Most people have at least a little familiarity with annuities, which are attracting more attention.

Sales set a record for the first half of the year: $223.0 billion in total, up 3% from the same period last year and a record, according to LIMRA, an industry research group.

More people are concluding annuities are right for them. That doesn't mean an annuity is right for you. Different types of annuities do very different things. One type might fit your needs precisely, while another might not at all.

The best plan is to learn about annuities, decide if any might be right for you, then home in on which would be optimal.

Here are four key considerations.

1. Your age

Nonqualified annuities are funded with after-tax money. They're not held in an IRA, Roth IRA or other qualified retirement account.

These annuities offer one of the few ways to get powerful tax advantages with nonqualified savings. As long as you don't withdraw any interest or earnings from the annuity, you won't be taxed on it.

With tax deferral, your money can grow faster. With an IRA or 401(k), you must start taking distributions, knowns as RMDs, by age 73. With nonqualified annuities, there's no age requirement. You can let your money compound without taxes as long as you like.

Sound like a great deal? Sure. It's such a great deal, the government puts restrictions on it. Any withdrawals of annuity earnings before age 59½ are taxed and penalized.

With a few exceptions (such as for permanent, total disability), there's a 10% IRS penalty on withdrawals, along with regular income tax.

All accumulated interest must be withdrawn first before you can take out tax-free return of principal, according to IRS rules.

Because of that penalty, most annuities are bought by people who are in their 50s or older because they're already exempt from the penalty or soon will be. Age is an important consideration.

2. How much you have in savings and investments

With few exceptions, annuities aren't completely liquid. Those designed to build up your savings (deferred annuities), you'll pay a penalty to the issuing insurance company if you make an excessive withdrawal or cancel your policy during the penalty period.

With almost all income annuities, once the free-look period is past, you're committed and can't get your principal back. You're locked into a contract.

If you're considering an annuity, it's important to figure out how much access to your money you might need.

If your savings are minimal and you have a lot of credit card debt, you probably can't afford to lock up money in an annuity. You'll need unhindered access to your funds when expenses come up.

There's no magic number for the amount of savings you need to make a nonqualified annuity feasible, but you don't have to be wealthy. It depends a lot on your circumstances.

Can an annuity be a good idea if you have $250,000 total in savings and investments? You can probably move some of that safely into one or more annuities.

But people with less in savings can safely put money into an annuity. For instance, if you're retired and have a good stream of income from a pension, Social Security and perhaps other sources, you might be able to safely sock away some money in an annuity.

3. Your asset allocation

Annuities of all types (except variable annuities) are designed to reduce risk because they come with guarantees. Income annuities guarantee payments for either a set period or life. Fixed deferred annuities come in various flavors, but (except variable annuities) guarantee your principal.

If you're heavily invested in stocks and can afford to tie up some money in an annuity, it would make sense to use a fixed or income annuity to lower your risk and give you peace of mind.

4. Income generation

If you're retired or semiretired, or about to be, you might need to generate income, especially if you want to delay taking Social Security benefits to maximize your payout.

An immediate income annuity can be a great answer. Most people choose the lifetime option. This lets you create your own lifetime private pension and helps assure you'll never run out of money. It's "longevity insurance."

I'm a big advocate of income annuities, but I know they don't appeal to some people because you're signing over your money to an insurer in exchange for a stream of guaranteed income.

Those folks might want to use a fixed-rate annuity — a multi-year guarantee annuity or MYGA — instead to generate income.

A MYGA is a CD-like vehicle that provides a set rate for a set period, and rates are typically higher than bank CD rates for the same term. For instance, as of November 2025, you can get up to 6.30% on a five, six or seven-year MYGA. Most MYGAs allow penalty-free withdrawals of interest.

If you put $100,000 into a 10-year contract earning 5.75% with that feature, you'll receive $5,750 a year for the next 10 years. If you withdraw all the interest each year, you'll still get your $100,000 principal back at the end of year 10.

Flexibility is a big advantage. Let's say during years one to five, you need to take out all the interest.

In year six, you start receiving Social Security payments and no longer need the income. You can let the interest compound tax-deferred in the annuity for the remaining five years. After five years, the principal will have grown to $132,252.

Determining if an annuity might be right for you takes some thought and planning. Consider your situation in total, and if an annuity can help you meet your goals, act now.

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at www.annuityadvantage.com or by calling (800) 239-0356. The firm also offers an income- annuity quoting service. There are no fees or charges for the firm's services; 100% of the client's money goes to work for them in their annuity.

Related Content

• I'm an Annuities Expert: Here Are Two Ways to Use Annuities to Benefit From the OBBB
• How Much Income Will an Indexed Annuity Get You? An Annuities Expert Lays Out the Numbers
• Watch Out for Annuity Surrender Charges: How to Avoid Them
• What You Don't Know About Annuities Can Hurt You
• How Much Income Can You Get From an Annuity? An Annuities Expert Gets Specific

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

That's the power of a private annuity sale — an advanced, yet simple and elegant estate tax-mitigation strategy used by sophisticated families and their advisers.

What is a private annuity sale?

A private annuity sale is a transaction in which you transfer an asset — such as a closely held business interest, investment real estate or a concentrated securities position — to an irrevocable dynasty trust in exchange for the trust's unsecured promise to pay you a fixed annuity for the rest of your life.

Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

There's no commercial insurer involved; it's a private arrangement, priced using actuarial life expectancy and an appropriate interest rate.

How it works

You sell the asset at its fair market value. In return, the dynasty trust commits to pay you a lifetime stream of payments calculated to be actuarially equivalent to that value, taking into account your age and prevailing rates.

From that point, all future appreciation accrues to the trust for your family. Because you receive only an unsecured promise to pay rather than retaining the asset, the transferred property and its post-sale growth are removed from your taxable estate, if properly structured and respected.

Why it can reduce estate taxes

Estate taxes apply to what you own at death. With a private annuity, you no longer own the transferred asset. You hold an annuity promise that generally has no value at death because payments cease when you do.

The result is that high-growth assets and future appreciation sit outside your estate, while you retain lifetime income. If the asset outperforms the assumptions used to price the annuity, that upside accrues to heirs without additional estate tax.

Here's an illustrative example. Assume you own $10 million of rapidly appreciating company stock. You sell it to a dynasty trust in exchange for a lifetime annuity priced at fair market value.

If you live to your actuarial life expectancy, you receive the economic equivalent of $10 million over time. If the stock grows to $16 million inside the trust, the $6 million of growth is outside your taxable estate, because you no longer own the shares.

Income and income tax features

The annuity provides predictable lifetime cash flow. Depending on basis and structure, each payment might be characterized among gain, return of basis and interest for income tax purposes.

Looking for expert tips to grow and preserve your wealth? Sign up for Adviser Intel (formerly known as Building Wealth), our free, twice-weekly newsletter.

When the buyer is a grantor trust, income tax treatment can be streamlined in certain circumstances, aligning cash flow with wealth transfer goals. Careful modeling and coordination are essential.

Key considerations and risks

The trust must be financially able to make payments; the promise is unsecured. The annuity must be properly priced and documented to avoid gift or valuation challenges.

Longevity risk is inherent: A longer life means more payments to you; a shorter life shifts more value to heirs. Success depends on rigorous legal, tax, valuation and actuarial execution.

When it's a fit and next steps

A private annuity sale can be compelling if you hold high-growth assets, want lifetime income and aim to minimize estate taxes.

Work with a team of experienced estate planning lawyers, valuation experts and tax experts to structure, document and fund the transaction correctly.

Related Content

• Is An Annuity Your Missing Retirement Piece?
• How Much Income Can You Get From an Annuity? An Annuities Expert Gets Specific
• Got Assets? Attorney Explains How to Protect Them From Greedy Lawsuits
• Is Your Cryptocurrency Safe? How to Shield Digital Assets
• New SALT Cap Deduction: Unlock Massive Tax Savings With Non-Grantor Trusts

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Often shrouded in mystery and misconceptions, annuities can actually play a pivotal role in a sound retirement strategy. As a financial adviser with a pragmatic, conservative outlook, I've encountered numerous myths about annuities.

Let's debunk five common misconceptions and shed some light on the truth behind annuities and the benefits they offer.

Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

Myth No. 1: Annuities are too complicated

The reality: Sure, the wide array of annuity products available in the market can seem overwhelming at first glance. However, with a bit of guidance and simplification, the concept of annuities is straightforward.

At their core, annuities are contracts with an insurance company. You pay them a sum of money (either as a lump sum or over time), and in return, they promise to pay you a regular income for a period of time — often for the rest of your life.

Understanding the basic types of annuities (fixed, variable and indexed) and their respective benefits can demystify them, making them a valuable tool in your financial arsenal.

Myth No. 2: Annuities are bad investments

The reality: Viewing annuities as "investments" in the first place is to misunderstand what annuities are. Seeing them as an asset comparable to stocks and bonds is to miss their purpose in your retirement strategy.

Annuities are, first and foremost, insurance products designed to provide guaranteed income. Comparing them to stocks or mutual funds is like comparing apples to oranges. They serve different purposes.

Annuities offer a unique blend of regularity and potential returns that is hard to find in traditional investment products, making them an excellent choice for conservative investors looking to protect their principal while enjoying a steady income.

Myth No. 3: You'll lose all access to your money

The reality: While it's true that annuities are designed to provide income over time, and that your principal investment is often illiquid, some annuity products do offer a certain degree of liquidity.

Features such as withdrawal benefits, death benefits and options for early access in certain circumstances (like medical emergencies) provide a measure of flexibility for some annuity holders.

It's important to carefully review the terms of your annuity contract and understand the conditions under which you can access your funds.

Study up on possible surrender charges for withdrawals, and be aware that withdrawals before age 59½ could trigger taxes and potentially a 10% federal income tax penalty.

With proper planning — including ensuring you have enough liquid funds held outside of your annuity — annuities can be a part of a balanced and accessible financial strategy.

Myth No. 4: Annuities are only for the wealthy

The reality: This couldn't be further from the truth. Annuities are incredibly versatile financial instruments that can benefit investors at various income levels.

They're designed to provide a steady income stream, making them an excellent choice for individuals looking to secure their financial future, regardless of their wealth status.

By allocating a portion of your savings into an annuity, you're essentially buying confidence in your financial stability for your retirement years.

Myth No. 5: Annuities don't make sense in today's economy

The reality: In an era of uncertainty, the guaranteed income offered by annuities is more valuable than ever. They can help protect against the effects of market downturns because they are not a market investment, and they are often able to provide an antidote to the risk of outliving your savings — a significant concern for many retirees.

Furthermore, certain types of annuities, such as indexed annuities, offer the potential for growth tied to market performance, with the added security of a guaranteed minimum return.

What annuities can mean for your retirement

As we navigate the complexities of planning for retirement, the priority shifts toward ensuring a stable and secure financial future.

One of the key benefits of annuities is that, with certain customizations, they can help you address the risk of outliving your savings by guaranteeing an income for life, regardless of how long that is.

This feature is invaluable, as it addresses one of the most significant concerns for retirees—the fear of outliving their savings.

Essentially, annuities can be viewed as a form of longevity insurance. By allocating a portion of your retirement savings into an annuity, you're securing a predictable income, much like a paycheck.

In some cases, that annuity can provide income regardless of how long you live or how the markets perform.

This consistent income can cover essential living expenses, allowing your other investments to grow or to be reserved for discretionary spending.

Looking for expert tips to grow and preserve your wealth? Sign up for Adviser Intel (formerly known as Building Wealth), our free, twice-weekly newsletter.

Moreover, annuities can complement other retirement income sources, such as Social Security and pension plans, filling the gaps to ensure that your financial needs are met later in life.

They can be tailored to begin payments immediately or deferred to a future date, providing flexibility to align with your retirement timeline and income needs.

The confidence that comes from knowing you have a guaranteed income can free you to enjoy your retirement years more fully.

You can plan with greater certainty, embark on those long-postponed travel dreams, invest in hobbies or simply enjoy the day-to-day without the looming worry of financial instability.

Some caveats to consider

While some annuities come with no fees, others may have surrender charges, mortality and expense risk fees, sales and commissions and administration fees.

In addition, potentially pricey income riders can add to the expenses, diluting your investment.

The conservative investor's perspective

From a conservative standpoint, financial security and stability are paramount. Annuities can play a crucial role in a well-rounded retirement plan by offering guaranteed income, protection against market volatility and a safeguard against the risk of outliving one's assets.

They embody the conservative financial principles of risk management and preservation of capital, making them an attractive option for those seeking financial confidence in their retirement years.

Annuities are often misunderstood, but when properly integrated into your financial plan, they can offer the type of financial benefits many seek for their retirement.

By debunking these common myths, I hope to shed some light on how they can be used in a retirement strategy that prioritizes financial stability.

Like any financial decision, considering annuities should involve careful investigation and consultation with a fiduciary financial adviser to ensure they align with your overall retirement strategy.

In the end, the goal is to achieve financial security and a comfortable retirement, and annuities can be a valuable tool in reaching that objective.

In the realm of your retirement, where stability and security are prized above all, annuities stand out as a beacon of financial assurance. So, let's cast aside the myths and embrace the pragmatic, beneficial role these tools can play in securing our financial futures.

This material is intended for educational purposes only and is not intended to serve as the basis for any purchasing decision. Fixed Index Annuities are designed to meet long-term needs for retirement income, and they provide guarantees against the loss of principal and credited interest, and offer the reassurance of a death benefit for your beneficiaries. While no product fee is assessed on index options, limits are imposed on the upside performance through the use of caps, trigger rates, and/or participation rates. These limits can impose implicit costs.

Related Content

• Annuity Red Flags to Watch Out For
• Annuity Payouts: How Much Can You Get Each Month?
• What You Don't Know About Annuities Can Hurt You
• How Are Annuity Withdrawals Taxed?
• Who Should Consider an Annuity (and Who Shouldn't)

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

For the first time, complex choices such as private equity, real estate, expanded annuities and even cryptocurrency may be added to your plan's menu.

These aren't the plain-vanilla mutual funds and index funds to which most of us are accustomed. They're bigger, flashier and at least on paper, full of promise.

But promise is one thing; reality is another. These products are generally more complicated, less flexible and often more expensive to own.

Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

The executive order doesn't require your employer to offer them. But if they do, you'll need to be ready to navigate a very different and potentially riskier set of choices.

Why add these complicated investments to 401(k)s?

You can buy private equity, real estate funds or annuities outside your 401(k). Why the sudden push to add them to workplace retirement plans?

The pitch is simple: These investments promise the potential for higher returns than traditional stocks and bonds.

Private equity and real estate, for example, can offer access to private deals and growth opportunities not found in typical mutual funds.

Annuities, on the other hand, are marketed as a way to guarantee income in retirement — a kind of safety net for those who want steady, predictable cash flow.

However, these offerings are much harder to evaluate and even harder to escape. That makes them risky for the average saver who doesn't have a team of analysts at their side.

It's fair to ask who really benefits. The strongest push is coming from the companies that stand to profit, such as insurance firms, recordkeepers and investment managers.

These are the same entities that can charge higher fees and lock in long-term contracts with plan sponsors once these products are on the menu.

Surveys from these companies claim that savers want more choice. But the reality tells a different story: Fewer than 2% of 401(k) plans currently offer private equity or private credit, and many employers avoid adding annuities because they're complicated to explain, compare and manage over time.

The heightened risk of complexity

More investment options can sound like a win. But in retirement planning, more choice often means more homework and more ways to get tripped up.

Before you even think about investing, you'd need to understand exactly what you're buying, how it fits into your bigger retirement picture and what it's going to cost you.

These aren't mutual funds, which are relatively straightforward and easy to sell if you need cash. Private equity, for example, can be illiquid. You might have to lock up your money for years. The fees are often layered and harder to spot, which can quietly shrink your returns.

Annuities come with their own hurdles. Contracts can lock you in for a decade or more, and the terms are often so dense that even seasoned investors struggle to compare one product to another.

Even if an annuity's promise of lifetime income sounds appealing, that doesn't mean it's the right fit for your retirement goals.

Here's the bigger concern: Are employers equipped to evaluate these products in the first place?

As fiduciaries, 401(k) plan sponsors are supposed to act in participants' best interests. But many lack the expertise to dig into these complex investments, monitor them over time and make sure they truly belong in your plan.

How will you make informed decisions?

It's important to remember that you already have ways to access these investments without complicating your 401(k).

If you have a Roth 401(k), you can take tax-free withdrawals after age 59½.

With a traditional 401(k), you might qualify for an in-service withdrawal after 59½, which lets you roll funds into an IRA.

Even if your employer decides to add these investment options to your 401(k), you're the one who must decide whether to use them.

Plan providers can explain how an option works, but they're not looking at your full financial picture, including your tax situation, your spouse's benefits, your other investments or your retirement goals. Their job is to educate, not advise.

That's why it's worth thinking about how you'll evaluate any new choices that appear in your plan.

Looking for expert tips to grow and preserve your wealth? Sign up for Building Wealth (soon to be called Adviser Intel), our free, twice-weekly newsletter.

In some cases, you might decide it's better to keep things simple. In others, you might choose to move part of your savings outside the plan through an IRA rollover or in-service withdrawal after age 59½.

An IRA typically offers a broader range of investments, including private equity and annuities, on your terms, not your employer's.

This way, you get more control over your retirement dollars without adding unnecessary complexity to your workplace plan.

The point isn't to say "no" to every new feature. It's to make sure you understand exactly how it fits into your strategy before you say "yes."

Proceed with caution

Just because something shows up on your 401(k) menu doesn't mean it belongs on your plate.

Private equity, real estate and annuities can have a place in some retirement plans, but they're not a free upgrade. They come with trade-offs in cost, flexibility and transparency that you need to weigh carefully.

Saving for retirement is a long game. It's easy to get distracted by what's new and shiny, especially when it's framed as an "opportunity."

But your 401(k) should always be built around your goals, your timeline and your comfort with risk, not whatever product just became available.

If you're unsure, this is the time to get a second opinion. Talk to a fee-only fiduciary adviser. That's someone who works for you, not for the companies selling these products. You get advice without the sales pitch or hidden agenda.

The executive order might expand what's possible in a 401(k). Whether that's good for your retirement depends entirely on how, and if, you choose to use it.

Related Content

• Your 401(k) is Changing: Trump Opens the Door to Private Assets, Cryptocurrency
• The 401(k) Shake-Up: Private Equity's Role and Risks
• Should You Add an Annuity to Your Retirement Portfolio?
• I'm a Personal Finance Expert: Here's the Truth About Using AI to Plan Your Retirement
• Five Things I Wish I'd Known Before I Retired

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

But to get the full or partial amount, you can't exceed the income limits. For some older adults, it can thus make sense to reduce their taxable income to get under the limit.

Through 2028, eligible taxpayers 65 and older can get an additional $6,000 deduction (or $12,000 for a married couple if both spouses are 65). This is in addition to the standard deduction for all taxpayers and the extra deduction for older adults.

Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

The full deduction applies to individuals with a modified adjusted gross income (MAGI) up to $75,000 and joint filers with MAGI up to $150,000. The deduction is reduced by 6 cents for every dollar above the threshold.

For couples filing jointly, the deduction is fully phased out at $250,000. For single taxpayers, the deduction fully phases out with MAGI above $175,000.

For older people with lower or moderate incomes, the new deduction will help in two ways. First, it's an additional deduction that will benefit the majority of older adults who do not itemize their deductions.

Second, for those whose income is low enough, it will help reduce the tax on their Social Security benefits, in some cases to zero.

How Social Security benefits are taxed and why it matters

The percentage of your Social Security benefits that are taxed is determined by your "combined income." To calculate it, add up your adjusted gross income (AGI), tax-free interest from municipal bonds if any, and 50% of your Social Security benefits.

Married couples with less than $32,000 of combined income pay no income tax on their benefits. Couples earning between $32,000 and $44,000 have up to 50% of their Social Security benefits subject to federal income tax.

Those making more than $44,000 pay income tax on up to 85% of their benefits. For singles, the thresholds are $25,000 and $34,000.

The new deduction can lower your taxable income and thus your combined income. It's estimated that 90% of older adults will now pay no federal income tax on their Social Security benefits. Some other older adults will still pay the tax but at a lower rate.

Reduce taxable income with a nonqualified deferred annuity

If you're on the threshold of being able to benefit from the new deduction for older people, consider ways to reduce your taxable income to become eligible.

There are many ways to do that, but buying one or more deferred annuities is a straightforward, dependable method that has other benefits. As we'll see, this strategy can be used for both "nonqualified" money and IRAs.

A nonqualified deferred annuity is one that's held in a nonqualified account instead of a qualified account, such as an IRA, Roth IRA or 401(k). Nonqualified variable, fixed, fixed index and deferred income annuities can all help reduce current income and taxes.

Looking for expert tips to grow and preserve your wealth? Sign up for Adviser Intel (formerly known as Building Wealth), our free, twice-weekly newsletter.

As long as you don't withdraw any interest or gains from an annuity, you won't be taxed on it. You can defer taking out interest as long as you like.

Here's an example. Let's say you have $150,000 in funds to invest, and you want to put them in a guaranteed account. You could buy a bank certificate of deposit (CD). As of early August, the top rate for a five-year CD was 5.5%, meaning it would produce $8,250 of taxable income each year.

If you don't need that income for living expenses, you could place the $150,000 in a five-year multi-year guaranteed annuity (MYGA) instead. That would reduce your taxable income by $8,250 in 2026 compared to the CD.

Additionally, such a product, which acts much like a tax-deferred CD, produces more interest income because you could get up to 5.85% on your money and earn $8,775, tax-deferred.

Let's say this is a couple whose "combined income" would be $158,250 if they bought the CD. Since they're over the income limit, they'd get a partial reduction of the new credit for older people.

In contrast, the annuity would bring their income down to $150,000, and they'd get the full $12,000 deduction as well as reducing other federal and state income taxes.

In this way, a couple or an individual with a more modest income might be able to use an annuity to cut their income so they'd be eligible for the full deduction for older people, which would reduce their combined income so that they'd potentially pay no tax on their Social Security benefits.

An annuity that defers RMDs and cuts taxes

Everyone must start taking taxable required minimum distributions (RMDs) from their IRA, 401(k) plan or other qualified retirement plan when they reach age 73.

The only feasible way to defer some RMDs is to transfer a portion of your retirement-plan assets to a qualified longevity annuity contract (QLAC). The money in one is excluded from plan assets on which RMDs are calculated.

A QLAC is a special lifetime deferred income annuity that meets IRS requirements. It lets you keep more of your retirement plan intact and tax-deferred longer.

You can place up to $210,000 in one or more of them. You must start taking taxable income payments from a QLAC at 85, but you may begin sooner.

To purchase a QLAC, you transfer funds from your IRA or 401(k) or other eligible retirement plan to a life insurer. This single premium funds the QLAC. Since the transfer is from one plan custodian to another, it's tax-free.

Suppose you place $150,000 in a QLAC at age 73 and defer payments until age 80. That $150,000 is now removed from your annual RMD calculation. By reducing your current RMD income, you might be able to get all or a greater portion of the temporary credit for older people.

If you need your entire RMDs to cover expenses, you won't be able to use this plan. But you can buy a QLAC with as little as $10,000.

The other big advantage of the QLAC is that it's a lifetime annuity that guarantees a level income as long as you live. You can choose an individual or a joint lifetime payout, with the latter paying out income until the second spouse dies. The joint payee must be a spouse.

The additional deduction for older people is scheduled to end after the 2028 tax year, so it can be a good move for certain people to defer some income for the current tax year and the next three.

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at www.annuityadvantage.com or by calling (800) 239-0356. The firm also offers an income-rider quoting service. There are no fees or charges for the firm's services; 100% of the client's money goes to work for them in their annuity.

Related Content

• A Bunch of IRS Tax Deductions and Credits You Need to Know
• 2025 Tax Brackets and Federal Income Tax Rates
• Annuity Definition and 17 Terms You Need to Know
• How Much Income Will an Indexed Annuity Get You? An Annuities Expert Lays Out the Numbers
• Why Annuities Sometimes Sound Too Good to Be True

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Thanks to a rise in virtual tools, annuity purchases that once required thick paper contracts and in-person meetings can now be completed online, sometimes in under an hour.

But just because it's fast and convenient doesn't mean it's simple.

Here's what to know before you click "Buy Now" on a product that could affect the rest of your life.

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

Why people are buying annuities online

Retirement-age consumers are increasingly comfortable with making financial decisions virtually. That trend has opened the door to online annuity quotes, illustrations and purchases, delivered through secure digital platforms, video calls and apps.

Some of the benefits of buying annuities virtually include:

• Convenience. There's no need to schedule in-person meetings or deal with paper forms. You can review options and apply from home
• Speed. With apps and e-signatures, it's possible to go from interest to issued policy within days
• Education-first experiences. Many advisers use screen sharing, retirement income calculators and interactive tools to walk you through how each annuity works before you commit

In short, buying an annuity online isn't just about skipping the office visit. It's about making a complex process more transparent and personalized.

What to look for in a virtual annuity experience

A good digital experience should feel thorough, not rushed. Just because something's virtual doesn't mean it should be vague. Here are four signs you're working with a professional, not a product pusher:

1. They start with education, not a sales pitch

A trustworthy adviser will walk you through the basics of how annuities work, the pros and cons, and when they're most useful in retirement.

Look for someone who screens to make sure an annuity is appropriate for your situation, not someone who jumps straight to a specific product.

2. You get a custom illustration

You should receive a detailed breakdown of how the annuity would perform based on your age, investment amount, timeline and goals.

For example, how much guaranteed income would you receive starting at age 67 if you invested $100,000 today? Can you add an income rider? What are the fees?

3. You're encouraged to ask questions (and sleep on it)

A red flag in virtual sales is pressure.

Annuities are long-term contracts. It's reasonable (and wise) to take a few days to think through your options, compare illustrations and talk to a family member or certified public accountant (CPA).

4. The application process is secure and transparent

Most virtual annuity applications happen through encrypted portals and require identity verification.

Looking for expert tips to grow and preserve your wealth? Sign up for Building Wealth, our free, twice-weekly newsletter.

If you're being asked to send sensitive documents over unsecured email or fill out handwritten forms, consider looking elsewhere.

Common types of annuities you can buy virtually

While virtually all types of annuities can now be sold online, these are some of the most common in virtual retirement income strategies:

Fixed indexed annuities offer growth potential linked to a market index, with downside protection. Popular for clients who want income and principal safety.

Immediate annuities convert a lump sum into guaranteed income right away — ideal for retirees needing income now.

Deferred income annuities lock in future income starting several years from now.

Multi-year guaranteed annuities (MYGAs) function like CDs with higher fixed interest rates over a set term, often used for short-term stability.

Each type comes with different fees, benefits and liquidity rules, so you'll want to see side-by-side comparisons.

Questions to ask before you buy

Before finalizing a virtual annuity purchase, make sure you get clear answers to these questions:

• How is the adviser compensated? Commission, flat fee or both?
• Are there surrender charges if you need to access your money early?
• How is income calculated, and are there guarantees regardless of market performance?
• What riders are included or optional (e.g., income, long-term care)?
• What happens to the money when you pass away?

If the adviser can't answer these questions (or dodges them), that's your cue to find someone else.

The bottom line

Annuities can be a powerful retirement income tool, and virtual platforms have made them more accessible than ever. But easy doesn't mean effortless. Take time to learn the basics, review multiple options and partner with someone who puts education first, not a quick sale.

A good virtual annuity experience should make you feel more informed, not more confused. With the right guidance, you can lock in income for life without ever leaving your couch.

Related Content

• Kiplinger Readers' Choice Awards 2025: Annuity Providers
• How Much Income Can You Get From an Annuity? An Annuities Expert Gets Specific
• Should You Add an Annuity to Your Retirement Portfolio?
• What You Don't Know About Annuities Can Hurt You
• I Want to Buy an Annuity, But I'm Scared I'll Get Ripped Off. Should I Get One Anyway?

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

A fixed indexed annuity is a type of deferred annuity that credits interest based on the changes to a market index, such as the Dow Jones Industrial Average or S&P 500. Interest is credited when the index value rises, but when it falls, you lose nothing.

In exchange for that guarantee, you'll typically get only part of the market's gains. Over the long term, an indexed annuity should outperform fixed-income vehicles, such as bonds, but underperform stocks, though with much less volatility.

Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

When you annuitize a more traditional fixed-rate annuity, such as a multi-year guarantee annuity (MYGA, also called a CD-type annuity) or a variable annuity, you no longer have access to your money.

