costs. The SEC and FINRA have repeatedly warned investors to review those fees carefully and to understand how they affect long-term returns.
Inflation is another pressure point. A fixed monthly payment can protect a retiree from market swings, but it may lose purchasing power over time if prices rise faster than the payout. That tradeoff is central to the product. Buyers give up some upside and flexibility in exchange for certainty.
There is also the risk of overbuying. If too much of a portfolio is converted into guaranteed income, retirees can end up with less liquid savings than they need for emergencies, travel or family support. Advisors generally recommend matching the annuity size to basic spending needs rather than treating it as the main retirement vehicle.
What the numbers say
Demand for annuities has been strong. LIMRA, the insurance industry research group, said U.S. annuity sales reached a record $385.4 billion in 2023, up sharply from the prior year. The group linked the surge to higher interest rates, which improved payout rates and made guaranteed income more attractive.
The broader trend reflects a retirement market that is shifting away from pure accumulation. A 2024 BlackRock survey found that many pre-retirees are worried about running out of money more than they are about market returns, a sign that income security is becoming a larger priority. That fear does not make annuities right for everyone, but it explains why more households are asking about them.
Advisors say the strongest use case is often the simplest one: a retiree with a pension gap, limited guaranteed income and a desire to cover fixed monthly expenses. In that setup, the annuity acts like a private pension. It is less useful when a retiree wants maximum flexibility, expects to leave a large liquid inheritance or needs frequent access to principal.
How advisors are reframing the product
Financial planners increasingly tell clients to stop asking whether an annuity is “good” or “bad” and start asking what job it is meant to do. That shift changes the evaluation. The right question becomes whether the contract lowers the chance of a shortfall in later life, not whether it can outperform a market index.
That framing also changes the timing. Annuities can make more sense when interest rates are higher because payout rates tend to improve. They can also fit better when a retiree is healthy enough to expect a long life, since longevity protection becomes more valuable the longer payments may be needed.
Still, the product is not a cure-all. Buyers need to compare the annuity against other income sources such as Social Security claiming decisions, bond ladders, CDs and Treasury securities. The best retirement plan usually combines several tools instead of relying on a single contract.
For readers, the practical takeaway is clear: an annuity should be evaluated as insurance against living too long, not as a shortcut to higher returns. The difference affects how much to buy, when to buy and whether the contract belongs in the plan at all. What to watch next is whether more retirees keep shifting toward income guarantees as rates remain elevated, and whether advisors continue to push the same message: buy annuities for income security, not for investment upside.