Annuitization means the insurance company is converting your annuity contract value into a stream of income, and in exchange for that, you normally no longer have any cash surrender value.

I believe that creating your own private pension is often a great move. But many people are leery about turning over their savings in exchange for future income.

An indexed annuity with an income rider avoids that disadvantage because you can guarantee a lifetime income and still have control over any remaining annuity balance.

It's a kind of have-your-cake-and-eat-it-too approach, but of course, there is no "free lunch."

You also usually retain complete flexibility about when you start receiving income. You can even stop receiving income and still access any remaining balance in your policy.

How the income rider works

The income rider on a fixed indexed annuity creates the "income account value." It is based on the amount of money you deposited in the annuity, usually growing at some predetermined annual rate.

The rider is a calculating factor that helps determine the amount of your guaranteed income payments. It's separate from the underlying contract value. It has no cash value and cannot be withdrawn. But it is real with regard to your income calculation.

With the rider, your income account value typically grows at a guaranteed annual compounded rate of 4% to 8%. This explains the somewhat misleading ads promising an 8% guaranteed rate on an annuity. They don't tell the whole story.

Since you don't set the date in advance for income payments to start when you buy the annuity, you retain planning flexibility. You can choose to start receiving lifetime income, typically beginning at age 55 or later, for just yourself or you and your spouse.

The longer you delay taking payments, the greater the income.

Your future monthly lifetime payments are determined by three factors:

• Your income account value
• Your gender
• Your age when you start taking payouts

Different insurers use different actuarial calculations. Therefore, you could get significantly more or less income from different insurers even when all other things are equal.

After the income starts, payments are deducted from the contract value. If that value ever reaches zero, annual income payments are still guaranteed for the remainder of your lifetime, but the annuity will no longer have any cash surrender value.

Looking for expert tips to grow and preserve your wealth? Sign up for Adviser Intel (formerly known as Building Wealth), our free, twice-weekly newsletter.

If you die before income activation, your beneficiaries will receive the full annuity contract value as a death benefit. If you die after income activation, the income payments will cease, and your beneficiaries will receive any remaining annuity contract value.

The rider has a lot of advantages, but there is usually a cost. For instance, it may cost 1.00% to 1.25% per year to guarantee a 7% to 9% annual income account value increase on the income rider.

This fee will be subtracted from your account value, and though seemingly modest, it can add up over time.

How much income — an example

A 55-year-old man deposits $200,000 into an indexed annuity and names a joint payee — his wife, also 55. She would keep receiving income if she outlives her husband.

Their income payments will begin at age 70. The current estimate is that lifetime income payments will be $37,392 per year. If they instead decide to start receiving payments at age 75, the figure increases to $46,663 per year.

Waiting till 80 would produce an estimated $50,758 a year.

Is an income rider worth it?

There's no easy answer because individual circumstances vary so much. Independent experts agree that most people should annuitize a significant part of their savings to ensure they'll never run out of money.

But people who have ample employee pensions and Social Security benefits may not need additional guaranteed income. Since the insurance company typically charges an annual fee for the income rider, it's not a good buy unless you're fairly sure you'll use it eventually.

But if you do want to reduce your risk and gain the peace of mind provided by guaranteed lifetime income, it's well worth investigating this innovative strategy and carefully comparing it with other options, including an immediate or deferred income annuity as discussed in my previous article.

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at www.annuityadvantage.com or by calling (800) 239-0356. The firm also offers an income-rider quoting service. There are no fees or charges for the firm's services; 100% of the client's money goes to work for them in their annuity.

Related Content

• Annuities: What They Are and How They Work
• Confused by Annuities? Making Sense of the Different Types
• Why Annuities Sometimes Sound Too Good to Be True
• I Want to Buy an Annuity, but I'm Scared I'll Get Ripped Off. Should I Get One Anyway?
• Watch Out for Annuity Surrender Charges: How to Avoid Them

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Think of your retirement savings as not only your 401(k), IRA and other qualified savings, but also the value of your home. And forget about rules of thumb. Think instead about refinements that make your plan your own.

What's your base plan?

In my previous two articles — Your Home + Your IRA = Your Long-Term Care Solution and What if You Could Increase Your Retirement Income by 50% to 70%? — I described IRA4Income, which delivers more income to meet budgeted expenses along with liquid savings to enable, for example, the coverage of typical long-term care costs.

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

We explained how to achieve these results by using financial products that are "off the shelf":

• An IRA account invested 50/50 in fixed income and stock investments
• Lifetime income annuities with income starting immediately (single premium immediate annuity, or SPIA) or in the future (qualified longevity annuity contract, or QLAC)
• A home equity conversion mortgage (HECM) that generates income and liquidity

Those pieces aren't exotic, but with our approach, called IRA4Income, we provide an individual with a "base plan" built around an allocation among and between asset classes, put in place with economic assumptions, such as:

• Rates of return on investments
• Personal planning choices, such as the percentage of increase in income
• Current interest rates based on a survey of annuity and HECM contracts

To measure the value of this planning model, we compared our results to two ends of the retirement spectrum:

• A single premium income annuity (SPIA) that would provide all guaranteed income but no liquid savings
• Investment-only plans with no guaranteed annuity income

Both of those and IRA4Income are based on a consistent set of assumptions.

While quite different in design but with consistent assumptions, the IRA4Income plans provide high starting income, they continue for life, and they have liquid savings late in retirement when the money will most likely be needed to cover long-term care.

Why do you personalize?

As the results below show, a base IRA4Income plan provides attractive results in the two areas we're working to improve: starting income and liquid savings at age 90.

Once you have a base plan that delivers the income and liquid savings, an adviser can help you modify it to better meet your personal objectives. The answer, unlike certain planning methods, is not simply to spend less.

Below, I provide examples of plan modifications, again with an emphasis on starting income and liquid savings.

Looking for expert tips to grow and preserve your wealth? Sign up for Building Wealth, our free, twice-weekly newsletter.

How do you personalize?

You can adjust income. A relatively simple way to adjust your starting and ongoing income is to revise the inflation protection assumption. Set out below is an example at different ages of what a change in the percentage increase can provide.

You can manage risk. In refining your plan, do you assume lower or higher assumed rates of return? If you aim for the high starting income you may want to use the base plan assumption of 8%, or a lower rate if you want to take less risk. The differences are shown here.

You can manage your legacy. Annuities are an important tool to create lifetime income in a plan. One feature of these lifetime annuities can be a payout to your beneficiary. You may want to provide beneficiary protection on early passing, as evidenced in the following table.

You can minimize taxes. Retirees who use just one source of savings to fund their retirement — their IRA or 401(k) — will pay taxes when distributions are made. Drawdowns from a HECM line of credit are not taxable and provide some tax benefit.

If taxes are a major consideration, you might consider using a portion of personal (after-tax) savings and reduce taxable portion, as seen here.

Now, create your options

The benefits of IRA4Income include increased income and more liquid savings. This combination of your IRA and your home can increase your income from your IRA-based planning by 50% to 75%.

While that increase sounds great, you have the ability to easily stress-test those results and anticipate long-term care or other events that can be planned for.

To get started, order an IRA4Income base plan as a great starting point for future refinements like those mentioned above.

Related Content

• What the HECM? Combine It With a QLAC and See What Happens
• Transform Your Retirement Plan With This Powerful Combo
• How Combining Your Home Equity and IRA Can Supercharge Your Retirement
• Is Your Retirement Solution Hiding in Plain Sight?
• How Your Home Can Fill Gaps in Your Retirement Plan

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Plus, not every annuity seller has your best interest at heart. Unscrupulous salespeople can charge you extra fees or sell you products that aren’t in your best interest, so it's understandable if you are worried.

But that doesn’t mean you should avoid annuities altogether. For certain individuals, annuities can be a way to get guaranteed income in retirement. It's one of the main reasons annuity sales topped $100 billion in the first quarter of 2025.

With that in mind, here is a look at when it makes sense to buy an annuity and how you can prevent yourself from getting ripped off if you do decide to purchase some guaranteed income via an annuity.

Annuity purchases: when it makes sense

If you have access to an annuity through your employer-sponsored retirement plan, the decision is easier. The product is already vetted through your company’s plan sponsor, so you don’t have to worry about shopping around.

Timothy Pitney, head of lifetime income default sales at TIAA, says it's typically cheaper than purchasing it in the retail market. “They don’t come with a lock-up or a commission that you find in retail,” says Pitney. “There’s fiduciary oversight. Often, these plans have consultants helping them. They tend to have much higher quality products than what you find in the retail space.” While that segment is growing, not every 401(k) or 403(b) plan offers it.

If you don’t have access to one through your 401(k) or 403 (b), ask yourself why you want to purchase an annuity in the first place before you begin your search, said Douglas Ornstein, director, wealth management coach at TIAA Wealth Management.

“You want to think about annuities as a retirement instrument primarily as opposed to purely an investment instrument,” says Ornstein. “You want something low-cost. It’s not a place to get a bunch of bells and whistles," or expect a big return on your investment.

Annuities make the most sense for people who want guaranteed income in retirement and are worried they will run out of money during their golden years. With an annuity, you enter into a contract with an insurance company and make payments over a specified period. That money is invested and paid out to you at a later date, either as a lump sum, monthly, or annual payments over your lifetime.

Annuities are also well-suited to individuals who want to play it safe but want a better return than bank CDs. Fixed annuities tend to outperform bank CDs because they are held longer, giving the insurance company more time to invest and grow the money.

Annuities can also make sense for people who want to supplement their Social Security benefits as part of their retirement, or as a bridge until they can claim Social Security if they retire early, says Ornstein. Annuities can also be used to pay for the aging process or long-term care costs, he says.

“Sometimes you’ll hear of people buying annuities because they are scared about the markets. That may be a good reason if you have a diversified, holistic financial plan in the context of a broader goal,” he says.

How to prevent yourself from getting ripped off

Once you understand why you are purchasing an annuity, you have to ensure you’re purchasing one without getting ripped off. That’s where education comes in. The phrase knowledge is power couldn’t be truer when it comes to shopping for a retail annuity. Understanding the types of annuities and all the costs is key.

Types of annuities

There are several types of annuities, but the main ones include:

-Fixed annuity: Payments are made monthly for the same amount. With a fixed annuity, you know exactly how much you’ll receive monthly.

-Variable annuity: The payouts are tied to the rise and fall of the underlying investment.

-Indexed annuity: The payouts are tied to the performance of an index such as the S&P 500.

-Immediate annuity: Payments are typically made as a lump sum. You then begin receiving payments in 12 months or less. An immediate annuity can be fixed or variable.

-Income for life annuity: Payouts are for life, no matter what age you live to. The size of the payments depends on the account size and the life expectancy of the person holding the annuity. This type of annuity can be fixed or variable.

Annuity costs and fees

As for annuity costs, be mindful of these:

-Commissions: This is the fee that goes to the agent you work with to purchase an annuity. The commission varies based on the type of annuity and its complexity. The more complex, the higher the commission will be. It can range from 1% to 8%, according to Annuity.org.

-Administrative fees: These are the fees that cover the cost of managing the annuity, recordkeeping, and processing transactions, in addition to other administrative costs. This fee is typically under 0.3% of the value of the annuity each year.

-Surrender charge: A penalty that’s deducted from the account value if money is withdrawn from the annuity prematurely. The surrender charge can vary based on the insurance company, the age of the annuity, and the amount withdrawn.

-Rider: These are additional benefits you can add to your annuity for a fee. Common types of annuity riders include living benefits and death benefits.

Consider professional help from a financial adviser

When shopping for annuities, Ornstein encourages clients to ask advisers and salespeople what conflicts of interest they have, how they are compensated, and whether or not the adviser is a fiduciary. A fiduciary doesn’t get paid by the insurance provider and therefore doesn’t have any incentive to recommend one annuity over another. An annuity broker may. Therefore, it's important to find this out before purchasing an annuity.

While you can purchase an annuity via a marketplace, annuities should be integrated into your broader financial plan. Therefore, working with a financial adviser may be your best option.

“While an annuity specialist may have expertise in annuities, that might not be the same person who can take a holistic look at an individual’s short, medium, and long-term goals,” says Ornstein. “Many things go into a comprehensive financial plan. I would encourage clients to talk to a holistic financial adviser first and see if an annuity is right for them.”

Don’t lose sight of the goal

At the end of the day, when considering if you should purchase an annuity, don’t lose sight of the end goal: managing risk in retirement. The key is to have a diversified income stream that addresses the four risks you’ll face: market risk, longevity risk, cognitive risk and annuity risk.

“That doesn’t mean put all your money into an annuity,” says Ornstein. “It means having a broad, diversified strategy for taking income. An annuity should be a strong consideration.” But it might not be the be-all end-all.

Related content

• Should You Add an Annuity to Your Retirement Portfolio?
• Are Annuities the New Safe Haven?
• Annuity Payouts: How Much Can You Get Each Month?

However, it's just a matter of comparing and selecting annuity options, plugging in the right information, then shopping for the best deals.

Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

The amount of monthly income depends on:

Timing. You can choose payments to start now or in the future.

Age and gender of the annuitants (the individual or individuals who will receive the income) at the time payments start.

Policy features. Do you want your heirs to get cash back if you die before the annuity has repaid the premium deposit you paid? If so, you would choose the cash-refund option. Another key choice is whether you select a lifetime payout or a set term, such as 15 years.

Number of annuitants. Will the annuity cover one life or two (usually a husband and wife)?

The insurance company you choose. Life insurance companies underwrite annuities, and it's a competitive market. Some deals are significantly better than others.

Type of annuity. An income annuity is a contract that produces only income. This type produces the most income because it doesn't normally have any cash surrender value, and a portion of the payments during the initial years includes the return of your own money.

Annuities pay more now than they did a few years ago because interest rates have shot up. Insurers invest annuity premiums mostly in high-quality bonds, mortgages and dividend-paying stocks.

This article covers only income annuities. In my next article, I'll show how much income you can get from multi-year guaranteed annuities (MYGAs) and indexed annuities.

Below are some examples that should provide a good idea of how much income you can get in the current market.

Immediate income annuity examples

With an immediate annuity, you'll typically start receiving monthly payments within about a month of purchase, but you can delay them up to a year. The examples here assume you'll start payments immediately.

Here's what you can get, as of June 2025, for a $200,000 premium deposit of nonqualified funds (money that's not in your IRA or other qualified plan). These examples are based on the highest-paying companies in our database.

Single-life payout, lifetime annuity, male age 65, no cash-refund option

The monthly lifetime income is $1,314.39, which includes $481.06 of taxable income and $833.33 of nontaxable return of principal.

After 20 years, at age 85, he will have recouped his initial premium deposit, and the income will become fully taxable.

With the cash-refund option, the monthly income would be less — $1,256.36.

Lifetime payments are the most popular option for good reason: They provide longevity insurance. Payments continue at the same level for as long as you live, even after the insurance company has repaid the entire principal.

Sometimes, there's a good reason not to take lifetime payments and get a higher income for a shorter period. The buyer might know he'll get a large inheritance or be able to tap a generous pension within the next 10 years.

Instead of a lifetime annuity, he chooses a 10-year period-certain annuity, which would pay $2,067.56 a month.

This type of annuity guarantees income for the entire term. If he dies after six years, for example, his beneficiary will get the income for the remaining four years.

Joint-life payout, lifetime annuity, male age 65 / female age 65, no cash-refund option

With the joint-life option on a lifetime annuity, payments will continue as long as one spouse is alive. Monthly income is $1,151.48, of which $484.77 is taxable and $666.71 is nontaxable.

After 25 years (at age 90) the initial premium deposit will have been repaid, and payments will become fully taxable.

With the cash-refund option, monthly income would be $1,136.31.

Deferred income annuity examples

With a deferred income annuity, you can choose when you want your payments to start, as long as you begin taking them by age 85.

You'll get a larger income by deferring them, but, of course, you won't be collecting them for as long. Again, we're assuming nonqualified funds.

Single-life payout, lifetime annuity, male age 65, no cash-refund option, income deferred to age 75

Monthly lifetime income will be $3,124.36. This includes $1,791.03 of taxable income and $1,333.33 of nontaxable return of principal. After 12½ years, at age 87, he will have recouped his initial premium deposit, and the income will become fully taxable.

With the cash-refund option, monthly income would be $2,841.67.

Joint-life payout, lifetime annuity, male age 65 / female age 65, no cash-refund option, income deferred to age 75

Monthly lifetime income payment will be $2,359.77 ($1,349.67 taxable; $1,010.10 nontaxable).

After 16½ years (at age 91), the couple will have recouped their initial premium deposit, and payments will become fully taxable.

With the cash-refund option, monthly income would be $2,328.43.

Looking for expert tips to grow and preserve your wealth? Sign up for Adviser Intel (formerly known as Building Wealth), our free, twice-weekly newsletter.

What about inflation?

Income annuities typically offer set payments, so there's a risk that future income might not be adequate many years from now if inflation runs high.

One way to counteract this is to buy a bigger benefit level, especially if you're choosing a deferred income annuity, in which the funds grow untouched until payments begin. That's the simplest approach.

Another way is to buy an inflation-adjusted annuity. You can buy a fixed annual percentage increase or choose an annuity that adjusts payments based on annual changes in the consumer price index.

Of course, in return for inflation protection, you'll get lower initial payments for the same deposit.

Joint-life payout, male age 65 / female age 65, no cash-refund option. Income deferred to age 75. Inflation-adjusted annuity that provides a 2% annual increase in the monthly income amount after payments have started.

Monthly lifetime income payment will start at $2,010.20 ($1,147.79 taxable; $862.41 nontaxable). After 20 years, at age 95, the monthly income amount will have grown to $2,987.05.

Joint-life payout, male age 65 /female age 65, no cash-refund option. Income deferred to age 75. Inflation-adjusted annuity that provides a 3% annual increase in the monthly income amount after payments have started.

Monthly lifetime income payment will start at $1,846.48 ($1,051.29 taxable; $795.19 nontaxable). After 20 years, at age 95, the monthly income amount will have grown to $3,334.95.

To determine if an inflation-adjusted income annuity is right for you, you need to make assumptions about your expected longevity.

You should also make a detailed analysis to compare a level-pay income annuity to an inflation-adjusted annuity to determine at what age the inflation-adjusted annuity crosses over and provides more total benefits.

Level-pay annuities typically look more attractive in the earlier years. But if you live a long life, the inflation-adjusted annuity can provide better total payouts if you're willing to wait that long.

As you can see, income annuities offer many options, and the payouts vary dramatically. These unique vehicles, especially lifetime annuities, can uniquely provide peace of mind and assurance that you'll never run out of money, no matter how long you live.

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. He is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at www.annuityadvantage.com or by calling 800-239-0356. There are no fees or charges for the firm's services; 100% of the client's money goes to work for them in their annuity.

Related Content

• What You Don't Know About Annuities Can Hurt You
• How Are Annuity Withdrawals Taxed?
• Five Things About Annuities That May Surprise You
• A Financial Adviser's Defense of Annuities: They're Just Misunderstood
• Should You Add an Annuity to Your Retirement Portfolio?

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Gone are the days when the 60/40 portfolio and the trusty 4% rule provided enough confidence to sleep soundly at night.

Instead, retirees and near retirees are turning to more engineered strategies for dependable income — ones that blend structure, flexibility and peace of mind.

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

Two key tools leading the charge in 2025: the modern bucket strategy and — brace yourself — the much-debated A word, annuities.

Let's talk about the A word

Annuities tend to stir strong opinions, kind of like pineapple on pizza or which way to hang the toilet paper. Some folks swear by the predictability they provide, while others grimace, often due to outdated advice or poor past experiences.

But annuities have evolved. When used as part of a personalized plan — not as a standalone product — they can help address some of retirement's trickiest problems: longevity risk, market volatility and the ever-creeping cost of living.

The challenge? Sorting through the noise to figure out where they fit.

That's where we come in.

Three reasons to use the A word

Turning assets into a paycheck. Retirement isn't just about growing a portfolio — it's about turning it into income.

If a retiree gets $5,000 a month from Social Security but needs $8,000 to cover expenses, that $3,000 gap could be filled with an annuity providing guaranteed lifetime income.

At today's rates, a 67-year-old might need about $480,000 in IRA assets to generate that income for life. That's retirement income engineering in action.

Building inflation resilience. Today's fixed indexed annuities often offer market-linked growth options that can adjust your income upward over time.

That means your paycheck has a shot at keeping pace with rising costs, which is especially important in a retirement that could span 30 years or more.

Reducing emotional risk. Markets go up and down, but bills don't wait. Annuities provide a steady stream of income that can reduce the urge to panic-sell during downturns.

For risk-averse retirees, knowing a portion of their income is guaranteed can help them stay invested (and sane).

Reasons to be cautious using the A word

As powerful as annuities can be, they're not magic. Here are a few caveats:

Overconcentration limits flexibility. While many annuities allow for limited penalty-free withdrawals (usually 5% to 10% annually), they aren't nearly as liquid as brokerage accounts. Putting too much into annuities can leave you cash-strapped when flexibility matters most.

Misplaced in a Roth IRA. Roth IRA accounts shine when used for high-growth investments. Using them for slow-growing annuities can water down their tax-free potential.

Misaligned expectations. If you want stock market-level returns without risk, you might be disappointed. Most income annuities offer moderate returns (think 3% to 5%) in exchange for guaranteed income.

Buying without a plan. Annuities should never be bought in isolation. They work best when integrated into a broader financial strategy that accounts for taxes, withdrawal sequencing and long-term income needs.

Modernizing the bucket strategy in 2025

Think of bucket strategies as the plumbing of your retirement plan — efficiently delivering water (income) where and when you need it.

In 2025, bucket planning has grown up. The basic framework still stands — dividing assets based on when you'll need them — but the tools and tactics have gotten smarter.

Here's a breakdown:

• Bucket one: Immediate needs (years zero to three)
  This is your faucet. Think cash, money market funds or short-term CDs. It covers the bills without forcing you to sell investments during market dips.
• Bucket two: Near-term growth (years three to seven)
  Picture this as your refill tank. It might hold short-term bond ETFs, TIPS or balanced funds — assets with moderate risk designed to replenish bucket one as needed.
• Bucket three: Long-term growth (years seven-plus)
  This is your reservoir — slow to fill, but critical during dry spells. Stocks, real estate and diversified ETFs live here. They're designed to grow and refill the other buckets over time.

Visualize your retirement plan as a three-chamber water tank. Chamber one feeds your daily faucet. Chamber two flows into chamber one during dry periods. Chamber three fills slowly but keeps the entire system running long term. That's the magic of a well-engineered bucket plan.

Where buckets and annuities work together

This isn't an either-or situation. Some of the best retirement income plans use both annuities and buckets in tandem.

Annuities can serve as a reliable foundation, ensuring essential expenses are covered no matter what the markets do.

Meanwhile, the bucket strategy provides structure, flexibility and growth potential to handle everything else.

Looking for expert tips to grow and preserve your wealth? Sign up for Building Wealth, our free, twice-weekly newsletter.

Used wisely, annuities can fund the first bucket (income now), while the rest of the portfolio focuses on growth and future needs.

It's a "belt and suspenders" approach — redundant by design but comforting when times get rough.

What you can do now

If you're nearing or already in retirement, here are three steps to help engineer more reliable income in today's interest rate environment:

Quantify your income gap. Add up guaranteed income (such as Social Security or pensions) and compare it with your monthly needs. Knowing your gap helps determine whether you need an annuity or just a smarter withdrawal plan.

Reassess your buckets. Are your short-term needs covered with safe, liquid assets? Are your long-term assets still positioned for growth? Review your allocation based on your spending timeline and today's higher yields.

Stress-test your strategy with a fiduciary. Work with an adviser to model different outcomes for market crashes, inflation spikes and longevity. A fiduciary can help integrate annuities, buckets and tax strategies into a cohesive plan — not just sell you products.

Final thoughts

Retirement planning in 2025 isn't about chasing returns or clinging to old rules. It's about building a system — an income engine — that balances predictability, flexibility, and peace of mind.

Annuities and bucket strategies can be two powerful tools in that system. Used together, they help answer the question every retiree faces: "Will I have enough — and will it last?"

With the right plan in place, you won't just retire, you'll retire with confidence.

Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser. Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products. They do not in any way refer to investment advisory products. Rates and guarantees provided by insurance products and annuities are subject to the financial strength of the issuing insurance company; not guaranteed by any bank or the FDIC.

Related Content

• Should You Add an Annuity to Your Retirement Portfolio?
• A Financial Adviser's Defense of Annuities: They're Just Misunderstood
• Confused by Annuities? Making Sense of the Different Types
• What You Don't Know About Annuities Can Hurt You
• Is an Annuity Worth It? Tax Pros and Cons

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

If you adopt a plan that combines assets to the best effect, our new IRA study shows average starting income of an IRA4Income plan of 50% to 75% over traditional planning.

Before describing the planning methodology and our study of the results, let’s describe these assets and answer the question, “Why haven’t I heard about this before?”

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

What are these assets? And why haven’t we seen this before?

Are we talking about high-yield bonds, complex annuities or other exotic investments? Nope. In fact, the elements are a little boring:

• An IRA account invested 50/50 in fixed income and stock investments
• Lifetime income annuities with income starting immediately or in the future
• A home equity conversion mortgage (HECM) that generates income and liquidity

What’s unique is that the asset classes come from three separate financial businesses — investments, insurance and mortgages — and the Go2Income planning methodology (a little like AI) has figured out how to put the pieces together for maximum benefit, for all retirement ages and objectives.

If you haven’t heard about this method, it’s because the different businesses operate quite separately, sales forces have their own requirements for what they can sell you, and combining these asset classes requires complying with multiple regulations.

That means most advisers can’t, or won’t, talk about the asset classes they don’t represent.

Consumers don’t share those restrictions and can explore something like my company’s IRA4Income method, which, besides the huge increase in income, creates more liquidity than the IRA alone. By age 85, it can provide nearly double the IRA by itself.

That increase could help to cover, for example, the long-term care costs that 40% of retirees will incur.

How well do these assets have to perform?

Using our Go2Income planning technology, we’ve put the assets together into IRA4Income by first combining two programs: IRA2Income, made up of investments and immediate annuities, and HomeEquity2Income, made up of a HECM and a QLAC deferred-income annuity. (For more on this combo, see my article How Combining your Home Equity and IRA Can Supercharge Your Retirement.)

As you’ll see below, these programs can also be set up on their own to provide benefits, even if you don’t seek the maximum win-win of complete integration into your retirement income plan.

Our study analyzes results for different ages, marital status, IRA savings amounts, value of home and market conditions.

The old rule about taking $40,000 as starting income from your $1 million IRA has been upended, with starting income amounts that range from $60,000 to $80,000, depending on the case.

Highlights from the study

Each case study starts with $1 million from a rollover IRA and $1 million in home value. Besides starting income, the study looks at liquid savings and legacy, making sure we consider all three key retirement objectives. Starting income grows by 1.5% per year until age 85.

Set out below are key results for sample cases, as well as key planning assumptions:

62-year-old man

• Starting income: $70,000
• Total liquid savings at 85: $763,000
• Total legacy at 95: $2,597,000

65-year-old woman

• Starting income: $69,100
• Total liquid savings at 85: $977,000
• Total legacy at 95: $2,659,000

70-year-old couple

• Starting income: $68,200
• Total liquid savings at 85: $1,138,000
• Total legacy at 95: $2,583,000

75-year-old couple

• Starting income: $70,700
• Total liquid savings at 85: $1,115,000
• Total legacy at 95: $2,364,000

Key planning assumptions: Stock market investment returns: 8%; fixed income total return: 5%; allocation to annuities: 30% in an immediate annuity, 20% in a QLAC deferred-income annuity; HECM adjustable interest rate: 7.75%.

Too good to be true?

As with any retirement plan, the study results are based on certain assumptions about the performance of each asset class. The most important aspect is that no one assumption drives the results:

• The lifetime annuity is fully guaranteed and is issued by a highly rated insurance company
• The HECM interest rates are adjustable within limits, but with a large portion of the mortgage interest paid by the QLAC deferred-income annuity
• The IRA investment assumptions reflect an equity return that is lower than average long-term market returns

In setting up a personalized plan, you can customize the assumptions to your risk tolerance.

An IRA4Income plan in more detail

Let’s look at our example investor, Sally, age 70, who now has $1 million in rollover IRA savings and a home worth the same amount. She wants the maximum amount of income, within reason, and liquidity for long-term care costs.

Fortunately, Sally has read our articles and realizes her home is a valuable asset and that she can consider it as a way to ensure her money not only lasts for her lifetime but also provides a resource for unplanned expenses.

The charts below demonstrate how IRA4Income can bolster her spendable income (starting at $71,000) while providing access to savings that could pay for large unplanned expenses after age 85. Her total liquid savings under this plan are nearly $1 million at age 85 and will continue to grow thereafter.

What about taxes? What about risk?

Sally is not obsessed with taxes but would like to understand whether there’s any portion of her income, unlike the IRA, that’s free from tax. She’s pleased that, until 85, about 20% of her income is tax-free.

If we measure risk by the uncertainty of the value of the investment portfolio, a 100% IRA is all at risk, while with IRA4Income, only about 50% is subject to market risk.

If you’re nervous about plunging in all at once, the parts of an IRA4Income plan can be put in place one at a time, following your own timeline.

Looking for expert tips to grow and preserve your wealth? Sign up for Building Wealth, our free, twice-weekly newsletter.

As pointed out above, you could start by combining investments with an immediate income annuity (IRA2Income) or access the value of your home with a HECM and a QLAC.

At the same time, you might consider whether to delay claiming your Social Security benefits to get larger payments.

You might be able to wait until 73 (or 75 if you were born in 1960 or later) to take RMDs (required minimum distributions) from an IRA, allowing that income source to grow.

When you consider all your options together, you have choices.

Are you ready to start now?

In these articles, we have worked to explain these financial approaches in clear language so readers can talk knowledgeably with an adviser about what steps to take and when.

Still, there are indications that some people just throw their hands in the air and resolve to live with their savings in different silos for stocks/bonds, annuities and their home.

You don’t have to do that.

Visit Go2Income to order a Go2Income plan that with IRA4Income inside can meet more of your retirement objectives. A Go2Specialist can answer questions about the plan or refer you to a qualified adviser.

Related Content

• What the HECM? Combine It With a QLAC and See What Happens
• Transform Your Retirement Plan With This Powerful Combo
• How Combining Your Home Equity and IRA Can Supercharge Your Retirement
• Is Your Retirement Solution Hiding in Plain Sight?
• How Your Home Can Fill Gaps in Your Retirement Plan
• Would a Reverse Mortgage Work for You in a Gray Divorce?

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

That infamous line, popularized by financial entertainers and clickbait headlines, has shaped a generation’s perception of annuities. But let’s be honest — most people who say it probably don’t understand how annuities work or why they exist.

As a financial adviser, I regularly hear objections like:

• “I hear they’re bad, but I’m not sure why.”
• “I can get a better return in the market.”
• “There’s no death benefit — what if I die early?”
• “Aren’t my funds locked up for 10 years?”
• “Annuities are full of high fees.”

These concerns sound reasonable. And for some annuities, they’re true. But others are misunderstood — and in today’s market, that misunderstanding can come with a cost.

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

A wake-up call for retirees

In the last 90 days, we’ve seen how fast the market can shift. Inflation, tariffs and weak GDP data have shaken investor confidence. For retirees, this kind of market volatility isn’t just stressful — it’s dangerous.

Many Baby Boomers are entering retirement without pensions, relying instead on 401(k) plans — vehicles never designed to serve as lifetime income sources.

That means the burden of generating reliable income falls on portfolios that may be vulnerable to market swings, rising taxes and behavioral missteps.

That’s where annuities — when used thoughtfully — can provide stability and confidence.

What annuities actually do

Annuities aren’t one-size-fits-all, but they can address key retirement risks:

• Sequence of return risk. This is the danger of withdrawing during a market dip, which can permanently impair a portfolio
• Longevity risk. With more retirees living into their 90s, outliving savings is a growing concern
• Behavioral risk. Annuities help reduce panic-driven decisions by securing foundational income
• Inflation risk. Some annuities offer rising income features to help keep up with cost-of-living increases
• Taxation risk. Deferred growth lets you control when to recognize income, which can support tax strategy

Some annuities are designed for principal protection, others for lifetime income and others for modest, consistent growth. Certain annuities even allow for partial internal Roth conversions before triggering income.

Used strategically, annuities can serve as a “personal pension,” allowing other assets to stay invested longer and grow without being tapped prematurely.

The drawbacks of annuities

No investment is perfect, and annuities are no exception. Here are common downsides to watch for:

• High fees. Some annuities — particularly variable contracts — come with layers of costs (mortality and expense fees (M&E), rider fees, investment subaccount costs).
• Liquidity limitations. Most annuities have surrender periods, meaning withdrawals above a certain amount can trigger penalties in the early years.
• Complexity. Features like income riders, caps, spreads and participation rates can be confusing.
• Inflation risk. Not all annuities offer inflation protection. Some provide level payments that lose purchasing power over time.
• Tax treatment. Withdrawals are taxed as ordinary income, not capital gains. That can matter in taxable accounts.

The key is understanding what you’re buying — and whether it fits your needs.

What to look for in an annuity

If you're considering adding an annuity to your retirement plan, keep these seven practical steps in mind:

1. Define your goal. Are you looking for lifetime income, principal protection, growth or tax deferral? Your goal should drive the type of annuity you explore.

2. Understand the time commitment. Know the surrender period and when you’ll need access to the funds.

3. Compare fees and features. Ask for a fee summary. Low-cost fixed annuities may suit some, while others may need riders that justify higher expenses.

4. Vet the insurance carrier. Guarantees are only as strong as the insurer. Look for companies rated A or better by AM Best, Moody’s or S&P.

5. Ask about income flexibility. Some contracts allow flexible start dates, inflation-adjusted income or joint payouts with spousal continuation.

Looking for expert tips to grow and preserve your wealth? Sign up for Building Wealth, our free, twice-weekly newsletter.

6. Coordinate with your overall plan. An annuity should complement — not replace — other investments. Think of it as a strategic building block, not the whole foundation.

7. Work with a fiduciary. Choose an adviser legally obligated to act in your best interest, not someone just selling a product. (You can learn more about this in the article The Financial Fiduciary Standard Explained.)

The bottom line

Annuities aren’t inherently good or bad — they’re tools. For retirees lacking pension income or concerned about market volatility, they can offer a sense of security that investments alone may not.

But like any tool, they work best when used properly, for the right job and with a clear understanding of the trade-offs.

As you transition from the accumulation phase of retirement (growing wealth) to the decumulation phase (using it), it’s critical to work with someone who understands the shift — and how to structure income that lasts, regardless of what the market or tax code throws your way.

If an annuity can help you retire on your terms, sleep better at night and live with more freedom, it might be time to rethink your views on them.

Index or fixed annuities are not designed for short-term investments and may be subject to caps, restrictions, fees and surrender charges as described in the annuity contract. Guarantees are backed by the financial strength and claims-paying ability of the issuer.

Related Content

• Should You Add an Annuity to Your Retirement Portfolio?
• Why So Many Experts Consider Annuities a Win for Retirees
• Annuity Red Flags to Watch Out For
• What You Don't Know About Annuities Can Hurt You
• How Are Annuity Withdrawals Taxed?

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

We offered up several ideas about using a QLAC as part of your plan for retirement income. One was to use a portion of QLAC lifetime payments to pay interest on a reverse mortgage called a HECM, resulting in a combination called HomeEquity2Income, or H2I.

The twofer benefits of a QLAC and a HECM

I’m a numbers guy, and I follow the patter of a former local New York sports broadcaster who used to urge, “Let’s go to the videotape!” for details of the game just played.

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

My primary reason for favoring a combination of a QLAC (qualifying longevity annuity contract) and a HECM (home equity conversion mortgage) is what I call the twofer rule applied to both components.

QLAC twofer:

• Save taxes by deferring distributions from a rollover IRA account until age 85
• Lifetime income, also called longevity protection

HECM twofer:

• Additional tax-free income
• New source of liquidity for unplanned or uninsured expenses

To get an idea of how much income a QLAC can generate, you can get a personalized quote using this QLAC calculator. That income, when combined with a HECM as part of your retirement planning process, can help you achieve your retirement goals:

• Lifetime income
• Liquidity to cover long-term care
• A financial legacy for your heirs

And at the same time, you can defer taxes and lower risk.

Here's the triple play when you combine a QLAC and a HECM: By taking care of longevity protection and using some of that QLAC income to pay HECM interest, you dramatically increase the liquidity to pay for long-term care expenses, which a lot of us will face.

A recent report by Morningstar shows that about 45% of all baby boomers will need long-term care — ranging from in-home services to a nursing home — in retirement. The QLAC-HECM combination in the form of H2I allows you to anticipate a long life and also pay for that LTC.

Now, let’s do the numbers and focus on how the right combination can benefit retirees.

Sally's current situation

Sally, 70, has a traditional IRA worth $1 million invested in a stock-and-bond portfolio. She fully owns her home, which has a value of about $650,000. She’s reevaluating her financial situation, particularly with regard to long-term care expenses.

Sally’s adviser told her that with her income spending starting at around $60,000 per year, the IRA alone should last until age 95 if she is careful. (Unplanned withdrawals would upend that plan.)

Having read our previous articles about the benefits of adding guaranteed lifetime income, she considered adding a single payment immediate annuity (SPIA) contract to reduce the risk of running out of money.

She created a plan with a 30% allocation to a SPIA and a 50/50 split between equities and fixed income for the balance. Under this plan, her starting income increases to $63,500, and her money doesn’t run out.

While the SPIA contract in Sally’s plan went a long way to address the “don’t run out of money” issue, she recognized that the only liquid assets would be her rollover IRA account, which she might need for planned and unplanned expenses.

Looking for expert tips to grow and preserve your wealth? Sign up for Building Wealth, our free, twice-weekly newsletter.

Her liquid IRA account, starting at $1 million, didn’t run out, as she found out when she “tested” the plan, but it wasn’t adequate to pay for any substantial amount of unplanned or uninsured expenses.

She needs more help in adding liquidity to her plan, especially because when she takes money out of the IRA to pay for those expenses, her remaining savings will produce even less income.

Adding the H2I strategy to her retirement plan

Sally realizes her home is a valuable asset and that she can consider it as a way to ensure her money not only lasts for her lifetime, but also provides a resource for unplanned expenses.

She could simply apply for a reverse mortgage in the form of a federally endorsed HECM that provides not only access to cash but also an increasing line of credit during the life of the loan.

However, the H2I combination provides even greater benefits. That’s because if she converts some of her IRA savings to a QLAC, a form of deferred income annuity, she can use a portion of that income to pay interest on the HECM and preserve more of her liquidity and her ability to leave a legacy to heirs.

The charts demonstrate how H2I can bolster spendable income while providing access to a HECM line of credit that can finance large unplanned expenses after age 85.

Her total liquid savings under this plan reach $968,000 at age 90. And she can draw on it without tax if it comes from an H2I line of credit.

A simple explanation of advantages

Some of you may be skeptical about the benefits that a QLAC and then a HECM can offer together. Here’s a simple description of what you saw above:

1. A HECM taps into the “largest savings source” of retirees (your house, per experts):

• Tax-free cash flow until age 85 from HECM drawdowns
• Finds the liquidity missing from many plans

2. A QLAC provides longevity protection in two ways:

• Increases your guaranteed lifetime income
• Pays a portion of HECM interest after 85 to grow liquidity and legacy

3. A QLAC and a HECM together provide increases in income and liquidity

4. Importantly, that liquidity from a HECM comes without income taxes

And none of the above is subject to today’s stock and bond market volatility.

Visit Go2Income to order a Go2Income plan that with H2I inside can meet more of your retirement objectives. A Go2Specialist can answer questions about the plan or refer you to a qualified adviser.

Related Content

• Transform Your Retirement Plan With This Powerful Combo
• How Combining Your Home Equity and IRA Can Supercharge Your Retirement
• Is Your Retirement Solution Hiding in Plain Sight?
• How Your Home Can Fill Gaps in Your Retirement Plan
• Would a Reverse Mortgage Work for You in a Gray Divorce?

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

With proper planning, however, you can easily avoid surrender charges. The key is knowing how much liquidity or access to funds you may need in your annuity.

That depends on your circumstances: how much you have in liquid savings, your other income sources, your health and how much spending flexibility you have.

Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

Some people need minimal unpenalized liquidity in an annuity. Retirees who have ample guaranteed income from employer pensions or IRAs and Social Security as well as good savings may need little flexibility.

Most financial experts recommend having the equivalent of several months' expenses in fully liquid savings or investments.

Many people, however, may need access to some of their funds for potential expenses, such as medical care or major home repairs, or even splurging on a new car or big vacation.

If you can’t afford to or don’t want to tie up any of your money, an annuity won’t be a good choice for you.

How surrender periods work

By understanding the surrender period and choosing annuities that provide sufficient access to your money, you can avoid surrender charges.

Here’s how the surrender period works for the most popular type of fixed-rate annuity, the multi-year guaranteed annuity (MYGA). Like a bank certificate of deposit, a MYGA pays a set guaranteed interest rate for a term of anywhere from two years to 10 years.

For instance, let’s say you have a seven-year MYGA that lets you take out 10% of the annuity value without penalty each year after year one. The surrender charge for any withdrawals above the allowed amount might start at 9% in year one and decrease by 1 percentage point each year after that.

There’s also usually a market-value adjustment, which essentially acts as an extra charge that can apply to early withdrawals if interest rates have gone up since you purchased the annuity.

If there’s a big interest-rate spike, the MVA could dwarf the usual percentage-based surrender charge.

While 10% penalty-free withdrawals are common, provisions vary. Some annuities may allow 5% to be withdrawn, and a few don’t allow any early withdrawals.

Make sure to understand the details before you buy. Sometimes you can get a higher withdrawal percentage in exchange for a slightly lower rate. That can sometimes be worth the peace of mind and greater financial flexibility.

If the annuity is in a traditional IRA, you may want sufficient penalty-free withdrawals to cover your required minimum distributions (RMDs), which start when you reach age 73.

Some annuities have enhanced withdrawal provisions, commonly referred to as living benefits, which waive penalties if you need to withdraw money for events such as an extended nursing home stay or a terminal illness.

'Laddering' also offers more access to funds

Laddering is a term originally applied to investing in bonds with different maturities. You can also stagger terms for MYGAs instead of putting all your money in one basket. Laddering can give you both good current income and future flexibility.

It also reduces the risk that you’ll ever be hit with a surrender charge, because once the term ends, the surrender charge of course no longer applies. You’ll get more frequent access to maturing funds without the possibility of penalties.

For example, you could create a ladder of MYGAs with three-, five- and seven-year terms. Then you’ll have complete access to about a third of your money three, five and seven years from when you created the ladder.

Three years from now, you’ll be able to roll those proceeds of the first annuity tax-free, via a 1035 exchange, into any other annuity that looks most attractive then.

If rates have moved higher, you’ll be able to get that new higher rate. The risk is that rates will have gone down in the interim — but you will have locked up most of your money in five- and seven-year annuities with higher rates.

But if you want or need the money then, you don’t have to do an exchange. If you decide to surrender your annuity (meaning cash it out), all of the accumulated interest you receive will count as taxable income, and if you’re younger than 59½, it’s normally subject to a 10% IRS penalty.

Looking for expert tips to grow and preserve your wealth? Sign up for Adviser Intel (formerly known as Building Wealth), our free, twice-weekly newsletter.

The best laddering strategy depends in part on what the interest rate curve looks like at the time you’re creating the annuity ladder.

Today, the MYGA rate curve is flattish, so you won’t give up much income by putting some of your money in shorter-term annuities. You can get up to 5.85% on a three-year annuity, 6.05% on a five-year term, and 6.00% on a seven-year product as of May 2025.

Surrender periods apply to other types, too

Fixed indexed annuities have become popular in recent years. They often allow 10% withdrawals annually and have declining surrender penalties for the first seven to 10 years, and may allow access to funds through annuitization or optional income riders.

In general, they’re better suited for long-term goals than flexible cash access.

Variable annuities typically offer more access than indexed annuities. A few even allow unlimited penalty-free withdrawals. But, unlike fixed annuities, they are subject to market risk and frequently come with hefty ongoing fees.

If your variable annuity is mostly invested in stock funds, the value could be down when you need funds and you could take a loss, even if you don’t pay a surrender charge.

Finally, income annuities (deferred and immediate) have the least flexibility. You’ve placed your money with an insurance company in exchange for a current or future stream of guaranteed income.

I’m a strong advocate of income annuities, but anyone considering purchasing one should understand that they typically have no cash value and don’t permit withdrawals. In some cases, you may be able to move up the date when you begin receiving regular payments.

The bottom line: Plan not to pay

Paying a surrender charge amounts to giving away your money to the annuity company. Similarly, paying the IRS penalty for withdrawals before 59½ is a gift to Uncle Sam, who won’t even send you a thank-you note.

With proper planning, there’s no need to ever get stuck with either bill.

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at www.annuityadvantage.com or by calling (800) 239-0356. There are no fees or charges for the firm’s services; 100% of the client’s money goes to work for them in their annuity.

Related Content

• How Are Annuity Withdrawals Taxed?
• What You Don't Know About Annuities Can Hurt You
• Annuity Payouts: How Much Can You Get Each Month?
• The Key to Choosing the Right Annuity: Do Your Homework
• Fixed Index Annuities as Retirement Tools: Pros and Cons

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Kiplinger Readers' Choice Awards: Annuity Providers

Annuities are contracts that allow you to pay up front or over time in exchange for the opportunity to create a steady stream of income in retirement; they may be fixed or variable, and they may provide income immediately or in the future. We asked readers to assess their annuity provider based on customer service, their overall satisfaction with the company and how likely they are to recommend it to others.

OVERALL WINNER: New York Life

Outstanding for:

• Customer service
• Most recommended
• Overall satisfaction

Readers rated New York Life's annuities highly in all three categories we asked them to judge. Several respondents expressed appreciation for the strength of the firm’s communication with clients. And one reader noted that New York Life’s annuities offer “very competitive rates” compared with other annuities on the market.

New York Life has been serving clients for 180 years and holds the highest financial-strength ratings from all four major credit rating agencies: A.M. Best (A++), Fitch (AAA), Moody's (Aa1), and Standard & Poor's (AA+). Its annuity products include fixed deferred annuities, variable annuities and immediate income annuities.

Allianz Life Insurance Company of North America

Outstanding for:

• Customer service
• Most recommended
• Overall satisfaction

Allianz Life offers two main categories of annuities:​ fixed index annuities and registered index-linked annuities, also known as buffered annuities. While the former provides potential for growth linked to market indexes with principal protection, the latter offers higher growth potential with some market risk, featuring various index options and crediting methods.​

Multiple readers pointed out that Allianz Life annuities offer great sign-up bonuses. "Their bonuses for annuities are amazing. I opened six months ago and got a 47% bonus annuity,” says one reader. With these sign-up bonuses, a certain percentage of the initial premium is credited to the annuity's value, typically lasting about 18 months.

MassMutual

Outstanding for:

• Most recommended
• Overall satisfaction

MassMutual offers the gamut of annuity products, including fixed annuities, fixed-index annuities, registered index-linked annuities and immediate annuities. MassMutual also holds some of the highest ratings from all major credit rating agencies: A++ from A.M. Best, AA+ from Fitch, Aa3 from Moody’s, and AA+ from Standard & Poor’s.

Nationwide

Outstanding for:

• Customer service

Nationwide earned accolades for its customer service. The firm offers an array of annuity products, including fixed annuities, fixed-indexed annuities, registered index-linked annuities and immediate annuities. Some contracts allow free withdrawals up to a specified percentage annually without surrender charges.

TIAA

Oustanding for:

• Customer service

“Carnegie provided a great benefit to the nation's teachers when he set up TIAA!” says one reader.

Originally established in 1918 to provide retirement services to educators, TIAA has since expanded its offerings to include a broader range of nonprofit and public-sector employees, including professionals in academic, research, medical, government and cultural fields. TIAA earned high ratings from readers, particularly for customer service.

TIAA's annuity offerings, such as the TIAA Traditional Annuity, are available through employer-sponsored retirement plans such as 403(b)s and 401(k)s, as well as IRAs.

Kiplinger Readers' Choice Awards Categories

• Readers' Choice Full-Service Brokers
• Readers' Choice Wealth Management
• Readers' Choice Cash Back Credit Cards
• Readers' Choice Travel Rewards Credit Cards
• Readers' Choice Airline Credit Card Rewards Programs
• Readers' Choice Hotel Credit Card Rewards Programs
• Readers' Choice National Banks
• Readers' Choice Internet Banks
• Readers' Choice Auto Insurance Companies
• Readers' Choice Homeowners Insurance Companies
• Readers' Choice Tax Software
• Readers' Choice Peer-to-Peer Payment Services

This record-setting growth in annuities comes during a three-month period that is typically slow for the annuity industry. While January saw sales dip at a rate not seen in a couple of years, sales picked up in February and March. The increase in sales has been driven by fear and uncertainty about the economy and interest rates that are still favorable for this type of product, says Keith Golembiewski, director of annuity research at LIMRA, the trade association for annuities.

“In mid-February and March, we really saw significant sales growth with a lot of the focus on a flight to safety,” says Golembiewski, noting investors were also reacting to the potential for the Federal Reserve to cut rates later in 2025. By purchasing a fixed-rate annuity, investors can lock in rates before they potentially decline.

Unlike growth stocks, annuities tend to perform better when interest rates rise. Just like CDs and money market accounts, the higher the rates are, the better the payout you’ll receive.

With interest rates on fixed annuities around 6%, the environment for the product is still favorable. That may change later in the year. The Federal Reserve has signaled it could cut interest rates, with the market anticipating two reductions this year. If President Donald Trump has his way, interest rates will fall further, which would be bad news for annuity investors.

“Lower rates mean lower returns on annuities,” says Michael Santiago, senior financial editor for Annuity.org. “Locking in a fixed rate now is part of what’s drawing attention to annuities. It allows investors to secure returns before potential rate cuts.”

Fixed-rate annuities are driving the growth

During the first quarter, LIMRA reported total fixed-rate deferred annuity sales were $39.5 billion. While that is down 8% year-over-year, fixed-rate deferred annuities were the main driver of annuity sales growth, accounting for close to 38% of the total annuity market during the first three months of the year.

Sales of fixed-rate deferred annuities jumped in March among investors looking to avoid volatility in the market and get a better return than with a CD.

With a fixed-rate deferred annuity, you can save money and grow it at a fixed interest rate over time before you start receiving payouts.

Investors are looking for a safe-haven

Another reason why older investors and retirees have been turning to annuities is market volatility brought on partly by the Trump administration's tariff policies.

Only a few weeks ago, the markets fell over a thousand points in a day over concerns about global trade wars; stocks then gained more than 3,000 points on another day when those concerns appeared to dissipate.

With tariffs on, off, back on and off again, and with talk of a recession, stagflation or none of the above, it is creating uncertainty and volatility. Investors seeking downside protection will turn to safer products like CDs and annuities to cushion any potential blow.

“There are a lot of unknowns," says Golembiewski. "What’s happening in the job market? Is inflation going up or down? How are the S&P 500 and the Dow Jones performing? There’s a lot of movement, a lot of volatility. A flight to safety gives clients peace of mind.”

That’s where a product like a Multi-Year Guaranteed Annuity (MYGA) comes in. It is similar to a CD but has a higher payout and can be held for longer than a CD. With MYGAs, you get a guaranteed fixed interest rate for the entire term of the annuity, which is typically up to ten years, earnings grow tax-deferred, and your initial investment is protected from any downside. Some MYGAs allow you to withdraw money penalty-free.

“It gives you downside protection,” says Michael Downing, Chief Operating Officer of Athene, the annuity provider. “You never lose your initial investment. Typically, you are getting a lot more than CD, upward of 200 basis points.”

What are the risks of owning annuities?

While the environment for annuities is still favorable, that may not always be the case. Sure, annuities can act as a haven during troubled economic times, but if the volatility gets too extreme, annuities tend to perform poorly, as do other areas of the markets.

After all, if the economy fell into a recession, investors would be more focused on saving money than purchasing an annuity, says Golembiewski.

“Extreme volatility would indicate some recession concerns that would have an impact on the annuity market,” he said.

The same goes for drastic cuts in interest rates. If the Fed surprised the markets and cut rates by more than anticipated, that could hurt sales of annuities.

Don’t act because of what ifs

At the end of the day, purchasing an annuity shouldn’t be driven by fear that rates will get cut or that the economy will fall into a recession.

Purchasing an annuity should be driven by the desire for guaranteed income in retirement, or by a belief that it represents a conservative way to get a better return than from a CD.

“Investors should consider how it fits into their long-term plan and determine if it’s a suitable fit for them,” says Santiago. “Additionally, speaking to a fiduciary advisor can alleviate the stress that often comes with financial decision making.”

Related content

• Should You Add an Annuity to Your Retirement Portfolio?
• Five Annuity Mistakes to Avoid
• Annuity Fees: Are You Paying Too Much?
• Annuity Payouts: How Much Can You Get Each Month?

Plus, depending on the annuity they purchase, they don’t have to worry about it tanking in the markets like stocks have been doing lately. It’s a big concern for millions of Americans, which is partly why annuity sales topped $100 billion in the first quarter, according to LIMRA, the insurance trade association. It's the sixth quarter in a row in which annuity sales were over $100 billion.

“Our latest Consumer Sentiment Survey shows Americans’ concern about the economy has risen sharply since January. This growing economic anxiety drove March sales results to be the second highest in history,” said Bryan Hodgens, senior vice president and head of LIMRA research.

But not all annuities are created equal. With over 1,500 products to choose from, there is certainly a risk of deception.

“The insurance companies aren’t scamming people, but annuities are complicated products,” says Ingrid Evans, an attorney at Evans Law Firm. “People don’t understand (annuities)...they are so hard to decipher that a normal person can’t figure out what’s going on with their money.”

Without a doubt, annuities are complicated and some less than scrupulous annuity brokers are using that to their advantage. From high pressure sales tactics to churning, here’s what should raise red flags when shopping for an annuity.

1. High-pressure sales tactics

Annuities tend to be sold to consumers via agents, who represent one insurance company or are licensed to sell annuities from a variety of providers. Most work off commissions, and the unscrupulous ones will resort to high pressure sales tactics to get people to buy an annuity, even if it's not the best product for them.

Red flag: If an agent uses phrases like “act now” or “limited-time offer,” that should raise red flags. When you purchase an annuity, you lock in your money for an extended period. You should not feel pressured to act.

2. Churning to get a fatter commission

Churning occurs when an agent or broker gets an investor to switch their annuity for another one, which could be more expensive or is not in the best interest of the client. The motivation is a bigger commission for the agent.

Red flag: “If you have an agent who sells you an annuity and two, three or four years later they want to sell you another annuity,” that should raise a red flag, says Evans. “You have to pay a surrender charge to go into another product that may or may not be inferior.”

The surrender charge is the penalty an insurance company charges when an annuity owner withdraws or transfers money before the contract ends. Typically the surrender fee is the most in the first year and declines each year after that.

The surrender charge can vary based on the insurance company, the age of the annuity and amount withdrawn.

3. Oversimplifying the product

Annuities are complicated, but some agents won’t present them that way. They tend to oversimplify the product, focus on the benefits, and gloss over potential negatives.

That’s particularly common in advertisements and at seminars designed to get people to purchase annuities, says Shawn Plummer, founder of The Annuity Expert, the national annuity brokerage and insurance agency. He says some of these unscrupulous brokers will hire new agents, teach them the basics of how annuities work, equip them with a script, and send them out to seminars.

Red flag: “All of my staff have to know the cons better than the pros,” says Plummer. “We want the person buying it to know exactly what they are getting.”

Plummer says that anybody buying an annuity should ask the broker what’s wrong with it, and if the broker can’t answer right off the bat and be brutally honest, it behooves the potential customer to walk away.

4. The broker asks you to send money directly to them

An annuity is a contract between the investor and the insurance company. A broker acts as the middleman, recommending and selling annuities. He or she gets a commission from the insurance company, not from the investor purchasing the annuity.

Red flag: If the broker asks you to send money to them directly, that should be a warning sign that something is amiss.

“There’s no reason” for the broker to ask you to send money directly," says Plummer. “We are an annuity expert. We don’t touch any money. It’s always between the financial institution," he says.

5. Misrepresenting annuity bonuses

Bonus annuities offer an immediate boost to the annuity balance, as either a percentage of the initial premium payments or as a first-year interest rate bonus.

This kind of annuity is designed to lure investors in; while it's not a scam, the way it is marketed to potential customers can be misleading. After all, that bonus may come with long surrender periods, high surrender charges if you withdraw the money early, more fees, lower interest rates over the life of the annuity, or a non-tangible bonus.

“Some annuity companies offer an ‘income bonus’ that is used towards the calculation of a lifetime income payment in the future," says Plummer. "It is not a value that a consumer can walk away with in a lump sum,” says Plummer.

Red flag: If you hear an advertisement on the radio or receive a flyer in the mail promising a 50% bonus with an annuity without any explanation of the strings attached, that should give you pause. That lofty bonus may be too good to be true.

Do your homework

The best way to protect yourself when shopping for an annutiy is to do your homework and learn as much as you can about this financial product before making a purchase.

If you have a financial adviser, tap that person for advice. If you work with a broker, find one that is reputable and sells annuities from a variety of firms instead of one insurance provider.

Make sure whichever insurance company you do decide to purchase an annuity from has a solid track record, sound financials, has been in the business for several years, and has a good rating from the three rating agencies: AM Best, Moody’s, and Standard & Poor’s.

“Stay away from B-rated companies,” says Plummer. “Since there are so many products to select from, there is zero reason to choose a B-rated company.”

Related content

• Annuities: Do You Need Guaranteed Income In Retirement?
• Annuity Fees: Are You Paying Too Much?
• 16 Retirement Mistakes You Will Regret Forever

No wonder.

A well-written and thoughtful op-ed in the New York Times about reducing risk in retirement did mention annuities, but to my chagrin, it didn’t bring up the value of QLACs, despite:

• Government endorsement of QLACs’ significant retirement benefits
• A competitive QLAC marketplace, with top-rated insurance carriers
• Flexible planning software that can show you how to integrate a QLAC into your retirement plans
• QLAC rates are at an all-time high ─ for a new retiree, an average of 80% better than three years ago

Check out the rates for yourself by visiting our QLAC Calculator.

Unique tax benefits plus more

Happily, you might have read my article This Underused IRA Option Offers Both Tax Benefits and Income Security to quickly learn about the basic aspects of QLACs and how they provide guaranteed income later in retirement while deferring RMD payments for a decade or more. That tax benefit can be worth $50,000 or more for a retiree who elects a maximum QLAC.

The most important uses of a QLAC, however, involve the ways you can integrate it into your retirement plan with other asset classes, including your IRA account value and home equity.

In those cases, not only does a QLAC provide income, but it also can help pay for costs like long-term health care.

This article lists multiple ways to take full advantage of a QLAC to manage retirement risk and create income for specific retirement needs and wants.

Managing retirement risks with a QLAC

We are often surprised when visitors to our site focus solely on the QLAC tax benefits and less on what these high amounts of lifetime guaranteed income can be used for.

We’re surprised because Sally, the 70-year-old woman we use as an example consumer, has a 50% chance of living to age 85 and beyond — and should need income possibly into her 90s.

She also has a similar probability of needing to cover long-term care costs occurring late in retirement. It’s better to manage risk ahead of those potential needs and create future income to address them.

Sally’s original plan. In Sally’s case, with the $1 million in her IRA account, she wants income of $60,000 per year (growing with 2% inflation) and not just the $40,000 she would take if she followed the well-known but tired 4% rule.

If she adopts a retirement plan without a QLAC and allocates 30% of her savings to equities ($300,000), with the balance to fixed income ($700,000), her starting income could be $60,000.

However, assuming a blended portfolio return of between 4% and 4.5%, she runs out of money at age 90, a scary fact that is illustrated in the charts below.

Even with the relatively low 30% allocation to stocks, she still has investment risk, and because of that will likely invest more in short-term funds with lower returns as her account begins to run low.

Sally’s plan with a QLAC. When Sally instead allocates $200,000 to a QLAC in a “laddering” strategy that adds more guaranteed income at her age 75, 80 and 85, and with $400,000 allocated to equities and $400,000 to fixed income, she does not run out.

Her IRA account decreases with RMDs she can’t escape after 85, but she still leaves a legacy because the QLAC is the source for nearly one-third of her late-in-retirement income.

To those who ask why Sally needs all that income late in retirement, we’d point to the health-related costs that she could face.

Other specific uses for her QLAC income

Once you understand the power of QLACs as evidenced above, there are multiple applications:

Provide a hedge against a reduction in Social Security benefits. Most pundits think the government will bail out the Social Security system, but the possibility remains that without government action, benefits could be cut significantly around 2033.

For those impacted, by shifting some of your IRA account value to a QLAC, you can guarantee yourself a large increase in income starting at, say, age 80 or 85. The new payments could bolster your capacity to cover bills and even splurge on the grandkids.

Charitable contributions. You’d like to continue to be charitable late in retirement, so you can earmark a portion of your QLAC payment to give to your favorite non-profit each year. The gifts are deductible, another tax benefit.

Payment of premiums on life insurance or long-term care insurance. Regular recurring insurance premiums can increase every year (and in any event can represent a large percentage of your budget), but if you stop paying these premiums, you could lose the benefit.

QLAC annuity payments are an effective way to protect your legacy for the next generation.

For instance, your QLAC income can cover the rising cost of your LTC insurance premiums, and instead of relying on savings to pay for a stay in a rehabilitation facility, let your LTC policy pay for it.

Payment of recurring caregiver expenses. The same is true for costs you may incur for a home health aide. Even when you don’t need to go to a nursing home, you may require special help at home to get over an illness or take care of your daily needs.

The extra QLAC income could pay a professional caregiver or a family member who gives up a job to provide support in this way. Again, the difference in outlay could amount to tens of thousands of dollars a year.

Payment of interest on a forward or reverse mortgage. Perhaps you are paying off a mortgage you took out at 60 for a new house or an addition to your existing house. Or you could have set up a reverse mortgage to pay other expenses.

A QLAC could pay the interest on the reverse mortgage, which means the money owed when the house is sold will not include the cumulative interest paid by a QLAC. This has the same effect on the reverse mortgage’s net line of credit. See my article A Different Way to Approach Your Mortgage in Retirement for more information on this. I will share more about QLACs and home equity in my next article.

The unexplored benefit of a QLAC

I like to say, “A QLAC doesn’t make your retirement. It makes it better.” Consumers can build a more efficient plan to free up income and increase liquidity to help them take care of the big stuff that might come up in retirement. One of the benefits of a QLAC is the most important to remember: In all cases, the QLAC income is guaranteed and continues for life.

Especially now, as the stock market has lost as much as 20% for certain indices and retirees are worried about their 401(k)/IRA account balances and resulting income, the value of a plan like Sally’s makes even more sense. You can build a version here, suited to your specific needs.

Related Content

• For Longevity Protection, Consider a QLAC
• This Underused IRA Option Offers Tax Benefits and Income Security
• How to Grow Your IRA in Retirement Rather Than Spend It Down
• Retirement Income Planning for Unfunded Health Care Costs
• Don’t Bet Your Retirement on Stocks: Follow These Four Tips

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

However, understanding their tax implications is essential to helping ensure optimal client outcomes. Proper planning around annuity taxation helps prevent surprises and supports the overall goal of financial security annuities aim to deliver.

By diving into key aspects of annuities and their tax consequences, advisers will be better equipped to make these unique retirement income tools work smarter for clients.

Types of annuities and their tax profiles

Annuities come in several forms, and their tax treatment varies significantly. Here’s what financial advisers need to know about the main types.

1. Qualified annuities

What they are. Funded with pre-tax dollars via tax-advantaged accounts like 401(k)s, 403(b)s and traditional IRAs.

Tax treatment:

• Contributions are tax-deductible
• Earnings grow tax-deferred, but withdrawals are taxed as ordinary income
• Required minimum distributions (RMDs) begin at age 73 (or 75 for those born after 1960)
• Withdrawals before age 59½ incur a 10% penalty, unless an exception applies

2. Non-qualified annuities

What they are.
Purchased with after-tax dollars, making them more flexible but subject to distinct tax rules.

Tax treatment:

• Principal withdrawals are not taxed (as they’ve already been taxed), but earnings are
• Distributions follow the last-in, first-out (LIFO) rule, meaning taxable earnings come out first
• No RMDs are required, though certain events may trigger mandatory distributions

3. Roth annuities

What they are.
Held within a Roth IRA or Roth 401(k), combining the guarantee of annuities with the tax advantages of Roth accounts.

Tax treatment:

• Contributions are post-tax, earnings grow tax-free and qualified distributions (after five years and age 59½) are entirely tax-free
• Non-qualified distributions of earnings may incur taxes and penalties

Pro tip: Strategically blending clients’ portfolios with a mix of tax-deferred (qualified) and tax-free (Roth) products creates powerful tax diversification for retirement.

Tax implications at the distribution stage

When it’s time to tap into annuities, the tax considerations shift. Advisers should familiarize themselves with how distributions are treated to help clients avoid surprises.

1. Partial withdrawals

• Non-qualified annuities.
These are taxed on a LIFO basis, meaning amounts withdrawn consist of taxable earnings first, then non-taxable principal
• Qualified annuities.
Withdrawals are fully taxable unless the account includes after-tax contributions, in which case distributions are taxed pro-rata

2. Annuitized payments

Once annuities are converted into a stream of regular income, the tax picture changes. Annuity payments are typically divided into two portions:

• A return of principal (non-taxable)
• Earnings (taxable as ordinary income)

The exclusion ratio helps determine how much of each payment is taxable by dividing the principal (investment in the contract) by the expected total return of the annuity.

2. RMD rules for qualified assets

• RMDs apply to qualified annuities, starting at age 73 (or 75 depending on birth year). Missing an RMD incurs steep penalties — up to 25% of the missed amount, reduced to 10% under certain correction conditions introduced by the SECURE 2.0 Act.
• SECURE 2.0 allows annuitized payments to satisfy RMD requirements, offering flexibility for clients using annuities in their portfolio.

4. Early-withdrawal penalties

If clients under 59½ need access to funds, a 10% penalty tax applies — unless exceptions (such as disability or medical expenses) are met.

Interested in more information for financial professionals? Sign up for Kiplinger’s new twice-monthly free newsletter, Adviser Angle.

Advisers can deploy strategies like substantially equal periodic payments (SEPPs) that spread withdrawals over time while avoiding penalties.

Strategies to optimize tax efficiency

1. Roth conversions

Converting traditional IRAs into Roth IRAs allows for tax-free distributions later. Advisers should focus on low-income years or market downturns to execute conversions at minimal tax cost.

Example:
A client converts $50,000 of a traditional IRA in a low-income year, ensuring all future distributions (including from annuities in that Roth) are tax-free.

2. Tax diversification

Advisers should consider structuring portfolios with three tax buckets:

• Taxable (e.g., investment accounts) for near-term liquidity
• Tax-deferred (traditional annuities, IRAs) for lower-tax-rate years
• Tax-free (Roth IRAs or Roth annuities) for legacy goals or high-tax-rate periods

Clients with this diversification can adjust distributions based on tax brackets, creating more retirement income with less tax exposure.

3. Addressing RMDs

Advisers can optimize RMDs by considering annuitized income streams, moving eligible balances between plans or taking distributions earlier to mitigate concentrated withdrawals in later years.

4. Leveraging 1035 exchanges

Non-qualified annuities gain flexibility from 1035 exchanges, which allow tax-free transfers to new contracts that better align with a client’s changing goals.

For example: Moving from deferred annuities to immediate annuities for guaranteed income in retirement.

Common tax pitfalls and missteps

Financial advisers should help clients steer clear of these major errors:

• Failing to track after-tax contributions. Without IRS Form 8606, returns of basis may be overtaxed.
• Mismanaging aggregation rules. Clients owning multiple annuities from one insurer may inadvertently aggregate distributions, complicating their tax treatment.
• Missing RMD requirements.
Clients not aware of their obligations (or updated SECURE 2.0 provisions) risk substantial penalties, jeopardizing retirement cash flow.

Quick insight: Taking more than the RMD in one year doesn’t offset the next year’s withdrawal requirement — it only reduces the account balance used to calculate future RMD amounts.

Actionable adviser takeaways

• Stay current with tax legislation.
SECURE 2.0 changed the landscape for retirement accounts. Knowledge of these provisions helps advisers guide clients toward better decisions.
• Create a tax diversification strategy.
A balanced mix of taxable, tax-deferred and tax-free accounts helps reduce the risk of future tax shocks.
• Be strategic with annuitization.
Use single premium immediate annuities (SPIAs) and other annuity products to complement and satisfy RMDs while providing stable income.
• Partner with tax experts.
Collaborate with CPAs to handle complex cases like Roth conversions, 1035 exchanges or legacy planning strategies involving inherited annuities.

Final thought

Understanding the intricacies of annuity taxation allows financial advisers to build better, more resilient retirement portfolios for clients.

With proper planning, annuities can provide both lifetime income and confidence as clients become confident in the knowledge that their tax impact is fully considered and accounted.

Investing involves risk, including the potential loss of principal. Any references to protection, safety or lifetime income, generally refer to fixed insurance products, never securities or investments. Insurance guarantees are backed by the financial strength and claims paying abilities of the issuing carrier. Our firm is not affiliated with the U.S. government or any governmental agency. Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. Please remember that converting an employer plan account to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences. Be sure to consult with a qualified tax adviser before making any decisions regarding your IRA. 4317283 – 3/25

Related Content

• How Good Advisers Manage Risk in Challenging Markets
• How to Thrive in Retirement: Balancing the Tradeoffs
• How Financial Advisers Can Build Retiring Clients' Confidence
• How Financial Professionals Can Empower Their Female Clients
• How Financial Professionals Can Build Trust With Clients

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

But is an annuity a must-have? Some 401(k) plan sponsors, insurance companies and money managers think so, but not every financial pro is on board with that assessment.

That’s what Cerulli Associates, the wealth and asset management research firm, found when it recently polled asset managers. In 2019, 42% of asset managers believed a retirement income solution needed a guaranteed component to be effective, but in 2024, only 37% believed that to be true.

The slight shift in sentiment comes as annuities are finding their way into more 401(k) plans, thanks to the SECURE Act 2.0. On the books since the end of 2022, the Act enables annuities to be included in 401(k)s. The idea is to create a lifetime guaranteed income stream for retirees.

While annuities have fans, including among retirement savers, the complexity, fees and nuances associated with this type of financial product are leaving some financial advisers questioning if they are necessary.

“If you look at the results of the survey over five years, there’s more doubt whether or not it’s actually a necessity,” says Idin Eftekhari, senior analyst at Cerulli. “Some folks are now looking at it as it's nice to have, not a need to have.”

Annuities: Is it worth it to give up liquidity?

A big knock on annuities, says Eftekhari, is the fact that you forfeit liquidity when you put money into an annuity. To fund an annuity, you either invest a lump sum or make a series of payments over time, and in exchange, you get paid out at a later date.

Once the free look period, or the window in which you can cancel the annuity, expires, which is typically ten to 30 days, you can no longer access that money without paying penalties and fees.

But if something comes up in retirement that requires you to access a significant amount of capital, you can’t touch the annuity.

That means you’ll have to tap your savings or draw down from other retirement accounts. The less money you have in, say, a 401(k) or IRA, the less opportunity you have to benefit from growth and compounding.

Plus, Eftekhari says a lot of annuities don’t have inflation protection, which means the money you put in today may not be worth the same amount in five, ten, or twenty years when you begin receiving payments.

Some annuities offer inflation protection, but they tend to be more costly. “If most participants were truly educated about what they are getting, they would probably say no, thank you,” says Eftekhari.

Are the fees worth it?

Another factor to consider when it comes to annuities: the fees. Depending on the type of annuity and extra bells and whistles, fees can range from 1.5% to 4% on average. Within a 401(k) plan, it can be difficult to determine the fees. Over the years, those fees can add up and take away from your returns.

“Annuities tend to be quite expensive,” says Jane Delashmutt O’Mara, a certified financial planner at FBB Capital Partners. “If there are any products out there that guarantee something, they come with a price tag. You have to understand what you are paying for and what the price tag is.”

That’s not to say annuities don’t make sense for some individuals. If someone wants to spend down assets to qualify for Medicaid, doesn’t want to invest in the stock markets, or has won a lawsuit or the lottery and has a large sum of cash, then an annuity can make sense, says O’Mara.

They can also make sense in a couple of other instances:

The thought of running out of money in retirement keeps you up at night. Annuities that guarantee income through your lifetime can give you peace of mind and a good night’s sleep. This kind of annuity can be either an immediate annuity or a deferred annuity.

An immediate annuity is typically purchased with a lump sum and begins receiving payments within 12 months or less. A deferred annuity is designed to grow on a tax-deferred basis, providing guaranteed income to the annuitant starting on a particular date they choose. The savings period for deferred annuities can last from a few years to decades, and the money grows over time.

You crave safety but a better return than you can get from a CD. Fixed annuities tend to outperform bank CDs because they are held longer, giving the insurance company more time to invest and grow the money. At last check, a fixed annuity has a yield of around 5% while a bank CD is paying about 3% to 4%.

But an annuity should be part of an overall financial plan, not the only component, says O'Mara. An alternative to an annuity is to build a portfolio of bonds or a bond ladder that generates income each year as the bonds mature, says O’Mara. Spread out over the years, bonds can give predictable income in retirement.

There is a place for guaranteed income

Rick Sweeney, director of insured solutions at RBC Wealth Management, says many clients are worried about outliving their savings and some will turn to an annuity to protect against that. In addition to guaranteed lifetime income, some clients purchase annuities to give them downsize protection.

Typically, the annuities are part of a well-diversified plan that includes different streams of income, he says.

“Annuities are not well suited for everybody," adds Eftekhari. “When you are sitting down reviewing the paperwork (with annuities), it's at least a 40 or 50-page contract you are signing with the insurance company. Most people don’t have time to read the fine print, only to realize after the fact what they purchased.”

A balanced approach

Ultimately, the best approach may be a balanced one, where you have a little bit of everything. That’s the case for clients at Boldin, the maker of financial and retirement software.

Of the company’s 41,000 PlannerPlus subscribers, roughly 3,000 have 100% of their expenses in retirement covered through guaranteed income. The average expenses covered by guaranteed income are 54%. That is typically derived from Social Security, pensions and annuities.

“What people try to do is have enough guaranteed income to cover necessary expenses like food, housing, insurance, health care and transportation, and use their investment portfolio for fun money such as travel, entertainment and gifting,” says Nancy Gates, lead educator & financial coach at Boldin. “The most important thing is to have a long-term financial plan tailored to your personal circumstances.

Related content

• Annuity Red Flags to Watch Out For
• Annuity Fees: Are You Paying Too Much?
• Annuity Payouts: How Much Can You Get Each Month?
• Are Annuities the New Safe Haven?

About 79% of American adults struggle to correctly define an annuity, according to a 2024 Policygenius annuities survey.

A 2023 study by the American College of Financial Services found that respondents ages 50 to 75 scored only 12% on annuity-related questions, ranking their knowledge of annuities below that of Medicare, life insurance and long-term care.

It’s not surprising. The topic is complex, and there are many different types of annuities. Most people hear more about stocks, bonds, insurance and bank certificates of deposit (CDs). Annuities are in a bit of an obscure corner.

Lack of knowledge may contribute to resistance to buying annuities. The Center for Retirement Research at Boston College found that while about half of survey respondents expressed willingness to purchase an annuity at prevailing market rates, only 12% had done so.

On the other hand, a survey by the American Council of Life Insurers found that 54% of retirement savers are considering products that provide guaranteed lifetime income, similar to a pension — in other words, lifetime income annuities. The survey gave no clues on what percentage will actually go forward.

Social Security's uncertain future means you'll need to be more self-reliant

When you’re young, you probably don’t need to know much about annuities because they’re more germane for people in their 50s and older. But once you’re in that age range, it becomes necessary to know the basics about annuities.

They’re not for everyone, but if you don’t know anything about them, you’ll never know if an annuity might be a good choice for you.

It’s important to know at least the basics about annuities because they can be a keystone for successful retirement. Going forward, it’s probable you’ll have to rely more on yourself and less on the government for your retirement income.

Social Security, essentially a pay-as-you-go system, faces a tough future as the population ages. In 1950, there were about 16 workers paying into the system for every retiree.

In 2023, roughly 2.7 covered workers were paying into Social Security for each individual collecting benefits, according to the Social Security Administration.

This ratio is projected to further decline in the coming decades due to demographic shifts, falling to 2.4 workers for each beneficiary in 2035. So, if you’re 55 today, chances are your benefits when you turn 75 may be substantially lower than they are today.

Another possibility is that the full retirement age may be delayed. For those preparing to retire today, the retirement age is 66 to 67 years old. In the future, it could rise to 70 or even older.

Furthermore, few people, other than government workers, have old-fashioned pensions that guarantee lifetime income. Most employers offer 401(k)s or similar plans. Such plans, while great, can expose you to investment risk and volatility and may not guarantee income.

With our Social Security system under growing pressure and the availability of pensions on the decline, the bottom line is that there could be trouble ahead for tomorrow’s retirees. In fact, the Employee Benefit Research Institute’s 2019 study estimated that 40% of U.S. households risk running short of money in retirement.

Annuities offer more tools for successful retirement

One or more annuities can be part of your self-reliant retirement plan so that you won’t run out of money, and equally important, not worry about managing it.

Annuities began as pensions in ancient Rome, providing annual payments for life. Today, many people are somewhat familiar with the concept of income annuities, but that isn’t the only type of annuity, as we’ll see.

An income annuity is a contract that promises to provide an individual income for a fixed period of years or their lifetime. You deposit your money with an insurance company and in return you get contractual guarantees.

Having lifetime income that will keep coming at the same level no matter how long you (and, optionally, your spouse) live promotes peace of mind and reduces worry. It’s “longevity insurance.” In a sense, you’re creating your own private pension.

Another advantage is that you won’t pay any taxes until you start receiving payments. And even then, much of the income will be non-taxable return of premium.

The downside is that you no longer have control over that money. You’re relying on the life insurer to keep its promise. For many people, this is a deal very much worth making, but not everyone is comfortable with it.

Furthermore, because an income annuity is somewhat inflexible and illiquid, it may not be a good choice if you have little in liquid savings or investments.

Income annuities are vastly underused, I believe — and many independent experts agree. Last year, sales totaled $18.5 billion, according to LIMRA. That might sound like a lot, but it is a small amount when compared with other financial vehicles.

So, on one side of the annuity world, we have annuities that guarantee either future (deferred) income or immediate income. The other half of the annuity universe is made up of various types that are designed to help you grow savings for the future.

They can provide interest income, too, which you can receive or plow back into the annuity.

A fixed-rate annuity provides a set interest rate for a fixed number of years, plus your principal is guaranteed, much like a bank certificate of deposit (CD). This type of annuity is called a multi-year guaranteed annuity (MYGA).

If it’s held in a non-qualified account (not in a traditional IRA), the interest is tax-deferred as long as you reinvest it in the annuity. The interest rate usually beats a CD with the same term.

Because fixed-rate annuities are somewhat standardized — the details differ, so make sure you understand the penalties for withdrawals during the penalty period — they’re easy to understand and compare, and they still rank as one of the most popular types of annuities. Sales in 2024 totaled $153.4 billion, according to LIMRA.

A fixed indexed annuity offers the potential for higher interest earnings, pegged to the performance of a market index, such as the S&P 500, while guaranteeing your principal (which is why it’s called “fixed”). It pays a fluctuating interest rate, which can go as low as zero when the stock market declines. Also, there are caps on upside gains.

Over the long term, a fixed indexed annuity stands a good chance of outperforming bonds, CDs and MYGAs. But you have to be able to accept and withstand fluctuating returns. Furthermore, they’re complex, so it takes some time and expert guidance to choose the one that best suits you.

A variable annuity is much like a set of mutual funds within an annuity wrapper that provides tax deferral and optional income and death-benefit guarantees. It is called variable because it doesn’t normally have the principal guarantee that comes with a fixed annuity.

While other types of annuities offer a safe haven for your money, the variable annuity offers the chance for higher gains over time. But the downsides are volatility, the potential for loss and high fees.

Taxes on annuity withdrawals

While non-qualified annuities (those bought with after-tax money) offer tax deferral that can be extended indefinitely, don’t buy a deferred annuity if you may need to withdraw the money before age 59½.

In addition to ordinary income tax on withdrawals of earnings, you’ll also pay a 10% IRS penalty tax. There is one safety valve: The penalty won’t apply if you become permanently disabled.

Annuities can be held in qualified accounts (Roth and traditional IRAs), too, and one interesting choice is the QLAC.

One final important element to keep in mind: Annuities, especially income annuities, are long-term commitments. Choose a financially strong insurer that can fulfill its promises. The industry is strictly regulated by the states and has a good track record.

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at www.annuityadvantage.com or by calling (800) 239-0356.

Related Content

• How Are Annuity Withdrawals Taxed?
• Five Things About Annuities That May Surprise You
• Why Annuities Sometimes Sound Too Good to Be True
• Annuities: What They Are and How They Work
• Should You Add an Annuity to Your Retirement Portfolio in 2025?

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

It doesn’t help that there are a variety of potential fees from administrative costs to commissions that can be hard to spot and will ultimately impact your payouts. How much is too much when it comes to fees, and how do you know if you're paying too much?

“You absolutely have to be mindful of the fees. In some cases, there are a lot of fees associated with them,” says Michael Berkhahn, CFP and vice president of Graham Capital Wealth Management. “If you are purchasing an annuity, you need a good understanding of what you are getting into and if it really fits your ultimate goal.”

Before you can do an apples-to-apples comparison of annuity fees, you have to decide what you are trying to achieve. That will dictate which type of annuity to shop for.

How does an annuity work?

Suppose you want to purchase an annuity for lifetime income only. In that case, the fees will be different than if you are purchasing an annuity that pays out a death benefit to your spouse or that has additional bells and whistles. Known as riders, some of the popular ones include the following:

Guaranteed lifetime minimum withdrawal benefit: This lets you withdraw some of your money from your annuity while you are alive, even if your annuity loses its value. You would only need this rider with a variable annuity.

Guaranteed minimum withdrawal benefit: It ensures the premiums are paid on the annuity contract regardless of how the underlying investments perform.

Guaranteed minimum accumulation benefit: This ensures you will receive payouts at least equal to the amount you spent to purchase the annuity or a percentage of the dollar amount after a predetermined number of years.

Guaranteed minimum income benefit: This also applies to variable annuities and gives you a guaranteed minimum income payout while you are alive, regardless of the performance of the underlying investments. It provides a floor and protection against market volatility.

Death benefit: This ensures beneficiaries receive a payout when you die.

Long-term care rider: If you don’t have long-term care insurance, this rider boosts your monthly payouts to help cover the costs of long-term care.

Cost of living rider: With this rider, your annuity payments will keep pace with inflation.

Disability income rider: If you become disabled or unable to work, this rider pays you a monthly benefit.

“A lot of times with annuities, you get what you pay for,” says Shawn Plummer, founder of The Annuity Expert. “You're not wasting money on fees, you are adding bells and whistles and paying for those add-ons.”

What do different types of annuities cost?

Investors purchase annuities for a variety of reasons, but most commonly they are buying them for either guaranteed lifetime income, tax-deferred growth or to protect a portion of their assets from market risk.

If you are looking for an income stream in retirement and want to keep costs down, then a fixed annuity is the lowest-cost option. With a fixed annuity, fees typically range from nothing to 1.5% depending on whether you add riders to the contract.

With a fixed annuity, the insurance provider guarantees a fixed rate of return for a predetermined period, giving you predictable income in retirement.

It’s similar to a certificate of deposit. You aren’t going to realize stock market returns, but you will know how much you are getting each month, and you don’t have to worry about fees eating away at your income.

Fixed-rate annuities are also the easiest to shop for because there are few to no fees. In that case, you are paying more attention to the payout, says Berkhahn. One insurer may provide a return of 5.2% while another will provide 5.3%.

It’s important to be mindful of the health of the insurance provider. After all, they may give you a much bigger payout, but they may not be around for your lifetime.

A variable annuity, the costliest of the annuities, has fees ranging from 2% to 4% but also has the potential to give you more of a return based on the performance of the investments held within the annuity.

Variable annuities are actively managed, and while they can give you stock market-like returns, there is also downside risk. Yes, you get guaranteed income in retirement, but how much depends on how the underlying assets perform.

“If the intent is lifetime income, then purchasing a fixed annuity would be a lot cheaper than a variable annuity,” says Plummer. “A variable annuity has the most fees.”

Other fees to pay attention to

Commissions: This is the fee that goes to the agent you work with to purchase an annuity. The commission varies based on the type of annuity and its complexity. The more complex, the higher the commission will be. It can range from 1% to 8%, according to Annuity.org.

Administrative fees: These are the fees that go to cover the cost of managing the annuity, recordkeeping, and processing transactions in addition to other administrative costs. These fees are typically under 0.3% of the value of the annuity each year.

These fees are typically disclosed within the prospectus or through disclosures provided by the insurance company or broker. Make sure to ask about them when shopping around.

It’s all about intent

Ultimately, how much you pay in fees boils down to what you want from your annuity. The more bells and whistles, the more costly it will be.

“Do you want protection with upside growth or are you looking for the highest lifetime income, or do you want long-term care protection?” says Plummer, who says you shouldn’t pay more than 1.5% in fees. “In almost every scenario, you are going to pay a fee for something.”

Related content

• I Want to Buy an Annuity, but I'm Scared I'll Get Ripped Off. Should I Get One Anyway?
• Should You Add an Annuity to Your Retirement Portfolio?
• Are Annuities the New Safe Haven?
• Five Annuity Mistakes to Avoid

“All Americans deserve security in their later years and need effective tools to make the most of their hard-earned savings,” the IRS said of the rationale for QLAC.

“As boomers approach retirement and life expectancies increase, longevity income annuities [our emphasis] can be an important option to help Americans plan for retirement and ensure they have a regular stream of income for as long as they live.”

As part of new legislation passed in December 2022, the SECURE 2.0 Act addressed many areas of retirement, including increasing the amount that can be invested in a QLAC to $200,000.

As important, the law also eliminated a requirement that limited QLAC premiums to 25% of an individual’s retirement account balance.

Finally, in January 2025 the limit was further increased to $210,000, up from the original $125,000.

Taken together, that means a single investor with $400,000 of IRA assets could more than double their QLAC allocation from $100,000 to $210,000.

What is a QLAC? It's not complicated

A QLAC, or qualifying longevity annuity contract, is issued by insurance companies, most, if not all, rated A or higher. You can purchase a QLAC in a lump sum or in smaller increments, in different amounts at different times and from different insurance carriers. Each QLAC purchase guarantees lifetime income to start in the future as late as age 85. Income can continue for the lifetime of two spouses and can continue to a beneficiary until the premium has been paid out. And each of two spouses can make their own elections with respect to their IRA savings.

Also, you can use the account value from a rollover IRA, 401(k) or tax-sheltered annuity as a source of the QLAC premium.

In today’s market (February 2025 survey), a 62-year-old man can purchase $72,000 of annual lifetime income starting at age 85 for $100,000 from his IRA account. Or a 70-year-old woman can use $200,000 from her account to purchase $81,000 of annual lifetime income starting at age 85.

The amounts are up 87% and 57%, respectively, since they hit a low just three years ago. For a personalized quote, you can use this QLAC calculator.

What are QLAC's tax savings?

In support of QLACs, the government is willing to lower taxable income for retirees by literally billions of dollars a year to help them secure their retirement plans. For that reason alone, it makes sense to consider using the money in your existing IRA, 401(k) or tax-sheltered annuity to purchase a QLAC.

That money will be removed from the calculation of required minimum distributions (RMDs) that start at age 73, and thus your taxable income is lowered.

QLAC payments will be included in taxable income when they start, usually at age 85. Importantly, the taxable income at that time may be reduced if used to pay interest on a mortgage, pay for deductible medical or long-term care expenses or make charitable deductions.

For Sally, the 70-year-old woman cited in our example above, the tax savings on RMDs, assuming a 25% tax bracket, could be worth about $2,000 a year, or accumulating with interest to about $50,000 by age 85.

With more than 4 million people turning 65 each year and nearly 20 million family units already eligible for a QLAC, that could mean billions of dollars in tax savings for retirees. A conservative estimate of the potential benefit is $30 billion to $50 billion per year — a lot of money.

The ways you can deploy a QLAC

The tax-deferral benefit is yours however you deploy a QLAC. By deploy, we mean:

• What configuration of QLAC you elect
• How you intend to spend the QLAC annuity payments

Also, the tax-deferral benefits are for each spouse and their IRA account and for each QLAC you purchase, provided the cumulative purchases stay under the current limit. (By the way, the $210,000 limit will increase each year, and for a 65-year-old today, it could reach $265,000 or more by age 73, when RMDs become mandatory.)

The most popular options as to when you elect to receive QLAC annuity payments are:

• Maximum deferral. A single purchase with annuity payments deferred to age 85. The two examples above were for maximum deferral for investors who were focused on tax benefits and maximum longevity protection.
• Laddered income. Multiple purchases made at one time with income starting at different ages, which enables income to increase in steps, as I wrote about in my article How to Get More Retirement Income From Your 401(k).

Here’s what laddered income could look like with a comparison to the before-tax RMDs. The laddered income buyer is less interested in tax savings and more interested in supplemental income starting before age 85.

As shown in the chart, Sally addresses her inflation risk through a laddering of QLAC income, which grows from $14,000 at 75 to $37,000 at 85. These payments would be guaranteed for as long as Sally is alive. With laddered income as part of your plan, the percentage of income that is safe increases substantially as you age.

Impact of most competitive rates

Annuity payouts on new QLAC purchases don’t stay the same as interest rates go up and down. We’ve been shopping the market for the best annuity rates of return and in the process have seen a greater spread between the industrywide median rates we use in planning and the rates the most competitive companies are quoting.

That means making a QLAC a component of your plan for retirement income today can improve results in a very powerful way.

The benefits for both max deferral of income and laddered income are clear for retirees seeking to keep tax payments low and secure high income in their retirement income plan. My next article will discuss some of the expected and unexpected ways to use that income.

For more information about how to find a QLAC with the best rates, visit Go2Income.com.

Related Content

• For Longevity Protection, Consider a QLAC
• Curious About a QLAC? SECURE 2.0 Act Gives This Annuity a Boost
• The Best Way to Defer RMDs (and Their Tax Bills): QLACs
• Stressing About RMDs? Two Ways to Reduce or Even Eliminate Them
• How to Grow Your IRA in Retirement Rather Than Spend It Down

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

According to a recent economic analysis published by the Retirement Income Institute, however, two-thirds of them will be challenged to meet their financial needs in retirement, let alone maintain their current standard of living.

More than half (52.5%) of the Peak Boomers have assets of $250,000 or less. Given the likelihood that they’ll spend 20 or more years in retirement, they will likely exhaust their retirement assets and be forced to rely mainly on Social Security, especially later in retirement when health care costs are likely to increase. Yet, Social Security is designed to replace only about 40% of a person’s annual pre-retirement income, on average. An additional 14.6% of Boomers have assets of $250,000 to $500,000, which means they, too, may strain to meet their needs in retirement.

The economic analysis is complemented by the findings of a survey conducted earlier this year of 2,516 U.S. consumers ages 45 to 75, including an oversample of those ages 61 to 65. It found that 51% of those Baby Boomers, the youngest Boomers of this generation, have less than $100,000 in total investable household assets, while 45% of them are already fully retired.

Most surprising is that 49% of these Peak Boomers ages 61 to 65 have already started claiming Social Security payments — including 77% who are already retired — well short of age 70, when monthly benefits are maximized. Forty percent who began claiming Social Security payments did so because they needed the income, while 45% did so because of a disability or inability to work.

There is good news for millions of Peak 65ers, though, if they course-correct and make some changes while there’s still time. The 47.5% of Baby Boomers with assets of more than $250,000, including the 14.6% with assets of $250,000 to $500,000, have the potential to achieve a financially secure retirement, although such an outcome is hardly guaranteed. Those who are on the brink of success should consider these seven ideas to make the most of their resources:

1. Budget, budget, budget

Establish, and live within, a sound budget, consisting of both discretionary and non-discretionary living expenses, that accounts for inflation. Anticipate the likelihood of spending more money earlier in retirement and the need for a health care reserve later in retirement. Baby Boomers with relatively limited assets cannot realistically expect to achieve a financially secure retirement without a budget.

2. Understand the different types of incomes

Understand the practical differences between protected income, which is income that’s guaranteed from Social Security, pensions and annuities, and probable income, which comes from stocks, bonds and other assets that can rise and fall based on the markets. Ideally, use your protected income sources to cover your essential monthly expense needs, and your market investments for your wants and everything else.

3. Tap your real estate holdings for income

Examine the income potential of your home and other holdings as potential income streams in the form of rent, sales or drawdowns from the equity. For roughly two-thirds of Peak Boomers, their home is their largest asset, and many have accumulated substantial equity over the years.

4. Delay full-time retirement

If circumstances allow, continue to generate earned income by working at least part time. Not only will the additional income stretch your existing savings, many Baby Boomers derive satisfaction and find purpose by continuing to work.

5. Claim Social Security as late as possible

Those in or approaching retirement should weigh whether to delay claiming Social Security benefits, until at least full retirement age of 67, as the monthly benefit amount is roughly 8% greater for each year you delay claiming past age 62 up to age 70.

6. Consider a bridge annuity

Instead of leaving substantial money on the table by claiming Social Security benefits early, consider using annuities as a short-term “income bridge” for a fixed number of years between full or partial retirement. A bridge annuity that guarantees monthly income can be a cost-effective means of maximizing Social Security benefits.

7. Seek professional guidance

A Nobel prize-winning economist once said that decumulation is one of the nastiest and hardest problems in finance to solve. So don’t go it alone. It is never too late to benefit from the counsel of a financial professional, even if it’s for help creating a basic retirement plan. Depending on your needs, they can provide guidance on issues ranging from income and withdrawal strategies to longevity planning and tax efficiency. In addition to helping to make the most of your assets, a financial planner can also provide peace of mind.

The greatest surge of retirement-age Americans in history is a welcome milestone for millions of Baby Boomers looking forward to retirement. Those who adopt these seven best practices have the best chance to realize the financially secure retirement they have long worked toward.

Cyrus Bamji is recognized as one of the foremost experts and innovators on disrupting and modernizing our concept of retirement. He is currently Chief Strategy & Communications Officer at the Alliance for Lifetime Income, a nonprofit consumer education association in Washington, D.C., where he leads financial education, thought-leadership and consumer outreach strategies to help Americans think and plan holistically for life in retirement.

Jason J. Fichtner, PhD, is a Senior Fellow and Head of the Retirement Income Institute, a scholarly research and thought-leadership program of the Alliance for Lifetime Income (ALI), where he manages the research, strategy and operations of the Institute. He is widely recognized as a leading researcher and expert on Social Security, federal tax and budget policy, and retirement security.

Related Content

• You're 62 Years Old With $1 Million Saved: Can You Retire?
• How to Retire Early in Six Steps
• Are You a DIY Retirement Planner? Four Things You Need to Know
• Do You Have the Five Pillars of Retirement Planning in Place?
• Annuities Have an Awareness Problem: Why That Matters

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

When it comes to annuities there are lots of things to consider, from the type of annuity to the surrender period. Not to mention the financial health of the insurance company backing the annuity. After all, if the company goes under, so does the money you invested in the annuity.

That’s why it’s so important to do your homework and read the fine print before selecting an annuity.

“Choosing the wrong annuity can result in high fees, poor returns and limited liquidity,” says Ken Nuss, founder and CEO of AnnuityAdvantage, an online provider of fixed-rate, fixed-indexed, and lifetime income.

“For example, if you purchase an annuity with excessive fees or a long surrender period, you may lose a significant portion of your investment if you need to withdraw early," he said.

To assist you in your decision making, here's a look at five common mistakes investors make when shopping for an annuity and how to avoid them.

1. Choosing the wrong type of annuity

There is no one-size-fits-all annuity on the market, although Nuss says some are presented that way. In reality there are different types of annuities that accomplish different goals depending on what you are aiming to achieve. Choose the wrong one and you may not accomplish your income generating goal. The most common types of annuities include:

-Fixed annuity: Payments are made monthly for the same amount. With a fixed annuity you know exactly how much you’ll receive monthly.

-Variable annuity: The payouts are tied to the rise and fall of the underlying investment.

-Indexed annuity: The payouts are tied to the performance of an index such as the S&P 500.

-Immediate annuity: With this type of annuity you typically purchase it with a lump sum and then begin receiving payments within 12 months or less. An immediate annuity can be fixed or variable.

-Income for life annuity: Payouts are for life no matter what age you live to. The size of the payments depend on the account size and the life expectancy of the person holding the annuity. This type of annuity can be fixed or variable.

2. Glossing over total cost details

Fees can eat away at your returns and that is true of annuities. Different annuities have different fee structures and if you aren’t aware of how they add up or impact the performance, you may be in for an unwelcome surprise with little recourse.

Sure there is the free look period or the window in which annuity holders can cancel the contract, but after that you’ll face penalties. Typically the free look period is between ten and thirty days.

There is a 1035 exchange, which allows you to transfer your annuity into a different one without tax consequence, but you could still face surrender charges.

“Each annuity exchange must be analyzed individually for suitability and to determine if it is ultimately in the client’s best interest, particularly if the existing annuity is still subject to surrender penalties,” says Nuss.

Some of the fees to keep in mind when shopping for an annuity include:

-Commissions: This is the fee that goes to the agent you work with to purchase an annuity. The commission varies based on the type of annuity and the complexity of it. The more complex, the higher the commission will be. It can range from 1% to 8%, according to Annuity.org.

-Administrative fees: These are the fees that go to cover the cost of managing the annuity, recordkeeping and process transactions in addition to other administrative costs. This fee is typically under 0.3% of the value of the annuity each year.

-Surrender charge: A penalty that’s deducted from the account value if money is withdrawn from the annuity prematurely. The surrender charge can vary based on the insurance company, the age of the annuity and amount withdrawn.

-Rider: These are additional benefits you can add to your annuity for a fee. Common types of annuity riders include living benefits and death benefits.

3. Shopping on rate or performance alone

Performance and rates do matter, but shouldn't automatically rule out a specific annuity provider. After all you may get a cheaper rate or a higher payout on one annuity but the quality of the insurance provider may be questionable.

Plus you may end up with a product that is harder to understand or contains higher internal fees that aren’t transparent.

“It is vital to evaluate the annuity carrier for their financial stability and client service,” says Stephen Kates, principal financial analyst at Annuity.org.

The Federal Deposit Insurance Corp. doesn’t cover annuities like bank deposits, but they are backed by insurance guaranty associations that protect insurance policyholders and their beneficiaries if the insurance company becomes insolvent and can no longer meet its obligations. Every state, including the District of Columbia and Puerto Rico, has a state insurance guaranty association.

When selecting an annuity, brokers typically look at how long the insurance company has been in business, its balance sheet and its rating from the three rating agencies AM Best, Moody’s and Standard & Poor’s.

4. Overlooking surrender periods and liquidity provisions

Depending on the annuity you select, you could face long surrender periods where withdrawing money early could result in penalties. If you don’t check these details before purchasing an annuity you could end up in a situation where you can’t access the money when you need it.

“Liquidity cannot be overvalued, and locking up your money into a single growth strategy for 10+ years should be considered carefully,” says Kates. Going with a long surrender period also limits your flexibility. “Over a decade-long surrender period, circumstances may change, or opportunities may arise which could change how you view the utility of your products,” says Kates.

Another thing to consider: built-in liquidity provision. They may or may not allow for penalty free withdrawals of interest earnings or a percentage of the contract value annually, says Nuss.

5. Blindly trusting the insurance producer or financial advisor

While recommendations are nice, that doesn’t mean you shouldn’t do your homework on your own before deciding on an annuity. The internet can help. There are online tools available to narrow down your annuity choices.

“Comparison and research are important. Without knowing what you want, it can be hard to find the right product,” says Kates.

“Consider multiple products from different carriers to gain a good perspective on what is available in the market as a solution for your particular goals. If you are working with an agent, understand how that impacts the products you see. Some agents only sell one carrier's products, while other agents sell multiple carriers' products.”

Related content

• Annuity Definition and 14 Terms You Need to Know
• Annuities: What They Are and How They Work
• Annuity Payouts: How Much Can You Get Each Month?
• 10 Ways to Generate Retirement Income

But even if you’re satisfied with your current annuity (or annuities), it can still make sense to review your contract(s) to see if you can do better. With today’s higher interest rates and evolving annuities, you may be able to benefit from replacing an older annuity with one that could potentially boost your income and add to the value of your contract.

Here are just a few reasons why you may want to consider an annuity “refresh.”

1. Higher interest rates

When interest rates rise, annuity income rates typically increase as well. Interest rates have soared in recent years: The Federal Reserve hiked interest rates 11 times between March 2022 and July 2023. If you purchased your annuity before March 2022, you may not be benefiting from those higher rates. A replacement annuity could help you maximize your payments, and it shouldn’t cost you anything to do some comparison shopping.

2. The cost of inflation

Rising inflation can take a toll on your income plan. Even in the best of times, inflation can slowly erode your purchasing power. But the surge in gas, food, housing and other consumer prices we’ve experienced since 2021 has been a good reminder of the significant impact high inflation can have on a household — particularly for retirees living on a fixed income.

If you purchased a deferred income annuity prior to 2021 to help bolster your Social Security benefits and other reliable retirement income sources, you may find that replacing it with a different annuity can help put your budget back on track.

3. Newer products may suit you better

A new annuity may offer better or more relevant options than your current contract. Thanks to the increasing popularity of annuities, the market has grown more competitive. Insurance companies are now offering a wider range of products to meet the demand and the diverse needs of an aging population. Most advisers recommend evaluating your financial plan at least once a year — and more often if your retirement goals change, economic conditions have you feeling uncertain or important life events have occurred that require making some updates.

Your annuity’s performance should be part of that review, and you can use that time to discuss how your annuity needs may have been affected by any changes to your health, your marital status, beneficiary designations, the amount of income you’ll require or your Social Security start date. You may choose to move to a different type of annuity (a fixed-index annuity instead of a variable annuity, for example), get rid of expensive or unnecessary riders, or find more favorable terms that are a better fit for you going forward.

Tax implications and other considerations

Impending cuts to the Fed’s benchmark rate may lead to lower rates and less competitive annuity offerings down the road, so this is a good time to look at the pros and cons of an annuity exchange. If you don’t have a planned review scheduled soon, you may want to give your financial adviser a call to ask about comparing your current annuity with newer annuities available on the market.

Of course, it’s important to consider any tax implications, potential surrender charges and other costs or consequences that could make this the wrong time to replace an in-force annuity. And, as with any financial move, you’ll want to ensure that you understand the terms of the new annuity and that it’s a good fit for your objectives.

Any decisions regarding an annuity purchase — whether you’re getting one for the first time, considering a refinance or wondering how much of your money to commit — should be made with the help of a properly licensed and credentialed financial adviser who has experience with these complex contracts.

Kim Franke-Folstad contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

Insurance products are offered through the insurance business Generations Retirement Group, LLC. Generations Retirement Group, LLC is also an Investment Advisory practice that offers products and services through AE Wealth Management, LLC (AEWM), a Registered Investment Adviser. AEWM does not offer insurance products. The insurance products offered by Generations Retirement Group, LLC are not subject to Investment Adviser requirements. 02839010-01/25

Want more guidance on retirement savings? Sign up for Kiplinger's six-week series, Invest for Retirement.

Related Content

• Three Options for Retirees With an Old (Forgotten) Annuity
• Annuities: 10 Things to Know
• Annuity Definition and 14 Terms You Need to Know
• Fixed Index Annuities as Retirement Tools: Pros and Cons
• Is an Annuity Right for You? Here’s What You Should Know

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Even 401(k) do-it-yourselfers who did just fine during the nest-egg accumulation stage realize that there’s a lot more complexity in the so-called “distribution phase” when work paychecks stop and paying the monthly bills relies on the retiree’s own assets and retirement plan.

It’s not easy for a DIYer to figure out how much income they’ll need for retirement. Key questions may seem straightforward but may quickly get complicated. For example: what funds should I invest in; how should I divvy up assets between stocks and bonds; when should I take Social Security; how should I manage required minimum distributions (RMDs); what financial accounts should I withdraw money from to save on taxes; and should I convert a traditional IRA to a Roth IRA?

That’s a mouthful. However, the laundry list of retirement puzzle pieces is designed to illustrate that coming up with a perfect retirement plan on your own is a challenging task. For most people, it’s simply too heavy of a lift.

When the job of overseeing your retirement-related finances becomes too complex or overwhelming, getting help from a financial adviser could relieve some of the burden. Indeed, working with a financial adviser acting as a fiduciary (e.g., someone who puts your best interests ahead of their own) can go a long way toward helping you get your finances on track, whether you’re nearing retirement or already enjoying your golden years.

The financial adviser, who offers services ranging from retirement planning to portfolio advice, risk management, and tax planning, will assess your financial position holistically and develop a financial plan to help you set and achieve your goals and desired lifestyle in retirement.

So, if you’re looking for a financial pro to help you plan for retirement, where do you start?

How to find a financial adviser for retirement

Word of mouth: One way to jumpstart your search for a financial adviser who specializes in retirement planning is to ask friends, family members, and professional contacts for referrals. Getting recommendations from people you trust, especially your accountant, attorney and other so-called “centers of influence,” can get the ball moving.

Look into a large brokerage firm: Another good option, especially if you already have a relationship with an investment company or brokerage, such as Fidelity Investments, Charles Schwab, Vanguard, or T. Rowe Price, to name a few, is to investigate the relatively low-cost advisory options, retirement planning solutions, and investment options these well-known firms offer. These services typically range from digital advice to a more traditional advisory relationship that includes your own dedicated adviser. In fact, many financial firms, including Schwab and Fidelity, have an adviser search tool on their websites,

Use industry group search tools. Tapping the resources of industry groups representing financial advisers and financial planners is also helpful. For example, the National Association of Personal Financial Advisors (NAPFA) helps you initiate contact with a financial adviser in just a few clicks. Similarly, the Certified Financial Planner Board offers a search tool to find advisers who have earned the Certified Financial Planner (CFP) designation. Some sites allow you to search by zip code, assets under management, area of specialty (such as retirement planning or estate planning), and by the type of client the adviser focuses on (e.g., women, retirees, or LGBTQ).

Financial planning networks: These networks are another excellent resource for locating financial advisers, according to NerdWallet. Examples include XY Planning Network, whose advisers hold the CFP designation and offer virtual services; and CHIP, which focuses on matching clients with African American, Hispanic, and Latinx financial advisers.

Check each adviser's certifications. You’ll run into acronyms for financial certifications and credentials when searching for financial professionals. A CFP, for example, stands for a certified financial planner. This financial professional has passed a comprehensive exam on financial planning topics and has met a minimum threshold for hours worked in a financial planning capacity. CFPs are held to a standard that requires them to act as fiduciaries. You may also encounter a ChFC, which stands for Chartered Financial Consultant, or an RIA, a Registered Investment Advisor.

Do your due diligence. No matter their credentials, ensure you check their professional background, Fidelity Investments advises. “That means treating them like you would any other person you were considering hiring for a job: by looking at their resume or LinkedIn as well as asking for references,” Fidelity noted in a blog post. You can also run a free background check using the Securities and Exchange Commission’s Investment Advisor Public Disclosure database or FINRA’s BrokerCheck system.

Ask these questions before you hire a financial adviser

Michael Cherny, head of Citizens Wealth Management Advisors, recommends getting to know a potential financial adviser better by asking key questions during your first introductory meeting. “Your first meeting can help determine if the financial advisor is a good match for you professionally and personally,” Cherny wrote in a blog post.

Here are the key questions to ask:

• What are your experiences and qualifications? Find out how long they’ve been in the industry and if they have any specialty designations like a CFP or if they specialize in retirement planning.
• Have you worked with people like me before? You can often find a better match, says Cherny, if the adviser commonly works with clients your age and income range and who share similar retirement goals.
• Do you prepare financial plans, manage investments or both? Make sure the adviser specializes in the area you need help.
• What’s your approach to investing? You want to ensure that the adviser invests in a fashion that you are comfortable with and that matches your risk tolerance and goals.
• How will we communicate? Get a sense of how frequently you’ll touch base with your adviser. Will it be a monthly, quarterly, or annual check-in? And find out if you will meet via phone, in person or digitally.
• How do you get paid? As noted below, financial advisers are compensated in several different ways. They can charge you based on the amount of money in your account, by the hour, or a flat fee. So, make sure you find out what payment system will be used and that you’re comfortable with that arrangement. “You may also find advisers who earn commissions by selling investments,” says Cherny. Commission arrangements should be evaluated carefully, as advisers can earn commissions by putting you into specific mutual funds or other types of investments when there might be lower-fee options available.

How much do financial advisers charge?

The cost of a financial adviser depends on how the financial professional charges for their services. Here are the common pricing structures:

Assets Under Management. Often, financial advisers charge a percentage based on assets under management — or how much of your money they manage. The industry median charge is 1% (meaning half charge less and half charge more), according to Fidelity. So, if a financial adviser is managing $500,000 of your money and charges 1% of assets under management, their services would cost you $5,000 per year. But it’s possible to get advice for less due to the competitive nature of the business. So, shop around and compare the costs for advice based on assets under management.

Hourly. Some charge by the hour, not by the amount you have in your account. Rates range from $200 to $400, according to financial website NerdWallet. Going the hourly rate route is a good option if you just want to set up, say, a basic retirement savings plan, or you want an adviser to analyze the holdings and asset allocation in your 401(k) to see how much income that will generate, as well as let you know if you’re on track for retirement or whether any tweaks to your portfolio are necessary to reach your goals.

Flat fee. Some financial advisers charge a set fee based on the work that’s being done. This pay structure is akin to an a la carte menu at a restaurant, where each menu item you select comes with its own charge. A financial adviser, for example, may quote you a set one-time fee to create a comprehensive financial plan for you.

Should I use a robo-adviser to save money?

Not every investor has the time or money to hire a real-life financial adviser to help them with retirement planning. Some people have simple goals, such as saving for retirement or planning a 4% annual withdrawal strategy, and therefore don’t require a comprehensive retirement financial plan. For these people, a robo-adviser may be a good option. Robo-advisers can deliver digital portfolio management and asset allocation decisions at a fraction of the cost of a traditional adviser.

There are several factors to consider when choosing the best robo-adviser for you.

Keep in mind that some digital robo-advisers, including Facet Wealth and Empower, as well as many big brokerages and mutual fund companies, also offer virtual access to a human financial adviser if the need for a financial plan arises.

Red flags when hiring a financial adviser — avoid the sharks

Zoe, a wealth platform that vets independent financial advisers and connects them with people looking for advisers, highlights key red flags to watch out for when shopping for an adviser. For one, you’ll want to think twice about joining forces with an adviser who focuses on short-term performance rather than a long-term plan. You should also tread carefully with advisers who claim to consistently outperform the market. Advisers who push products, such as mutual funds or annuities, for which they earn a commission, are another red flag. It’s also important to vet financial advisers to ensure they have no record of unethical or illegal behavior.

Read More

• Average Net Worth by Age: How Do You Measure Up?
• The 'Rule of 25' for Retirement Savings: Start Here
• Use the 'Newton Rule' to Grow Your 401(k) Retirement Savings
• Are Investment Fees Putting Your Retirement at Risk?
• How to Retire Early in Seven Steps

One answer comes from a financial adviser who 30 years ago weighed the past performance of the stock and bond markets in a portfolio composed of 60% equities and 40% bonds. He calculated that retirees could safely withdraw 4% of their savings during the year they retire and adjust that amount for inflation each subsequent year. He claimed a retiree wouldn’t run out of money for at least 30 years of retirement under this plan.

As a rough guideline, the 4% rule has some merit, but it’s far from a foolproof strategy. At the very least, it exposes early retirees to risk because, according to theory, it assures only 30 years of solvency. If you retire at 60, for instance, you’re likely to run out of money once you reach 91, according to this theory. But that’s not the only risk.

Volatility can torpedo your plan

The biggest risk is market volatility, especially in the early years of retirement. Suppose Mr. and Mrs. Doe have a $1.67 million portfolio, invested 60-40 stocks and bonds — meaning they have just over $1 million in stocks and $670,000 in bonds. Say that in year one, their $1 million stock portfolio drops by 26%. If they also make a $40,000 withdrawal, their stocks would be worth just $700,000. The stock market would have to have a terrific multi-year run to make up for that loss plus future withdrawals. It could start their equities on a spiral toward zero prematurely.

Suppose their 40% bond allocation ($670,000) returned 4% that year, so there’d be no loss of value after a 4% withdrawal. That provides a nice cushion, and the couple could instead take all or most of their withdrawal from the bond portfolio — but that would leave them overly invested in stocks.

One way to reduce the risk is to lower the stock proportion. If you went with 40% stocks and 60% bonds to start, you’d have less risk because bonds are theoretically less volatile. But stocks, though more volatile, have given higher returns over time.

A way to ensure you won't run out

If you could predict exactly how long you (and your spouse, if you’re married) will live, it would simplify planning. But you can’t, and you may exceed the average by a wide margin. This is called longevity risk.

A lifetime income annuity lets you transfer this risk to an insurance company. Essentially, you’re creating a guaranteed lifetime pension. In return for a lump-sum payment, the insurer guarantees a stream of income for life.

It works much like any other form of insurance. Annuity owners who die younger than average subsidize those who live past their life expectancy. It’s the opposite of life insurance, where policyholders who live to a ripe old age subsidize insureds who pass early.

An income annuity can cover a single person or a married couple. A couple choosing the joint option ensures the same income will flow as long as either spouse is living. This option pays somewhat less income because it’s more likely that at least one spouse will live to a very old age.

The income annuity can be either immediate or deferred, with payments starting at a future date you choose.

Some tax implications

An income annuity pays more income than other vehicles because each income payment includes both non-taxable return of principal and taxable interest until your principal has been repaid. This assumes you’re using nonqualified funds — that is, an annuity that’s not in an IRA or other qualified retirement plan.

You may think, “Well, what’s the big deal since much of the income is just my own money coming back to me!” But remember, that ample income will keep flowing to you even after you’ve gotten all your money back if you live long enough. (Once that happens, the payments become fully taxable.) That’s the longevity insurance aspect.

Suppose Mr. and Mrs. Doe, both age 65, purchase a joint life annuity with $500,000 of nonqualified funds. As of January 2025, they could get up to $2,784 of monthly income, of which just $1,116 is taxable for the first 25 years of the contract. After that, the entire amount would be taxable.

The product they chose offers no payment to their heirs should both die before the principal is repaid. If they chose an installment-refund option that guarantees their heirs would inherit any unpaid principal, the monthly benefit would be slightly lower.

A higher-yielding, safe alternative to CDs and bonds

Retirees who buy an income annuity won’t need to have as much money in fixed-income vehicles, but just about all retirees need some funds in that bucket. This bucket includes bonds of various types (as individual bonds or bond funds), money-market funds, bank certificates of deposit and CD-like fixed-rate annuities known as multi-year guaranteed annuities (MYGAs.)

Each of these options has its pros and cons, and determining which mix best suits your needs takes some thought. Retirees and people about to retire, however, should consider MYGAs because rates are attractive today.

Like a CD, a MYGA pays a guaranteed interest rate for a set period, usually two to 10 years. There’s no sales charge, so all of your money goes to work for you immediately. Because nonqualified interest is tax-deferred until withdrawn, it can accumulate faster.

While annuities are not FDIC-insured, they are covered by state guaranty associations, up to certain limits, which vary by state. While this is a valuable backstop, it’s unlikely you’ll ever need to rely on it, especially if you choose a financially strong issuer.

How MYGAs can fill a gap

Today, you can get a great rate on a MYGA and lock it in for whatever term you’re comfortable with. For instance, you can earn up to 5.60% for a six-year guarantee or up to 5.55% for a 10-year term. If you only want to commit for two years, you can still get up to 5.20%.

Most MYGAs offer significant liquidity. Many let you take out up to 10% of the current value annually, penalty-free, after the first year. This makes them suitable for retirees who need income. Some annuities, however, have lower amounts or penalize all withdrawals during the term.

If you have one or more MYGAs that permit ample withdrawals, it provides great flexibility. Suppose the Does have a great year with their stocks, which are up 25%. They might decide to withdraw the entire 4% from their stock portfolio that year and leave all their annuity interest untouched and tax-deferred.

The following year, the market declines 15%, so they decide to use their annuities to fund the bulk of their 4% withdrawals. MYGAs with liquidity would let them tap their equities when the market is up and not be forced to sell when it’s down. (Note: Withdrawals of annuity interest before age 59½ are normally subject to a 10% IRS penalty.)

The best strategy for withdrawing money in retirement takes thought and planning and choosing the optimal financial vehicles. Income annuities and/or fixed-rate annuities may be a suitable choice for you.

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities since 1999. Ken is a nationally recognized annuity expert quoted in national media and a widely published author. A free rate comparison service with interest rates from dozens of insurers is available at www.annuityadvantage.com or by calling (800) 239-0356.

Want more guidance on retirement savings? Sign up for Kiplinger's six-week series, Invest for Retirement.

Related Content

• Should You Add an Annuity to Your Retirement Portfolio in 2025?
• Annuities: What They Are and How They Work
• Buying an Annuity? Avoid These Three Classic Mistakes
• The Key to Choosing the Right Annuity: Do Your Homework
• The Tax Rules to Consider Before Buying an Annuity

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

For retirees seeking a steady stream of income, an "immediate annuity" is a popular choice. This type of annuity converts the amount you invest (usually a lump sum at the start of the annuity) into regular payments over a set period or for your lifetime. Immediate annuities may be fixed or variable interest.

You can invest as much as you want in an annuity, but balances tend to range from $200,000 to $1 million, according to Ken Nuss, founder and CEO of AnnuityAdvantage. That doesn’t mean you can’t purchase an annuity with $50,000 or $100,000. It's up to you.

How do interest rates affect annuity payouts?

The interest rate set by the Federal Reserve is a key factor in how much your annuity will pay you each month. The higher the interest rate, the more money you get.

“What ultimately impacts the payout is the expected return the insurance company gets on the premium,” says Stephen Kates, formerly a principal financial analyst at Annuity.org. “The higher the rates are, the better.” Beyond interest rate, here are the factors that impact your annuity payment.

Amount deposited: The more you deposit in the annuity, the more of a payout you’ll receive.

Age: The older you are when purchasing an annuity, the higher the payment. The insurance company doesn’t expect you to live as long as someone who purchases an annuity at a younger age, thus the higher payment.

Gender: Since women tend to live longer than men, the payment is typically smaller for females than males. At last check, the life expectancy for males and females in the U.S. is 74.8 years and 80.2 years, respectively.

Premium amount: A higher initial premium will yield a higher monthly payment. Once you purchase an annuity, however, you cannot access the money without facing potential penalties and fees.

Payout choice: With an immediate annuity, you can have it pay you until your death, which is known as a "single-life payout." Or, you may have it continue to pay a survivor or beneficiary, known as a "joint" or "survivor payout." Your monthly annuity payout will be lower than with a single-life payout option in that type of annuity.

Period of payouts: If you choose to guarantee payments for your lifetime, your payout will be smaller than if you selected a ten-year term. Many retirees select a lifetime payout to guarantee income for the long haul.

What are immediate annuities?

Immediate annuities can be fixed, variable or indexed. With a fixed immediate annuity the interest rate is fixed when the contract is signed, which gives you that protection from fluctuations in the markets. With a variable annuity, payments fluctuate based on the performance of the underlying investment.

An indexed annuity payout is linked to the performance of a specific market index. A fixed immediate annuity typically has the smallest return but it is the safest and most consistent. You know what you are getting paid. There are no surprises.

How much does a $100,000 annuity pay per month?

Before you purchase an immediate annuity, you probably want to know how much income it will give you each month. That will help you determine how much money you want to annuitize and how it will impact your monthly budget.

While all of the factors discussed above impact the annuity payout, you can get a general idea of how much your annuity payout will be monthly below.

We’ve based the payouts on a fixed immediate, life-only annuity for a 65-year-old buyer. Data is provided by Annuity.org.

Immediate annuity amount: $50,000
Buyer age: 65
Buyer sex: Female
Payout: $300

Immediate annuity amount: $50,000
Buyer age: 65
Buyer sex: Male
Payout: $314

Immediate annuity amount: $100,00
Buyer age: 65
Buyer sex: Female
Payout: $599

Immediate annuity amount: $100,00
Buyer age: 65
Buyer sex: Male
Payout: $629

Immediate annuity amount: $200,00
Buyer age: 65
Buyer sex: Female
Payout: $1,199

Immediate annuity amount: $200,00
Buyer age: 65
Buyer sex: Male
Payout: $1,258

Immediate annuity amount: $250,000
Buyer age: 65
Buyer sex: Female
Payout: $1,498

Immediate annuity amount: $250,000
Buyer age: 65
Buyer sex: Male
Payout: $1,572

Immediate annuity amount: $300,000
Buyer age: 65
Buyer sex: Female
Payout: $1,798

Immediate annuity amount: $300,000
Buyers age: 65
Buyers sex: Male
Payout: $1,886

Immediate annuity amount: $500,000
Buyer age: 65
Buyer sex: Female
Payout: $2,997

Immediate annuity amount: $500,000
Buyer age: 65
Buyer sex: Male
Payout: $3,144

Immediate annuity amount: $750,000
Buyer age: 65
Buyer sex: Female
Payout: $4,495

Immediate annuity amount: $750,000
Buyer age: 65
Buyer sex: Male
Payout: $4,716

Immediate annuity amount: $1 million
Buyer age: 65
Buyer sex: Female
Payout: $5,993

Immediate annuity amount: $1 million
Buyer age: 65
Buyer sex: Male
Payout: $6,288

What are joint annuities?

For married couples a joint annuity is another popular choice. With a joint annuity two people, usually spouses, are named as annuitants and have the right to receive payments.

Joint annuities are designed with retired couples in mind who want guaranteed monthly income that continues after either one of the spouses is alive. Payments tend to be lower but they also tend to last longer.

A joint annuity provides a steady stream of monthly income and peace of mind knowing when you pass your spouse can still revieve the income. It also prevents the spouses from outliving their income in retirement, a real fear for many retirees.

How much does a $100,000 joint annuity pay per month?

With a joint annuity, the monthly payout is going to be smaller. Here’s a look at how much. We’ve based the payouts on a fixed immediate, life-only annuity, with both buyers aged 65. Data is provided by Annuity.org.

Joint annuity amount: $50,000
Buyers' age: 65
Payout: $280

Joint annuity amount: $100,00
Buyers' age: 65
Payout: $561

Joint annuity amount: $200,00
Buyers' age: 65
Payout: $1,122

Joint annuity amount: $250,000
Buyers' age: 65
Payout: $1,403

Joint annuity amount: $300,000
Buyers' age: 65
Payout: $1,684

Immediate annuity amount: $750,000
Buyers' age: 65
Payout: $4,212

Knowledge is power

Annuities are a way to guarantee income for your lifetime, but many factors impact how much of an annuity payout you’ll receive.

Knowing how much you can get each month based on different contract sizes can help you plan your cash flow when you do decide to retire.

Related content

• Should You Add an Annuity to Your Retirement Portfolio in 2025?
• Annuity Definition and 14 Terms You Need to Know
• Buying an Annuity? Avoid These Three Classic Mistakes
• Annuity Red Flags to Watch Out For

Instead of outliving their money, their money outlives them. For others, that fear keeps them up at night, ruining what is supposed to be a time of enjoyment and rediscovery.

Annuities can alleviate some of those fears, which is why quarter after quarter, sales top $1 billion. That was the case in the second quarter. Total U.S. annuity sales increased 8% year over year to a record high $119.2 billion, according to LIMRA’s U.S. Individual Annuity Sales Survey. Favorable interest rates have been a big driver of demand, but so too is a desire for guaranteed income in retirement.

Then there’s the SECURE Act 2.0, which allows annuities to be included in 401(k)s. It gives investors more access to this type of guaranteed income, making annuities more popular.

But just because you can, should you add an annuity to your retirement portfolio? The answer: it depends.

Should you buy an annuity in 2025?

If any of this sounds familiar, an annuity may be right for you.

1. You're worried about running out of money in retirement. If you are losing sleep fretting over your nest egg, an annuity can give you peace of mind and a good night’s sleep. With an annuity, you enter into a contract with an insurance company and make payments over a period of time. That money is invested and paid out to you at a later date, either as a lump sum, monthly or annual payments over your lifetime.

Annuities that guarantee income for your lifetime are either immediate or deferred. “Guaranteed income annuities (immediate or deferred) are the only financial products that can do this,” says Ken Nuss, founder and CEO of AnnuityAdvantage, an online provider of fixed-rate, fixed-indexed, and lifetime income. “We sometimes call this creating your own personal pension.”

An immediate annuity is typically purchased with a lump sum and you then begin receiving payments within 12 months or less. An immediate annuity can be fixed or variable. A deferred annuity is designed to grow on a tax-deferred basis, providing guaranteed income to the annuitant starting on a particular date they choose. The savings period for deferred annuities can last from a few years to decades, and the money grows over time.

2. You want to play it safe but with a better return than bank CDs. Fixed annuities tend to outperform bank CDs because they are held longer, giving the insurance company more time to invest and grow the money. Also known as multi-year guaranteed annuities, these annuities have guaranteed interest rates and grow on a tax-deferred basis. Nuss says they are best for savers seeking higher yielding alternatives to bank CDs and bonds, but still want their interest rate and principal to be guaranteed.

3. You've maxed out your qualified retirement plan contributions. If you’ve maxed out all of your tax-advantaged investment accounts including a 401(k) and IRA and still want to save more for retirement, an annuity can be a tax-smart way. The money in the annuity grows tax free, enabling it to compound at a greater rate. If you contribute with after-tax dollars, those contributions are not subject to any additional income tax upon withdrawal.

4. You want stock market exposure and principal protection. Fixed indexed annuities are a safe way to get exposure to the stock market and diversify a retirement portfolio. With a fixed indexed annuity you’re apt to produce higher returns than other fixed-income investments but lower returns than equities.

This type of annuity is particularly attractive to people who are in the preservation phase of retirement savings. “If you want to participate in the stock market upside, but simultaneously guarantee your principal against downside risk, take a look at fixed indexed annuities," says Nuss. “Most people are aware, as we age...portfolio risk reduction should be a serious consideration.”

5. Your saving sources aren’t diversified. A good rule of thumb for retirement savers, according to Jeffrey Mellone, a wealth advisor at TIAA, is to structure your expected retirement income in thirds: one-third from Social Security, one-third from portfolio distributions, and one-third from lifetime guaranteed income.

Without the guaranteed income you end up with too much risk. “The stocks and bonds portion is susceptible to market fluctuations,” says Mellone. “Lifetime income adds more stability.”

Are there any downsides to annuities?

Annuities have a place in retirement savings, but there are downsides that should be considered.

For starters, your money is tied up in annuities. You invest now for a payout later. If you need the money before 59-1/2, that money is taxed as ordinary income and you could get hit with a 10% federal income tax penalty.

There are also fees and commissions. Some annuities may charge fees, such as surrender charges, mortality and expense risk fees, sales and commissions and administration fees. In some cases, coupled with fees and commissions, a rider could further dilute your investment.

Annuities growing role in retirement

Annuities are finding a place in American retirement portfolios thanks to their ability to provide guaranteed income for life. An annuity is protected, can grow tax deferred and provides peace of mind. As a result, annuities are becoming a sought-after component of a diversified retirement plan.

Related content

• Annuities: Do You Need Guaranteed Income In Retirement?
• Annuity Red Flags to Watch Out For
• Annuity Payouts: How Much Can You Get Each Month?
• The 'Me-First' Rule of Retirement Spending

Thanks to the SECURE Act of 2019, sponsors of 401(k) plans can offer annuities to participating employees. Nonetheless some plan sponsors are reluctant to roll them out. A big reason: a lack of annuity fluency.

A recent survey of plan sponsors by TIAA found that adding annuities to 401(k) and other defined contribution plans may be slow to take off because of a lack of understanding about how annuities work.

Of the plan sponsors offering annuities, only 37% said they could articulate the value and importance of annuities. Meanwhile, among plan sponsors that aren’t adding annuities to their lineup, 43% said a lack of understanding is the primary barrier to adoption.

It's not just the plan sponsors who are confused. According to the Policygenius Annuities Literacy Survey, four out of five American adults still can’t define an annuity.

If a lack of annuity fluency is keeping you from adding guaranteed income to your 401(k), we’ve got you covered.

Here’s a list of the key annuity terminology you need to know to demystify this type of retirement savings vehicle.

Annuity definition and terms to know

1. Annuity: It’s a contract between an insurance company and an individual in which a fixed sum of money is paid periodically over a specific period of time or for the person’s lifetime.

2. Annuization: The process of converting the investment into the periodic income payments.

3. Annuity contract: This is the legal and binding contract that spells out the terms of the annuity including the schedule of payments, surrender fees (we’ll get to that later) and costs associated with the annuity.

4. Annual contract fee: This is a fee paid yearly to the insurance company for administering the contract. If your annuity has a high account value it may be waived.

5. Cash value: This is the total accumulated value of the annuity. It includes the premiums you paid plus interest before withdrawals and charges.

6. Accumulation phase: This is the period in which you make payments to the insurance company. It can be periodically or a lump sum. That money is invested with the aim of it growing over time.

7. Distribution phase: This is the period in which you begin to receive periodic payments.

8. Death benefit: If you own an annuity you must designate a person who will receive any payments due if you were to pass. That person is known as the beneficiary.

9. Fixed annuity: Payments are made monthly for the same amount. With a fixed annuity you know exactly how much you’ll receive monthly.

10. Guaranteed interest rate: This applies to a fixed rate annuity and is the minimum interest the insurance company pays each year.

11. Variable annuity: The payouts are tied to the rise and fall of the underlying investment. If the investment thrives account holders have the opportunity to increase the payout. But if the underlying investment falls, so does the payout amount.

12. Indexed annuity: The payouts are tied to the performance of an index such as the S&P 500.

13. Immediate annuity: With this type of annuity you typically purchase it with a lump sum and then begin receiving payments within 12 months or less. An immediate annuity can be fixed or variable.

14. Income for life annuity: Payouts are for life no matter what age you live to. The size of the payments depend on the account size and the life expectancy of the person holding the annuity. This type of annuity can be fixed or variable.

15. Surrender charge: A penalty that’s deducted from the account value if money is withdrawn from the annuity prematurely. The surrender charge can vary based on the insurance company, the age of the annuity and amount withdrawn.

16. Free look period: This is the window in which the annuity holders can cancel the contract and receive the initial payment or the value of the annuity contract depending on the rules of the state the account holder resides in. It’s typically between ten and thirty days.

17. Rider: This is additional benefits you can add to your annuity for a fee. Common types of annuity riders include living benefits and death benefits.

Living benefit riders provide additional benefits during the life of the annuity contract while death benefits allow you to pass on the benefits to someone else after the account holder dies. For married people a death rider can provide income to the surviving spouse.

Related content

• Should You Add an Annuity to Your Retirement Portfolio in 2025?
• Annuity Fees: Are You Paying Too Much?
• Annuity Payouts: How Much Can You Get Each Month?
• How to Find a Financial Adviser for Retirement Planning

Should you consider crypto? It depends on where you are in life and what your financial situation is. The general rule is, don’t gamble with any money you can’t afford to lose.

Cryptocurrency is way out on the risk curve. It’s volatile. You can make a bundle or lose it just as fast. Some people have made their fortune; some have lost millions. Most folks have come out somewhere in the middle.

It is somewhat like buying lottery tickets or going to a casino. Maybe you’ll get lucky, and unless you’re very poor, losing $50 once in a while won’t imperil your financial future. A small stake in crypto won’t either. But making big bets can be perilous.

If you’re young, you can wait out the crypto market. Sooner or later, it will probably go up. Older people don’t have that luxury. When you’re retired, you’ll need a steady, reliable income to replace your former wages or business earnings.

Though some merchants do accept certain cryptocurrencies, most often, the only way you can get money out is by selling it. If you need to cash in when the price is up, you’ll do fine. But if you must sell when the price is low, you won’t. That’s the problem. Most cryptocurrencies are extremely volatile and experience wide price swings.

Reducing risk while keeping up with inflation: Stocks and bonds

People in or near retirement need to have their investments, savings and future income keep up with inflation without exposing themselves to excessive risk and volatility. It takes a balanced approach.

Here are some more appropriate investments for people in their 50s and older, starting with options that are higher on the risk scale and then moving on down to lower-risk possibilities.

Individual stocks. Having some money in common stocks can make sense, provided you can withstand volatility. While the stock market has performed spectacularly in recent years, far outpacing inflation, you have to have the stomach to bear sharp declines. (Remember 2020?) The law of gravity in the stock market hasn’t been repealed! Many financial experts recommend caution today because the major stock indices are at all-time highs.

Don’t overdo it. The right equity allocation depends entirely on your situation. Stick to a smart allocation over time.

Mutual funds and ETFs. Another way to reduce risk is to invest in stock mutual funds and ETFs instead of individual stocks. You can also achieve risk reduction by concentrating your holdings in stocks that may pay substantial dividends so that you’ll have a stream of income even if the market plummets.

Bonds. Bonds are less risky than stocks and pay out more income than most stocks. They’re worth considering, but they have drawbacks too. With individual bonds, you’ll get your principal back if you hold them to maturity, assuming the issuer (a corporation or municipality) remains solvent. That’s called credit risk. U.S. Treasury bonds have virtually no credit risk, but they pay lower rates.

Most people instead invest in bond funds but their price is not guaranteed. When interest rates rise, the price per share of a bond fund will fall. That typically won’t affect dividend payments, but it can be unnerving.

Lowest-risk options: Bank CDs and guaranteed fixed annuities

Guaranteed vehicles, in contrast, are very low-risk because both income and principal are guaranteed. What you see is what you’ll get, which is why they’re popular and useful from both financial and peace-of-mind viewpoints.

They include bank certificates of deposit and CD-type annuities, officially labeled multi-year guarantee annuities (MYGAs). With each, you get a guaranteed interest rate for a certain term. The biggest risk is that if you need to cash in a CD or MYGA before the term has concluded you’ll pay a varying penalty, which may be substantial. Some CDs and most MYGAs do offer penalty-free partial withdrawals.

Though similar in many ways, CDs and MYGAs have some significant differences. Bank CDs are guaranteed by the Federal Deposit Insurance Corp. (FDIC). MYGAs are not. But annuities are backstopped by annuity guaranty associations in every state. Coverage limits vary.

CDs in nonqualified accounts create taxable income every year. Nonqualified annuities offer tax deferral as long as you don’t take withdrawals from them, and you can defer interest distributions as long as you like. Any withdrawals of interest from an annuity before age 59½ are normally subject to a 10% IRS penalty.

Both CDs and annuities can also be very suitable for an IRA or Roth IRA.

Have your cake and eat it, too?

Can you get market growth potential without risking your principal? Surprisingly, it’s possible.

Fixed index annuities, first introduced in 1995, protect you from any losses but offer upside potential and can guarantee income too. Like any other vehicle, they have pros and cons.

Fixed indexed annuities credit interest annually to your account based on annual changes to a market index, such as the S&P 500 or Dow Jones Industrial Average. You receive an interest credit when the index value increases.

When index value decreases, even if the market dives 30%, you’ll lose nothing. Your principal and all previously credited interest are always protected, even if the stock market crashes.

But you don’t usually get all of that increase. You normally get only part of it because the annuity upside will be limited by a cap or participation rate percentage. So, you can have part of your cake and eat it, too.

Many indexed annuities let you purchase an optional income rider that guarantees a certain future lifetime income. These annuities are complex, and finding one that fits your needs takes more careful consideration than with a MYGA, which is straightforward.

If you’re considering investing in a cryptocurrency, evaluate your situation first. Do you need to take the risk it entails? Have you considered the alternatives? If you do decide to invest, limit your risk with a modest stake if you’re in your 50s or older.

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at www.annuityadvantage.com or by calling (800) 239-0356.

Related Content

• A Personal Journey Through Cryptocurrency's Ups and Downs
• Should You Own Crypto if You’re Retired?
• Fixed Index Annuities as Retirement Tools: Pros and Cons
• How Are Annuity Withdrawals Taxed?
• Why Annuities Sometimes Sound Too Good to Be True

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Before purchasing an annuity, it’s important to understand how these products work. Annuities are contracts issued and distributed by an insurance provider. They have two different phases: The accumulation phase and the annuitization phase. During the accumulation phase, the investor funds the annuity either with monthly payments or a lump sum. The money then grows depending on the type of annuity it is. During the annuitization, or payout phase, the investor receives that money for a fixed time or the remainder of their life. These products are designed to provide a steady stream of income to retirees who fear they may outlive their assets.

An annuity can be immediate or deferred. Immediate annuities are typically purchased by investors who’ve received a large sum of money and prefer to exchange it for cash flow beginning instantly or up to a year away. Deferred annuities are different. They’re designed to grow on a tax-deferred basis, providing annuitants with stable income that begins on a specified future date of their choosing.

Annuities are usually structured as fixed, fixed indexed or variable. Fixed annuities provide a declared guaranteed interest rate for a set number of years. Some of the more common term lengths are 24 to 72 months. Because of their similarity to certificates of deposit (CDs), some people refer to these as CD annuities. Variable annuities have the potential to bring larger future payments so long as the investments of the funds do well. If the funds do poorly, the payments will be smaller. In other words, your payments are dependent on the success of the investment strategies. Fixed indexed annuities (FIAs) are fixed annuities that offer a return based on the performance of an equity index, like the S&P 500 index. But because they are fixed, contract guarantees protect the contract owner from market losses. FIAs share in the returns of the index they are linked to and its gains, but not in its losses.

As with any investment, there are varying levels of risk involved, so you’ll want to ensure you make the best choice for you and your financial goals. To help you get started, here are a few mistakes you’ll want to avoid.

Not understanding taxation

You should be aware of the difference between purchasing an annuity with pre-tax or after-tax dollars. An annuity purchased with pre-tax dollars, such as in an IRA or 403(b) plan, is a qualified annuity. Non-qualified annuities are those purchased with after-tax dollars. Many people enjoy the additional benefits of not having to pay tax each year on interest earned inside a tax-deferred annuity or the required minimum distributions (RMDs) that come with pre-tax accounts. But keep in mind that while the deposit (cost basis) will never be taxed, the gains inside of the annuity will be taxed at the time of withdrawal.

Are you purchasing an annuity within an inherited IRA? With the SECURE 2.0 Act changing RMD rules, you need to be aware of the annuity’s surrender charge period and the need to deplete the account within 10 years. What about using an annuity in a Roth IRA? A tax-free income stream from a Roth annuity sounds wonderful, but that Roth must be “seasoned” by being open for a minimum of five years before its withdrawals are fully tax-free. As always, consult a tax adviser to give you proper guidance on the type of account you’re looking to open and any potential pitfalls involved.

Not refinancing a low-interest annuity

When mortgage rates are high, the chances are it’s not a good time to refinance a low-interest mortgage. The days of 3% mortgages seem like eons ago. The average 30-year fixed rate reached an all-time record low of 2.65% in January 2021 before surging to 7.79% in October 2023, according to Freddie Mac. If you have a 3% mortgage, with 27 years left on your loan, refinancing at 7% doesn’t make a lot of sense.

On the flip side of the coin, refinancing opportunities currently abound with lower interest-paying annuities. Back in January 2021, fixed annuity rates were paying 2% to 3% due to the U.S. 10-year Treasury being in a very depressed state. The insurance companies that offer annuities themselves invest in long-term, safe investments, such as corporate bonds and government treasuries, mortgages, real estate and policy loans, and price their offerings to clients based on the rates they can get on their own investments at that time. Fast-forward to September 2024, and the highest interest five-year annuities are paying between 4.5% and 6%. It’s not a coincidence that the 10-year Treasury reached a high of 5.021% as recently as October 2023.

The same can hold true for refinancing and upgrading older income-focused annuities. Higher interest rate environments have increased income payout factors and income account value growth for insurance companies. Since they are earning more on their own savings and investments, some of those earnings can be shared with policy owners. We have seen many instances of annuities that have been deferring income for several years being unable to keep up with the guaranteed income available in today’s annuity space. With inflation hitting recent long-time highs, why would you not try to maximize every dollar you can get for future income?

Overinvesting in annuities

While the current rates and income benefits in today’s annuity market can be very alluring, annuities can be a complicated investment with a lot of different factors at play. That is why the type of annuity you purchase, the insurer you’re purchasing it from, your age and your personal situation all impact the right fit in this type of investment.

To use a simple example, if a 70-year-old person has $100,000 of investable assets, it doesn’t make sense for them to invest $90,000 of that into a long-term insurance contract, no matter how good those benefits may be. This is poor diversification, leaves them with little liquidity to address emergencies and is not in the best interest of the consumer.

To ensure you’re purchasing an annuity that suits your needs, be sure to consult with a financial adviser with annuity experience. A qualified independent fiduciary can help you determine how much to invest in annuities based on your financial circumstances as part of a healthy, holistic retirement plan.

Investment Advisory services offered through Brookstone Wealth Advisors, LLC (BWA), a registered investment advisor. BWA and Brookstone Capital Management, LLC are affiliated companies. BWA and Beckett Financial Group are independent of each other. Insurance products and services are not offered through BWA but are offered and sold through individually licensed and appointed agents. Index or fixed annuities are not designed for short-term investments and may be subject to caps, restrictions, fees and surrender charges as described in the annuity contract. Guarantees are backed by the financial strength and claims-paying ability of the issuer. Please refer to our firm brochure, the ADV 2A Item 4, for additional information. Registered Investment Advisors and Investment Advisor Representatives act as fiduciaries for all of our investment management clients. We have an obligation to act in the best interests of our clients and to make full disclosure of any conflicts of interest, if any exist. Please refer to our firm brochure, the ADV 2A item 4, for additional information.

Related Content

• Annuities: 10 Things to Know
• Five Things About Annuities That May Surprise You
• With Fixed Indexed Annuities, Zero Is Your Hero
• Is Inflation a Big Retirement Worry? How to Protect Savings
• Should Retirees Continue to Invest? Yes, and Here’s How

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

I spent six years of that period registered with ING Financial Partners. At the time, ING was one of the biggest providers of variable and fixed annuities. Today, ING doesn’t exist in the U.S., and its insurance and annuity arms have been sold. This is representative of the massive shift in the market during the past 25 years. The companies that once dominated have moved on to new things. The products have also significantly changed and, in many cases, have improved.

This article is a nudge to dust off that old contract and use it for something you care about. After all, you worked hard for the money, so you should get something out of it. Here are three options that will cover most, but not all, situations.

1. Surrender the annuity

I recently met a husband and wife with about $1 million in annuities purchased in the early 2000s. Despite having the annuities for this length of time, the couple had made only about $100,000 in the accounts. Reasons: a combination of poor investment choices, expensive products and a low-interest-rate environment.

The surrender option makes sense for those who are looking for liquidity over income. It does not make sense for anyone in the surrender period and likely does not make sense for anyone with large, unrealized gains. That’s why it was important to point out that their gains weren’t significant relative to the surrender or account value.

Unlike a taxable investment account, annuities are tax-deferred until withdrawn. At that point, they are taxed on a LIFO (last-in, first-out) basis, as income, not capital gains. In plain English, that means the clients would show $100,000 in additional income in the year surrendered on the front page of their income tax return.

2. Turn on the income

This is often referred to as “annuitizing,” which is also often an incorrect characterization. While annuities allow you to turn on income via annuitizing, most people turn on an income stream via a guaranteed minimum income benefit (GMIB). These are “riders” that you pay for and that guarantee you income for the life of the income beneficiary. It is important to understand guarantees are subject to the claims-paying ability of the issuing insurance company.

Many of the deferred variable annuities that we have come across with prospective clients are underwater. This means that the income benefit is higher than the account value. In this case, the best option may be to elect to start income from the current annuity contract. If the account value and income value are similar, you may be able to get more income from a new annuity.

3. Exchange the old annuity for a new one

In the example I gave earlier, the poor performance of the couple’s annuities was due in part to expensive products and low-interest-rate environments. Deferred variable annuities were plagued by the former. Fixed annuities, by the latter.

Many of the deferred variable annuities of the early 2000s came with all-in expenses of over 3%, annually. These types create quite a hurdle for even the best underlying investments. In the past decade, costs and structures of variable annuities have come down significantly.

If you are just looking for tax-deferred accumulation, the odds are that a new product would be less expensive. The IRS allows you to exchange an old annuity for a new one, deferring the gain until you take money out. This is referred to as a 1035 exchange.

Fixed annuity guarantees move up and down with interest rates which means the period from 2010 to 2022 was quite painful. However, in the past two years, the guarantees have moved up significantly. We have had clients who were able to generate more than 30% more income by exchanging their old annuity. Those rates have decreased since the Fed started to cut, but are still quite a bit higher than they were previously.

Look at different scenarios before taking action

One cool thing you can do within most financial planning software is run “what if” scenarios that can illustrate surrender vs income vs exchange. Your odds of success will go up or down based on the choice you make. You can access a free version of the software we use.

Lastly, you may have noticed that I didn’t mention leaving the annuity to your kids as one of the options. Nine times out of 10, this is not a good move. I’ll cover why in a forthcoming article.

Related Content

• Annuities: What They Are and How They Work
• What You Should Know About Annuities
• Annuities: 10 Things to Know
• Which Retirement Accounts Should You Withdraw From First?
• 10 Inefficiencies I Look for on Rich Retirees' Tax Returns

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

An annuity is a contract between you and an insurance company where you make payments through a lump sum or contributions in exchange for future income. The insurance company invests these funds for you throughout the accumulation phase where they grow tax-deferred.

However, annuities are complex and often misunderstood, so it's important to do your homework by researching which annuity may best suit you and your retirement plan.

Pros of annuities

Annuities are most commonly used as an investment tool for those in or very close to retirement. An annuity provides the purchaser with a fixed income stream. The payouts will typically last for a lifetime, with the payout agreed at purchase. This can help provide peace of mind for the retiree and help them to avoid outliving their assets.

Annuities have other benefits as well, depending on which type you choose. They can be a relatively safe investment option compared to others. The insurance company has to pay the annuity income they promised to the buyer, giving you a guaranteed income stream.

Annuities also provide flexible payout options, such as monthly, quarterly and annual payments or a lump sum. Unlike other retirement accounts, like IRAs or 401(k)s, annuities have no contribution limits. This makes them a great option for anyone who wants to put more money away for retirement.

Cons of annuities

While annuities can be a great investment choice, they are not perfect. One of the reasons why many people choose not to invest in annuities is because of the possibility of high costs and fees. This can be investment management fees, administrative fees or expense fees, which could significantly reduce your returns over time.

If you want to get out of an annuity contract, it may cost you. Many companies make it difficult to leave your annuity by adding high surrender charges, which could end up being a large percentage of the value of your contract. You may not be able to get out of the contract when you want either, as many annuities come with a limited surrender period.

Which annuity is right for you?

There are five different types of annuities, so which one is right for you? The most common, and often easiest to understand, are fixed annuities. These annuities guarantee a minimum payment and are not impacted by market volatility, so it's easier to anticipate your monthly payments. This annuity will grow at a fixed interest rate determined by the insurance company you purchased it from.

A variable annuity can be riskier and more expensive. Unlike fixed annuities, the interest rate can change with market fluctuations. They can also come with a variety of rider fees. A rider is an optional enhancement you can add to your annuity at an additional cost. These are designed to help you modify your contract and help protect what is important to you. A variable annuity uses several investment options, like stocks and bonds, to determine payouts and grow the principal. You will choose the risk that you want for your contributions — low, moderate or high — and in turn your payouts will increase or decrease depending on the state of your investments.

Immediate annuities are designed to provide a guaranteed lifetime payout and payments begin right after purchase. This type of annuity is funded by a large, one-time contribution.

Similar to an immediate annuity, a deferred annuity provides payouts in exchange for a large sum of money. However, these payouts do not begin immediately. The dollars grow tax-deferred until you are ready to begin receiving payments.

An indexed annuity provides returns that are linked to a specific market index. If the market does well, your return will go up, and even if it performs poorly, you won’t lose money on your principal. This is good for people who want the potential for growth while still being protected. The main difference between an indexed annuity and a fixed annuity is how their interest works. With a fixed annuity you are guaranteed a fixed interest rate, while an indexed annuity pays interest based on the performance of the market.

When deciding whether an annuity is a good investment for you, first, fully understand all the fees, payouts, participation rates and structure of the annuity to help you choose the right type for your retirement. Sitting down with a financial adviser, particularly one who is a fiduciary and well-versed in annuities, can help you navigate the complexities of annuities and protect your retirement.

Related Content

• Five Things About Annuities That May Surprise You
• How Are Annuities Taxed?
• Confused by Annuities? Making Sense of the Different Types
• How Annuities Can Help You Retire Early and Delay Social Security
• Why So Many Experts Consider Annuities a Win for Retirees

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

One of the principal benefits of an annuity is the ability to grow on a tax-deferred basis. However, an annuity is also subject to tax, and how it’s taxed depends on how it was funded.

Qualified vs non-qualified annuities

Annuities can be purchased either with qualified or non-qualified dollars. Qualified annuities are funded with pre-tax dollars, typically through an employer-sponsored retirement plan such as an IRA, 401(k) or pension plan. Contributions are tax-deferred, meaning taxes are paid when withdrawals are made.

Non-qualified annuities are funded with after-tax dollars and only the interest portion of the withdrawal is taxable. However, depending on whether an annuity is immediate or deferred, it’s subject to either the exclusion ratio or last-in-first-out (LIFO) rules.

Exclusion ratio vs last-in-first-out

The exclusion ratio is used to determine what percentage of non-qualified annuity income is taxable and involves calculating the principal (non-taxable) and earnings component (taxable). After the principal has been depleted, any remaining income payments are considered to be interest. If the person lives longer than their actuarial life expectancy, any payments received after that age are fully taxable since the exclusion ratio is calculated to spread principal withdrawals over their lifetime.

For example, a $100,000 immediate annuity is purchased by a 65-year-old with 15 years of life expectancy (or 180 months) and the payment is $800 per month. About $555.56 of each payment is not taxable and the exclusion ratio is 69.4%.

LIFO tax rules dictate that earnings are always taxed first. Prior to the Tax Equity and Fiscal Responsibility Act of 1982, deferred annuities were subject to first-in-first-out (FIFO). Once the amount withdrawn exceeds the amount of earnings, subsequent withdrawal amounts are considered a tax-free return on the principal. After the original deposit has been reimbursed, all subsequent payments are completely taxable.

For example, a $100,000 fixed annuity grows to $150,000, meaning $50,000 is interest. If withdrawals begin after age 59½, all withdrawn funds up to $50,000 are subject to ordinary income tax. Amounts above $50,000 would be considered a return of principal and not subject to taxes. However, any proceeding withdrawals are once again taxed at ordinary rates.

Annuity inherited 'stretch'

If a client inherits an annuity, the tax rules vary depending on which type was received. Inherited qualified annuities follow the SECURE Act, where the outcome depends on if the recipient is either an eligible or non-eligible designated beneficiary. If deemed eligible, the beneficiary can stretch payments over their life expectancy. If not eligible, the annuity would have to be withdrawn by the tenth year after the original account owner’s death. Withdrawals are subject to ordinary income tax, and it depends on whether the original annuity owner had begun taking required minimum distributions (RMDs) before passing away.

Inherited non-qualified annuities don’t benefit from a step-up in basis — meaning the taxes remain unchanged — but can be taken over a beneficiary’s lifetime. Beneficiaries who want to reduce their tax liability will use the stretch provision, which allows them to receive periodic payments of the annuity’s value over their life expectancy. As such, the remaining balance continues to grow tax-deferred, which helps the beneficiary reduce taxation.

1035 annuity exchanges

Existing non-qualified annuities can be exchanged — meaning no tax is paid on earnings — when moved from one insurance company to another. This process, known as a 1035 annuity exchange, is allowed under Section 1035 of the Internal Revenue Code. In addition, Section 844 of the Pension Protection Act of 2006 gave new incentives to fund long-term care with annuities and life insurance.

Clients with no need for their existing annuities can be effectively converted to a long-term care annuity, either partially or fully. Regardless of the reason, a 1035 annuity exchange offers a tax-free alternative to cashing in an unwanted annuity and using the proceeds to purchase a new one. This tax benefit can make a 1035 exchange a more attractive option for clients looking to optimize their annuity investments.

For example, a $100,000 fixed annuity grows to $150,000, meaning $50,000 is interest. A 1035 exchange transfers it to a long-term care annuity that provides benefits up to $450,000. If used for long-term care, the money used is completely tax-free.

Annuities are complex financial products that offer significant benefits, but the various tax implications require a deep understanding to navigate them effectively. It’s crucial to be informed and have competent guidance as part of an overall retirement planning strategy. By having a fundamental understanding, you can make more well-informed decisions for an enhanced financial outcome.

Related Content

• How Are Annuity Withdrawals Taxed?
• Why Annuities Sometimes Sound Too Good to Be True
• Confused by Annuities? Making Sense of the Different Types
• Why So Many Experts Consider Annuities a Win for Retirees
• Seven Big Retirement Risks to Avoid

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

The product-by-product approach

Choosing among financial product options is sometimes fairly easy and is sometimes more challenging. When you’re comparing, for example, investments against guaranteed lifetime annuities, it’s not that difficult to measure market risk, tax effects and liquidity. It’s rarely an either/or decision, but rather a “how much.”

An advantage of this DIY approach is that you are in control of the decisions. The way to have confidence in your decisions, however, is to look at a plan with the options built in and then exclude those that don’t feel comfortable.

A traditional plan is a start for most retirees

Here’s an example for Sally, the sample investor we often refer to, who at 70 years old looks at her financial situation in two distinct buckets:

• Retirement savings that total $1.5 million, with half in her rollover IRA and half in her personal (after-tax) accounts
• Her home, worth $1 million with no mortgage

She may have another bucket for short-term cash needs or higher-risk investments. These are excluded for this exercise when planning for the three key objectives.

As she developed her traditional plan below, Sally has followed conventional wisdom in at least two other respects:

• She invests her retirement savings 30% (100 less her age) in equities and 70% in fixed income
• She plans to own her home without any mortgage in retirement

That’s about as simple as you can get. However, Sally realized it produces too little starting income ($68,000) vs. her 6% income goal — or $90,000 per year from her savings. (This doesn’t consider Social Security payments or any pension.) Drawing down another $22,000 to start, and increasing that annually to account for inflation, creates the risk of her running out of savings. And the $90,000 income goal doesn’t even consider the costs of long-term care and other unplanned expenses. (For more on this, see my article How ‘Home-Based Planning’ Can Address Long-Term Care Costs.)

Sally’s DIY starter plan is easy to understand, but if spending down your savings is not the answer, then how do you find the right plan design for you?

Start with a plan with the three L’s, then find the products

Begin with your goals, which for most retirees include lifetime income, liquidity for unplanned expenses and a legacy for heirs. To achieve those three L’s, your savings — including equity in your home — can be put to work in ways that Sally ignored in her plan above. Another part of the plan involves deciding which of your savings accounts you want to buy products from: tax-qualified or personal (after-tax) savings. Then, select single-purpose financial products that can be put together or eliminated to best serve your purposes.

For people who want to live in their own home as long as possible during retirement, access to home equity through a home equity conversion mortgage (HECM) is a consideration. And for lifetime income, which eases the fear of running out of money, converting some savings into lifetime income annuities provides a solution.

Those two (HECM and lifetime annuities) are not on every adviser or planner’s radar, but they should be on yours. Here’s a revised picture that shows how lifetime annuities and the value of the home add to a retirement plan. We call this an All-Asset Retirement Income Plan since it includes assets representing 90% of all asset classes.

Initial refinements to the All-Asset Retirement Income Plan

Now let’s apply these elements to Sally’s plan, which needs to be personalized for Sally’s age, gender and percentage of rollover IRA in her savings. Three important allocations are made in the refinement of this plan:

• Equity portfolios are allocated between high-dividend and growth portfolios
• The lifetime annuities are allocated between a SPIA (single premium immediate annuity) for current income and a QLAC (qualifying longevity annuity contract) for future income
• The value of the home is allocated between the HECM line of credit (with the amount determined by LOC percentages set by HUD) and the remaining equity

Sally’s All-Asset Retirement Income Plan delivers starting income of $92,000 that exceeds her objective of $90,000. She can add that extra $2,000 to her budget or reinvest it for future budgets.

Other deliverables under Sally’s All-Asset Retirement Income Plan

As you can see above, 68% of Sally’s income is “safe,” which means the income is not dependent on the liquidation or sale of investments. Even at a low market return, the plan will generate income from dividends, interest, annuity payments and drawdowns from HECM. (As part of the refinement process, planning software, such as that used by Go2Income, can test different investment returns and resulting plan outcomes.)

Her other objectives are also important, and the plan will help her achieve them:

• Liquidity. By adding the line of credit from HECM to her plan, more than 50% of her savings are liquid at the start, even with the addition of lifetime annuity payments.
• Legacy. Sally plans to live a long life, so the legacy, while delivered far in the future, equals or exceeds the original total value of savings.
• Lower taxes. Only 50% of her income is taxable through age 85. In turn, that will have a favorable impact on all of her taxable income, including Social Security and pension.
• Long-term care costs. Her liquidity is able to absorb, for example, substantial long-term care costs, with the impact felt on her legacy, not on income.
• Inflation protection. Under the starter plan with conservative return assumptions, her income grows by 1.4% per year until age 85. If inflation protection is a key objective, she can address it during the refinement process.

Of course, in order to achieve the best outcomes for Sally, she will need to speak with a financial adviser well-versed in all the elements of a diverse retirement plan. During that process, the plan can be attuned to Sally’s personal needs and desires.

You can order a Go2Income plan today based on the answers to three or four questions about your goals. Get started here with no obligation. Consult with your own qualified adviser, find an analytical tool to provide some guidance, or talk to a Go2Specialist.

Related Content

• A Different Way to Approach Your Mortgage in Retirement
• Transform Your Retirement Plan With This Powerful Combo
• Is Your Retirement Solution Hiding in Plain Sight?
• How Your Home Can Fill Gaps in Your Retirement Plan
• Annuities and Tax Planning Boost Retirement Income and More

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

People spend 30 to 40 years investing and saving for their retirement, through good and bad market cycles. As retirees shift their accounts from the accumulation phase of obtaining and saving funds to the distribution phase of allocating and spending funds, their investment strategy needs to adjust accordingly. They can no longer tolerate significant losses in principal, as they may not have enough time to recover from a bad year. This begs the question: Which retirement tools are available that can offer potential growth while limiting market risk?

How is zero your hero?

When I meet with clients to discuss their retirement plans, many express concerns about exposing their entire savings to market risks. This is a reasonable and prudent approach considering the current economic climate and the impact of the coronavirus pandemic, as well as the bear market of recent years. People still recall the market crash of 2008, when the S&P 500 lost 37%. More recently, during COVID-19, the market dramatically dropped over a very short period of time. If you retired around that time, the hit to your life savings would have been a cause for concern and sleepless nights.

A fixed indexed annuity (FIA) is a type of insurance contract that helps you earn index credits based on the performance of a selected stock market index, such as the S&P 500. The principal amount remains protected even if the index experiences negative returns. Suppose you had invested in the S&P 500 index at a participation rate of 50%. In layman’s terms, this means you would get half off the S&P 500 growth over a one-year span. Each year, on the policy anniversary, you would lock in interest credits for one year. If the S&P 500 index is up by 26%, you receive a credit of 13%. Similarly, if the S&P 500 index rises by 8%, you receive a credit of 4%. 

However, if the S&P 500 index falls by 20%, you will not receive any interest credit. In this scenario, we always tell our clients, "Zero is your hero." It's a reminder that the year you receive 0% interest is the best year to own this type of account, as you don’t have to play catch-up from previous years’ losses.

Expand your options with income riders

FIAs offer a safe way to grow and accumulate funds, which are attractive features all by themselves, but these types of annuities can also include income riders that can provide a single or joint lifetime income. For someone on the verge of retirement who needs additional income beyond their pensions and Social Security, income riders can be used to increase a key percentage — income stability. It is our preference to have our clients have as high of a stable income percentage as possible. Some carriers even offer long-term care (LTC) coverage, making it a smart option for those who don't want a stand-alone LTC policy but still want to be prepared for the future.

Here's the flip side to all this good news: FIAs have limitations just like any other investment or insurance product. The accounts usually allow you to take out up to 10% of the account value without penalty, so it's important to diversify into other accounts that offer more liquidity. It's always a good idea to have some funds available in a checking or savings account to access quickly for an emergency or an unforeseen larger expense. Annuities have been an important part of retirement portfolios for a long time, and the industry's evolution has made them even more flexible and attractive in recent years.

The bottom line

When considering an annuity, it's crucial to work with an independent agent who can research your specific profile and objectives to find the insurance company that offers the best overall benefits to you. Even after you've found the annuity product that's right for you, a best practice is to know how your FIA works with the other tools in your financial plan. 

Ultimately, the best way to protect and preserve your principal in retirement is to create a diversified investment portfolio. Investing in a variety of other asset classes, such as equities, fixed income and alternatives will help reduce your risk and ensure that you have a steady stream of income in retirement.

Here are some additional tips when making important financial decisions in retirement:

• Understand the amount of risk you are taking with your investments. Will you be able to stick to your investment plan when markets are difficult?
• Make sure to keep your beneficiaries updated.
• Monitor and adjust your accounts on a regular basis.
• Talk about future health care needs to determine if you are going to self-insure for LTC or if you might want to consider additional coverage.
• If you need help making decisions and turn to a financial adviser, ask them how they are compensated. Also, make sure to ask if they are able to just help with insurance, investments or a combination of both worlds.

By following some of these suggestions, you will be on the right path to best protect everything you’ve saved over the years, create additional income if needed and enjoy your retirement years.

Related Content

• Fixed Index Annuities as Retirement Tools: Pros and Cons
• How to Find Fixed Indexed Annuities That Work for You
• Fixed Indexed Annuities Can Be a Potent Diversifying Tool
• Why So Many Experts Consider Annuities a Win for Retirees
• Why Annuities Sometimes Sound Too Good to Be True

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

To help fill in some blanks, here are five things that you may not know about annuities.

1. Besides just guaranteeing income, some annuities both create income and grow savings.

The word “annuity” is derived from the Latin annuus, meaning yearly. The original type of annuity guarantees the buyer annual payments for a set period. But income annuities aren’t the only kind.

In contrast, accumulation-building annuities are designed to grow savings for the long term while deferring taxes. With them, you keep control of your money, earn interest and can pass the funds to your heirs.

These come in different types. Fixed annuities, which include fixed-rate annuities (more on them below) and fixed-indexed annuities, guarantee your principal. Variable annuities are linked to the performance of financial markets and have fewer guarantees, exposing your principal to investment risk.

Of course, the income annuity is still a valuable tool. The most popular type guarantees lifetime income, starting either almost immediately (immediate annuity) or at a future date (deferred income annuity). It provides invaluable “longevity insurance” and helps assure you’ll never run out of money, no matter how long you live. Essentially, you’re converting some of your money into your own private pension.

Many independent financial experts say that most people should put a substantial part of their savings into an income annuity when they approach or enter retirement. Income annuities are underused, I believe. But not everyone needs or wants one. If, for instance, you have ample guaranteed retirement income from Social Security and other sources, you may not need an income annuity. You may not like the idea of giving up control of your money to an insurance company in exchange for an income guarantee. In that case, you’d be looking at an accumulation-building annuity.

2. You won’t pay a sales charge.

The selling agent earns a commission, but you won’t pay it. The issuing insurance company does. All of the money you deposit in an annuity goes to work for you right away.

Many people don’t believe this, but it’s true. If you ever encounter an agent who would charge you an upfront commission, go elsewhere.

Once you own an annuity you might pay a fee under a couple of limited circumstances. If you surrender your annuity early or take excessive withdrawals during the surrender period, the insurer will hit you with a surrender penalty. Therefore, don’t put money in an annuity if you may need the whole amount before the contract is up. Most annuities do permit partial withdrawals annually up to a certain limit, so there is usually some liquidity. However, any earnings withdrawn from a nonqualified annuity before age 59½ are normally subject to income tax plus a 10% IRS penalty.

If you choose an optional rider — an add-on that provides additional benefits, such as increased liquidity or guaranteed lifetime income — the fee for it will typically be deducted from your annuity account value annually, or you’ll earn a slightly lower rate.

3. The interest rate can be guaranteed for up to 10 years.

A traditional fixed-rate annuity pays a set interest rate that’s usually guaranteed for just the first year. After that, you’re guaranteed only a minimum rate as specified in the contract. So, potentially, the insurance company could take advantage of you in subsequent years because you are locked into a long surrender term and would have to pay a substantial fee to surrender the contract and earn a better rate elsewhere.

But this approach is rarely used now. Instead, you can guarantee the interest rate from three to 10 years. That’s why this product is called a multi-year guaranteed annuity (MYGA).

It’s also sometimes called a CD-type annuity because it behaves much like a bank CD. For instance, you can choose one that guarantees 5.66% for five years (as of September 2024). Unlike a CD, a nonqualified annuity is tax-deferred, as long as the interest earnings are not withdrawn.

Current rates are historically high, so it’s a good time to consider a MYGA.

4. There are no government-imposed limits on how much you can put in a nonqualified annuity.

Qualified retirement plans such as traditional IRAs, Roth IRAs and 401(k) plans have limits on the amount anyone can contribute annually. The law places no limits on the amount of nonqualified funds you can allocate to annuities.

If you can afford to place a big lump sum in an income or accumulation-building annuity, you’re free to do so. You don’t have to spread out your deposits over the years.

A nonqualified deferred annuity is tax-deferred by design. Earnings compound free of federal and state taxes until they’re withdrawn, and withdrawals aren’t required. If you don’t need the income, withdrawals can be postponed indefinitely.

The exception to this is an immediate-income annuity, where you’ll get some ongoing taxable income along with tax-free return of principal.

5. Annuities can work well in an IRA or Roth IRA.

Since annuities provide tax deferral, it may seem redundant to use them in a tax-deferred retirement plan. But an annuity can work well within a qualified plan, particularly an IRA or a Roth IRA. They’re especially apt for people in their 50s and older.

A MYGA can be an excellent substitute for bonds. The guaranteed rate of three to 10 years can be matched to your time horizon and usually exceeds the rates on available bank certificates of deposit or individual bonds. Bond funds, in contrast, don’t offer a guaranteed rate of return. If rates spike, you can lose money.

A fixed-indexed annuity offers market-based growth potential while still guaranteeing your principal. They pay a share of the gain as an annual interest rate credit when the stock market goes up. In exchange for the guarantee that you’ll never lose money, you may get only part of the market’s annual gain as measured by an index, such as the Dow Jones Industrial Average or S&P 500. If the market index is negative for the year, you’ll typically get no interest.

These complex products are meant for the long term. That’s one reason why they can work well as IRAs.

You must start taking required minimum distributions (RMDs) from your IRA, 401(k) plan or other qualified retirement plan when you reach age 73. You can defer some RMDs by placing some of your IRA assets in a qualified longevity annuity contract (QLAC). The money in a QLAC is excluded from plan assets on which RMDs are calculated.

A type of deferred lifetime income annuity that meets IRS requirements, a QLAC lets you keep more of your retirement plan intact and tax-deferred longer. Under the SECURE 2.0 Act, an individual can place up to $200,000 in a QLAC IRA. You must start taking income payments from a QLAC at 85 but may begin sooner.

To purchase a QLAC, you can transfer funds from your IRA, 401(k) or another eligible retirement plan to the issuing life insurance company. This single deposit funds the QLAC. Because the funds are going from one plan custodian to another, it’s a tax-free transfer.

A QLAC cannot be used as a Roth IRA, but other types of annuities can. Besides using a MYGA or fixed-indexed annuity, you could put some or all of your Roth IRA money into a lifetime deferred or immediate annuity and receive lifetime guaranteed tax-free income.

With annuities, what you don’t know can hurt you. They’re one of the mainstay financial products that everyone should know something about.

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at www.annuityadvantage.com or by calling (800) 239-0356.

Related Content

• How Are Annuities Taxed?
• Confused by Annuities? Making Sense of the Different Types
• How Annuities Can Help You Retire Early and Delay Social Security
• Are Bonus Annuities a Good Deal?
• Non-Qualified Annuities: Should Retirees Think Twice?

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Traditionally, many investors have allocated a portion of their portfolio to bond funds in an effort to lower their overall risk while maintaining liquidity. The problem is bonds and bond funds are different. Bonds are guaranteed by and only as good as the entity that backs them, while bond funds are actively traded funds focused on the bond market bonds and can lose principal.

When retirees and near-retirees realize that their diversified portfolio of various stocks, ETFs and mutual funds, blended between the equities market and the bond market, is technically at risk, many start to look elsewhere for more safety. This is especially true when you consider the markets’ historical patterns, which I covered in my article Four Historical Patterns in the Markets for Investors to Know.

This article is intended to highlight the benefits and detriments of five investments and products that offer principal protection with growth potential. Please note investments and products that offer growth potential and principal protection are likely to underperform your standard benchmark indexes during the good years. However, because they offer principal protection, they won’t lose money in the down years (assuming there are no fees associated with the investment or product). Also, make sure to consider the credit rating of the entity that offers these investments or products. The principal protection offered is only as good as the entity that is backing them.

Liquidity could be an issue

Lastly, these investments and products also lack liquidity. Remember, there’s no such thing as a perfect investment, product or strategy. If you want growth potential and principal protection, you’ll have to give up some or all liquidity for a period of time. Consider for a moment that you probably don’t need access to all of your money in any given year. However, making sure a portion of your portfolio cannot lose ground may help you sleep better at night.

Don’t fall into allocation ambiguity and blindly guess how much needs to be protected. Design your lifestyle and legacy plan first and then build your portfolio around those requirements. If you want help understanding how to do this, you can learn more about how to create a retirement plan that’s designed to last longer than you without locking up assets into lifetime income streams from insurance companies in my book, How to Retire on Time. Let’s dive in.

1. CDs

Certificates of deposit, or CDs, are cash-equivalent products that offer a fixed rate for a fixed period of time. Because they are heavily influenced by interest rates, many banks may be hesitant to offer too high of a rate for too long of a period of time.

CDs tend to help with short-term protection needs. If the Fed were to drop rates, the new CD rates may not be enough to maintain your lifestyle expectations.

If you want protection with reasonable growth potential longer than two years, you may want to consider another option on this list.

2. Bonds

Bonds (not bond funds), like U.S. Treasuries or corporate bonds, are debt instruments guaranteed by the entity that backs them. Technically, you can sell a bond before its maturity if needed. However, if you were to sell before it matures, it would be sold at market price. That means you could sell it for a gain or a loss. If you want the protection, you would need to hold it until maturity.

Bonds may be a good fit if you want protection with a slightly longer duration than a CD, even though the short-term CD may have a higher rate. You never know when the Fed will increase or decrease rates. It is important to note that if interest rates were to go down, your bond would become more valuable, in case you decide to or need to sell it early. Otherwise, you can buy a bond and hold it to maturity, knowing what the rate is expected to be.

Be careful when picking high-yield bonds. The higher the yield or rate offered, the riskier the bond. Remember, bonds are only as good as the entity that backs them.

3. Fixed annuities

Fixed annuities, on the surface, are similar to a CD but from an insurance company. Insurance companies and banks operate differently. You may be able to get a higher rate for a longer duration through a fixed annuity. Once the annuity matures, you can liquidate it and spend it or move it into another investment or insurance product (e.g., fixed annuity, fixed-indexed annuities, etc.). If you are working with non-qualified funds, you can defer the capital gains tax by moving the cash from one non-qualified annuity into another non-qualified annuity through what’s called a 1035 exchange.

If you are younger than 59½, proceed with caution. Distributions from annuities before the age of 59½ may be subject to a 10% penalty. It is a retirement product that has limitations.

4. Fixed-indexed annuities

Many people do not realize that fixed-indexed annuities can be used as bond or CD alternatives, offering growth potential and principal protection on your cash value. In other words, fixed-indexed annuities do not have to be used as an income strategy. Many investors use them as an asset-preservation strategy to help hedge against downside market risk.

In a nutshell, here’s how they work. When the fixed-indexed annuity’s benchmark index, such as the S&P 500, goes up, the annuity’s cash value increases as well. When the benchmark index goes down, the principal of the annuity is maintained.

Assuming you picked an annuity with an annual reset, each year, a new “floor” is established. That means, unless you were to take a withdrawal or your annuity has fees associated with the policy, you cannot lose ground. Each year is a new year when the fixed-indexed annuity can grow its cash value or maintain the cash value of the previous year.

That said, I can’t emphasize the following enough: Not all fixed-indexed annuities are built the same. Just like some CDs may offer a 5% rate while others may offer a 0.5% rate, some fixed-indexed annuities have more growth potential than others. Your research and due diligence are incredibly important.

Here are a few words of caution for those considering using fixed-indexed annuities as a bond or CD alternative. Don’t add features you don’t need. If you are looking for potential cash growth and principal protection, don’t add on lifetime benefit riders or try to make your policy into a makeshift long-term care policy. The additional fees may compromise its original purpose of growth potential on the cash value with principal protection.

Also, many times an insurance company will have an annuity with and without a cash bonus offer. Annuities that offer a bonus, known as bonus annuities, tend to have less growth potential throughout the life of the policy. Because the bonus option may offer less growth potential, you may end up with less cash overall at the end of the policy, even when you calculate the cash bonus in the beginning. If you want your cash to grow, compare the options and their long-term growth potential.

I have found that fixed-index annuities, when sufficient shopping and research have been conducted, may offer more growth potential over the longer-term time horizon than CDs, Treasuries and fixed annuities. However, you must shop around and vet the insurance companies’ reputations, renewal rates and credit ratings. Make sure you also spend time understanding the benchmark index associated with any annuity. There are many new indexes focused on back-tested hypothetical results. That doesn’t make them bad. This means you may want to proceed with caution.

5. Cash value life insurance

Cash value life insurance, or permanent life insurance, can be used as a source of principal protection to help you through turbulent times. Even though some life insurance policies may have a cash component, they should not be considered investments.

You should only consider life insurance, whether it be indexed universal life insurance or whole life insurance, if your primary focus is to have a death benefit. The cash value associated with the policy, the tax strategies that can be implemented alongside the policy and so on should all be secondary objectives when considering life insurance. When funded and structured correctly, these secondary strategies can act as a nice complement to a retirement plan.

If you want to consider cash value life insurance, I would recommend exploring your options with an independent insurance agent who is also a licensed investment adviser and tax professional. The additional licenses may be able to help you explore a more comprehensive strategy with your policy than through a professional who is limited to only an insurance license. In other words, if their disclosure states they do not offer tax advice, how can they recommend an IUL for tax planning purposes?

Conclusion

Having principal protection can be helpful during difficult market conditions. If your portfolio is causing you to lose sleep, then maybe you are taking too much risk. I believe every investor should operate within their emotional and economic limits. Overall growth is important, but at what cost? Consider the potential benefits of having some of your portfolio’s principal protected.

If you are wondering how much should be protected, consider putting together your lifestyle plan first, then explore the tax and other strategies you want to implement. Once you understand your plan and the strategies designed to help bring that plan to life, you can start designing your portfolio.

Related Content

• 10 Ways to Generate Retirement Income
• Retirees’ Anti-Bucket List: 10 Experiences You Don’t Want
• Many Retirees Don’t Know About This Major Market Risk: Do You?
• Roth Conversions: Convert Everything at Once or as You Go?
• Social Security Optimization If You Save More Than $250,000

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

1. How does an annuity help my retirement goals? 

Start by having your adviser justify how an annuity improves your financial plan in the first place, says Kelly LaVigne, vice president of consumer insights at Allianz Life. If you’re considering one as an investment, what extra returns and benefits are you getting versus simply investing through your retirement plans and brokerage accounts?

This discussion is even more important if you’re considering an annuity to turn part of your nest egg into future income payments, as the annuity will lock up that money. “Your adviser should have software that estimates the probability of success of your plan with and without annuity income,” says LaVigne. In other words, how likely will you have enough income to  last for the rest of your life?

The software will consider how you currently stack up with your expenses, savings, and other sources of guaranteed lifetime income, like Social Security and a pension. “Is there a major improvement with the annuity? Otherwise, it might not make sense,” says LaVigne.

2. What are the returns and performance guarantees? 

A fixed annuity shows exactly what interest rate you would earn over a period of years, making it easy to compare companies. Top options are currently paying over 6% a year. You can also easily compare income annuities. Each insurer will tell you how much they’ll pay in annual retirement income based on your principal.

A fixed index annuity has returns based on a market index like the S&P 500, with limits on your gains and losses. A variable annuity invests your money in mutual funds. While your return depends on the market, the variable annuity may offer some guarantees. For instance, it promises a minimum retirement income regardless of investment performance.

Variable and fixed index annuities are complex and should be compared with the help of a professional. “The insurer gives a prospectus, but it’s a tough read. An adviser can walk you through the details,” says LaVigne.

3. What are the fees?  

Fees depend on the type of annuity and the insurer. fixed annuities tend to have little to no fees. Variable and fixed index annuities can be significantly more expensive.

The annuity may have a surrender charge. If you cancel before an agreed-upon number of years, the insurer will deduct a percentage of your balance, potentially 7% or more. It’s a tradeoff with the return. “The longer the surrender period, typically the better the deal,” says Joel Russo, founder of NJ Retirement Planning in Sea Girt, N.J. Some insurers will let you take out a percentage of your money early penalty-free, such as up to 10% a year.

Ask your adviser if they earn commissions for selling the annuity. If so, what steps are they taking to prevent conflicts of interest? Check about non-financial incentives too, like the adviser qualifies for free trips by selling annuities.

4. What extra benefits are available? 

Riders are additional benefits you pay to add to your contract, reducing your return or income. A few could be worth the investment.

You could add a cost-of-living rider so your retirement payments increase over time. In exchange, your payments start lower. “It usually takes six or seven years before you start collecting more than without the rider, but over a 30-year retirement, inflation protection makes sense,” says LaVigne from Allianz Life.

A long-term care rider increases your annuity income payments if you need long-term care. You could also purchase an enhanced death benefit, so more money goes to your heirs after you pass away. Alternatively, you could set up joint life income. Payments continue as long as you or the other person is alive. A joint life annuity could be a good idea if you’re married or have a long-term partner.

5. How does the annuity company stack up? 

As you compare product details, pay attention to the insurance company itself. Check its customer satisfaction rating using services like J.D. Power and the Better Business Bureau.

You should also pull up its credit rating for financial stability from agencies like AM Best and Moody’s. Ideally, the carrier should have a credit rating of A- or higher, showing strong financial stability. 

If you buy an annuity from an insurer that goes bankrupt years later, your state guaranty association reimburses you, but only up to your state’s coverage limits. You might not receive all your money and the full promised benefits back.“Go with carriers that have been around a long time with a high rating, even if lower-rated carriers may give better deals,” recommends Russo, the retirement adviser in New Jersey.

Note: This item first appeared in Kiplinger Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money.

Related Content

• Annuities: 10 Things to Know
• Retirement Calculator: How Much Do I Need to Retire?
• How to Pay for Long Term Care

A combination of factors has juiced interest in annuities:

• A bulging population reaching retirement age without the same level of income from pensions as the previous generation, but with longer life expectancy.
•  A spike in interest rates is making fixed-rate annuities—the most popular kind—more lucrative investments able to generate higher returns and potentially more income than any time in more than a decade.
•  Ever Increasing stock values have given retirees more wealth that they are seeking to protect and transform into income to replace pensions.

Whether any individual should buy an annuity is, like most financial issues, a personal decision that depends on a person’s needs and assets, as well as priorities and plans for the future. 

For those whose financial goals would be met by an annuity, this is a good time to buy, says Frank O’Connor, vice president of research at the Insured Retirement Institute, an annuity industry association. Because interest rates are higher than in the past, “you'll either get higher yield or higher payments, depending on whether you're buying the annuity for accumulation and wealth building or whether you're buying it for income,” he says. “So it is a good time relative to past periods when interest rates were significantly lower.”

Nonetheless, Micah Hauptman, director of investor protection for the Consumer Federation of America, warns against trying to time a purchase based on market conditions, which he says amounts to “speculation.” He adds, “as a general rule, market timing rarely works out in investors’ favor.”

Getting an annuity is “not a decision that should be made lightly,” Hauptman adds, ”given the fact that they can be pretty costly to reverse.”

Not so popular 

Traditionally, a relatively small portion of the population has invested in annuities for retirement income. Just 12% of households with assets over $100,000 receive any annuity income, according to a study of people 50 and older by the University of Michigan.

But more people are turning to annuities with sales reaching records, soaring above $385 billion in 2023. That’s a jump of more than 23% from the previous year and 58% higher than 2014 sales, according to figures from LIMRA , a trade group that tracks the industry.  

“There are a number of tailwinds” helping push these increasing sales, says Keith Golembiewski, head of LIMRA Annuity Research, including higher interest rates and strong equity markets. While experts agree that no specific interest rate signals the best time to buy annuities, Golembiewski says annuities that offer 5% rates are resonating with advisers and clients now. 

Get more for your money 

If you wanted to get an income stream of $15,000 a year starting at age 65, it would have cost you about $300,000 as recently as two or three years ago, says Michael Finke, professor of wealth management at The American College of Financial Services. Now, you can get that $15,000 a year for close to $200,000.

Will it get better? That depends on what happens with interest rates, which are difficult to predict. Interest rates aside, O’Connor, at the Insured Retirement Institute, says the way to get the highest income payments for your money is to get a life-only immediate annuity, which will pay income your entire life—even after the principal has been exhausted—but not guarantee return of principal if you die before collecting the full amount. 

Most people want to ensure that they or their beneficiaries won’t lose out on the underlying investment, however, O’Connor says. Guaranteeing that costs money, which means less annual income from the annuity. 

Another way to increase the amount of annual income is to start the income when you’re older. The older you are when you start the income, the more income you can get.

For example, Finke says, if he, at the age of 54, spends $200,000 now on an annuity to buy an income stream that will start when he turns 85, he can get about $200,000 a year in income every year for as long as he lives.Knowing that income will kick in when he’s 85 means it’s easier to comfortably spend the rest of his money in the years between the age of 65 and 85.

Funding a long life 

More than half of Americans say they want to live to be 100 years old, according to a survey by Corebridge Financial, but 55% also  say they are extremely or very concerned about running out of money.

The good news is that if you’re considering buying an annuity, you’re probably going to live longer than someone for whom an annuity is out of reach. That’s because research has shown that people who contribute to defined contribution plans, such as 401(k)s live much longer than those who don’t, Finke says.  

“So people who have enough money to worry about this are going to live significantly longer than the average American,” Finke says. “And it's really dramatic; people who make more money in the United States live a lot longer, mainly because of differences in smoking rates and, to a lesser extent, exercise and diets and access to health care.”

But the prospect of living longer paralyzes the spending of some retirees, who consequently live more frugally than necessary, depriving themselves of the enjoyment they worked hard to afford.

“I think one of the biggest mistakes people make is that they want to  put their arms around their nest egg and keep it forever and they don't have a realistic conversation with themselves about what the goal of that money is,” Finke says 

Different annuities meet specific retirement needs, says Mike Harris, a senior education adviser at the Alliance for Lifetime Income, which promotes annuities.  Some annuities are used like certificates of deposit — places to keep money for a set period of time where it can grow at a specified interest rate. And unlike CDs, annuities’ growth is tax deferred, meaning the added funds are not taxed until they are withdrawn. 

But the real strength of annuities is their ability to create a lifetime income stream. “That's where they shine,” Harris says. “There's only three ways to have a guaranteed lifetime income: Social Security, pensions and annuities. That's it. Nobody else can guarantee the income off of any product.”

Stan Haithcock, also known as “Stan the Annuity Man,” sells annuities and educates consumers online. He says only people who have financial needs that annuities are designed to address should buy them. So, for example, if you’re looking for guaranteed income or principal protection, consider an annuity. But if you hope to get investment returns similar to the stock market, stocks are a better idea.

“That's the biggest mistake people are making, if they're buying annuities for potential market growth or a very good sales pitch, when they should be buying them for the contractual guarantees.”

Satisfied with their choices 

For Phyllis Gresham, 90, of Fort Myers, Fla., relying on annuities to fund her retirement income for life is a no-brainer. The retired nurse practitioner says she lives comfortably without worrying about money because of the income she receives as a result of her late husband putting all his retirement funds into annuities when he retired more than 25 years ago from his career as an academic physician. While she says she has slowed down a bit in the past couple of years, she continues to lead an active life and says having reliable, steady income has enabled her to do the things she enjoys. Money, she says, is “not a worry.”

Mark Emerson decided more recently to invest some of his retirement savings into annuities. Emerson, 65, of Watertown, N.Y., retired last November from FedEx after a 40-year career as a diesel truck mechanic

He says he consulted with a financial planner who put his financial details into a spreadsheet and helped him chart out his priorities and needs. 

Emerson says he got two pensions from FedEx, one of which he received in a lump sum that he used to buy an annuity. He also more recently took some money from his 401(k) and bought another annuity. Altogether, he estimates he has $400,000 in annuities to supplement his pension, real estate investments and Social Security to support him and his wife in their retirement. 

“I've never been rich and I've also never wanted for anything,” Emerson says. “I mean, I've worked all my life and if I can retire and  have the same income and maintain the same lifestyle, that's all I want. That’s exactly what I’m doing.”

The higher interest rates means his annuities pay him more, says Emerson, but that wasn’t the deciding factor. He was mainly concerned with their ability to provide reliable income. Confusing options

One aspect of annuities that makes them both appealing and intimidating is they come in many different kinds, which means they can be tailored to the buyers’ needs, but also that they can be confusing and can carry varying fees. 

To start, there are immediate annuities and deferred annuities. This refers to when you collect your payout in relation to when you give the insurance company the money. As a rule, with an immediate annuity, you are paid within a few weeks, and generally less than a year after paying for the annuity. A deferred annuity pays you later. 

There are variable, fixed and indexed annuities. This refers to  how your principal is invested. Fixed annuities generally pay a set interest rate, while variable and indexed annuities are connected to other investments or market indexes.

By far, the most popular kind of annuity is the fixed-rate, deferred annuity, which pays an agreed-upon interest rate. According to LIMRA, these annuities accounted for $165.9 billion in sales last year, compared to indexed annuities, which saw $95.9 billion in 2023 sales. 

Caution advised

Unlike most other financial investments, annuities are issued by insurance companies. And, depending on the type, they are generally regulated by the states, rather than by the federal government. Funds in annuities are not insured by the FDIC, but are protected by state guaranty associations, which protect insurance.

Consequently, experts advise checking the financial health of insurance companies before investing in their annuities.

Hauptman, of the Consumer Federation of America, says some annuities may not be a good deal.

“A lot of annuities I have significant concerns about,” Hauptman says, “particularly the more complex annuities with a lot of moving parts that are recommended and sold by financial professionals who have significant conflicts of interest in the transaction, meaning they make more money by selling an annuity relative to other investments.”

Hauptman recommends investors ask financial professionals about these conflicts involving both financial and non-financial incentives they may receive for selling particular products.  

“They can get higher commissions for recommending annuities and selling annuities, and they can also get non-cash compensation like trips to exotic locations for selling a certain amount of premiums and all of these conflicts of interest create misaligned incentives that can harm retirement investors and with less money in retirement.”

Hauptman says Investors considering annuities should know the ones that are simpler, with fewer rules and provisions, such as fixed-rate deferred income annuities, are generally a better deal. The more complicated ones, such as registered index-linked and fixed indexed annuities, can be more costly, meaning you spend more to get less return. 

Some consumer advocates advise people to steer clear of annuities altogether. Minnesota Attorney General Keith Ellison, for one, says annuities are  “unsuitable investments for seniors.” He warns on his office website that some “unscrupulous sellers use high-pressure sales pitches, seminars, and telemarketing. Beware of agents who ‘cold call’ you, contact you repeatedly, offer ‘limited time offers,’ show up without an appointment, or won’t meet with you if your family is present. Beware of estate planning ‘seminars’ that are actually designed to sell annuities. Beware of seminars that offer free meals or gifts. In the end, they are rarely free. Beware of agents who give themselves fake titles to enhance their credibility.”

Moreover, he notes that annuities often have high surrender charges, which involve a percent of the principal investment consumers forfeit if they withdraw funds early. “For instance, one of the insurance companies that the attorney general’s office sued charged a retired farmer on a fixed income $6,800 in surrender penalties when he needed access to his $24,000 (most of his net worth) placed in annuities.”

Industry reforms cited 

Harris at the Alliance for Lifetime Income says much of the general criticism of the annuity industry is unwarranted. 

“The industry has changed so much,” he says. “We've managed, over the last six or seven years. to really help the consumer understand the value of annuities because there's a lot of misconceptions. So there's a lot of people who say, ‘Oh, never buy one; they're too expensive. The guy that sells it to you is a crook.’ In the past, there's been bad actors in every industry. But the laws have changed. There's a lot of change; the industry itself has changed, and, and my adviser wouldn't make any more profit or commision off of selling me an annuity then if I wanted to buy stock, I don't worry about that.”

Navigating options 

The names of the various types of annuities can be unwieldy, which has resulted in an alphabet soup of acronyms. 

Here’s a cheat sheet with examples of popular annuities to illustrate this challenge with definitions provided by LIMRA:

• MYGA: A multi-year guaranteed annuity, which is similar to a certificate of deposit issued by an insurance company.
• RILA: A  registered index-linked annuity is a variable annuity that offers an investment option linked to a specific index.
• QLAC: A qualified longevity annuity contract, which is a type of deferred income annuity funded with an investment from qualified retirement savings, such as in an IRA.
• SPIA: With a single premium iImmediate annuity the guaranteed stream of payments begins within one year of purchase. 
• DIA: A deferred income annuity is sometimes referred to as a deferred payout, longevity annuity or advanced-life delayed annuity. This type of annuity pays a benefit to the policyholder starting more than one year from the policy date if he or she survives to a pre-established future age.

Some annuities are regulated by the federal Securities and Exchange Commission, while others are state regulated. Specifically, variable annuities are regulated by the SEC because they’re considered securities. An indexed annuity may or may not be a security. One that is a security and SEC-regulated is a registered index-linked annuity. Fixed annuities are not considered securities and are not regulated by the SEC.

Then there are different add-ons or riders that can provide protection for income or principal or beneficiaries, as well as long-term care and inflation. One category of annuity provision that has its own alphabet soup of options is the guaranteed living benefit:

• Guaranteed lifetime withdrawal benefit (GLWB): This benefit guarantees that owners can make withdrawals, subject to a specified maximum percentage per year, that will equal at least a certain minimum (e.g., premiums paid less withdrawals) or for life.  
• Guaranteed minimum accumulation benefit (GMAB): This benefit entitles the contract owner to receive a minimum amount, equal to some percentage of premiums received less withdrawals, at a specified future date (i.e., maturity). 
• Guaranteed minimum income benefit (GMIB): This benefit allows the contract owner to receive lifetime income based on a guaranteed amount and annuity rates specified within the benefit, at or after maturity. Owners must choose to annuitize after benefit maturity to use the benefit. 
• Guaranteed minimum withdrawal benefit (GMWB): This benefit guarantees that owners can make withdrawals, subject to a specified maximum percentage per year, equal to at least a certain minimum (e.g., premiums paid less withdrawals). Owners are not entitled to lifetime withdrawals under this benefit. Typically, this benefit has no waiting period. 
•  Hybrid GLB: Includes all GLBs that combine two or more of the above GLB types (e.g., GMIB/GMAB combination) within a single fee or cost.

Note: This item first appeared in Kiplinger Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money. 

Related Content

• Annuities: What They Are and How They Work
• What's My Social Security Full Retirement Age?
• A 10-Year Checklist For Retirement Planning

If you’re considering buying a multi-year guaranteed annuity (MYGA), the illustration is usually straightforward. It will show only guaranteed values because there are no variables, except perhaps for market-value-adjustment penalties for excessive withdrawals during the surrender period. Also called a fixed-rate or a CD-type annuity, a MYGA guarantees a fixed interest rate for a term — for instance, 5.95% annually for five years (as of July 2024).

Hypothetical returns aren’t the whole story

If, however, you’re considering a fixed indexed annuity, which has many variables, the agent will usually show you an illustration with multiple pages or columns. One set of pages or columns shows the guaranteed cash values. You’ll also be shown a “hypothetical” illustration that paints a rosier picture. It shows how much your annuity would be worth in future years if it outperforms guaranteed rates. Most agents focus on the hypothetical portions of the illustration.

A type of deferred annuity, indexed annuities credit interest to your account based on annual changes to a market index, such as the S&P 500 or Dow Jones Industrial Average. You receive an interest credit annually when the index value rises.

But when that value falls, you don’t lose anything. Your principal and all previously credited interest are always protected, even if the stock market crashes. In effect, you can have your cake — part of it, anyway — and eat it, too. And that’s why this unique vehicle is so popular.

However, there are upside limits. Interest earnings will usually be based on only a portion of the change in the market index over each index-crediting term, usually one year. In exchange for the added guarantees and principal protection, most likely you will not receive 100% of the index market gains in any year.

Including all these factors, the hypothetical illustration will show future values based on various future market returns. Since the stock market has historically done very well over the long term, the odds are that a well-chosen index annuity will have good long-term performance, too. But past performance does not guarantee future results.

That doesn’t mean that the hypothetical illustration is worthless. It isn’t. But you need to take it with a grain of salt. Consider both the guaranteed figures (the worst case) and the rosier upside possibilities.

Income account value and cash account value are not the same

If you are considering an indexed annuity with an optional income rider, the illustration will usually also show the “income account value,” which is used to calculate your future guaranteed lifetime income payment. These annuities let you either activate a lifetime income payment or take out cash withdrawals or pass down the annuity value to your spouse or other named beneficiaries.

Don’t confuse income account value with your “cash account value.” Given that they sound almost identical, it’s not surprising it’s confusing.

Some agents will claim an indexed annuity has a 7% or 8% guaranteed rate. That may be semi-accurate, but the agent might not fully explain (or in some cases even understand!) that this attractive rate is only used to arrive at your “income account value.” It is not applied to your cash account value. It is not money that can be withdrawn as a lump sum or rolled over to another annuity. That value has a much lower guaranteed rate.

That’s not to say that the guaranteed rate on the income account value is meaningless. It’s one key thing to consider when comparing annuities. But you also need to know any guarantees that apply to your cash account value, in case the stock market enters a prolonged downturn.

Big upfront bonus? Remember the no-free-lunch principle

Be wary of high introductory interest rates or large upfront bonuses. They can be tempting, but they usually come with a cost, typically lower performance in future contract years when compared with a product that doesn’t offer a bonus. The issuing insurer has to eventually recoup its initial “generosity.”

When an annuity offers a large bonus, it must be adjusted in other ways for it to remain profitable for the insurance company. A bonus annuity may not credit interest as generously as a similar non-bonus index annuity. For instance, there may be a lower annual cap or participation rate, which both limit the annuity’s growth potential.

The bigger the bonus, the longer your funds will probably be tied up in the annuity via a significantly longer surrender period. During the surrender period, you’ll be assessed a penalty if you withdraw amounts beyond those allowed by the contract. Most bonus annuities have a significantly higher surrender charge penalty.

Additionally, the bonus vesting schedule may require that you keep your money in the annuity for a certain number of years to fully benefit from the bonus. In such cases, if you take your money out during the surrender period, you may forfeit all or a portion of the previously credited bonus. Of course, you can avoid all penalties by not taking out excess funds during the surrender period.

Index annuities have more complexities than other fixed deferred annuities, so it’s particularly important to understand their features and guarantees and not be overly swayed by the most optimistic possibilities. Of course, carefully look at the illustration and other features with any annuity you’re considering, and make sure the agent answers all your questions.

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities since 1999. Ken is a nationally recognized annuity expert quoted in national media and a widely published author. A free rate comparison service with interest rates from dozens of insurers is available at www.annuityadvantage.com or by calling (800) 239-0356.

Related Content

• Are Bonus Annuities a Good Deal?
• Annuities: What They Are and How They Work
• How to Use Annuities for Retirement Paychecks
• Confused by Annuities? Making Sense of the Different Types
• How Are Annuities Taxed?

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Somewhere in the primordial past, hydrogen and oxygen atoms came into being. They were fine as stand-alone elements, but they really showed their value when they combined as H2O to become the useful substance we know as water.

In the same way, combining seemingly unrelated retirement products that come on the market at different times may produce some surprising results.

The retirement big bang

First, Congress in 1987 created the HECM, for home equity conversion mortgage, which enables homeowners 62 and over to create additional income and liquid savings from the value of their home.

Second, the IRS adopted regulations in 2014 to permit a type of deferred income annuity called a QLAC, which enables IRA holders to defer required minimum distributions (RMDs) from their accounts, and therefore defer taxes, while providing guaranteed lifetime income starting no later than age 85.

Despite the tax and product feature advantages, neither has attracted a large share of retirement planning interest when offered on a stand-alone basis.

However, when HECM is combined with QLAC, a transformation occurs that, while not the stuff of life-preserving water, could provide the income and financial liquidity to make the difference in a retiree’s retirement finances. We call it H2I, for HomeEquity2Income.

How HECM and QLAC work separately

A QLAC, in addition to the tax savings of deferring RMDs, provides guaranteed lifetime income and the flexibility to select the date annuity payments begin and the income pattern you want. For example, our sample investor (female, age 70) can use the maximum QLAC amount of $200,000 and purchase $70,000 per year of lifetime income starting at age 85. (Visit our QLAC calculator to get a free quote to evaluate these options.) While QLAC provides substantial longevity protection, purchasers give up access to the QLAC reserve. In other words, they can’t access the money they spent to purchase the QLAC and have to wait for annuity payments.

A HECM gives homeowners 62 and over access to the value of their home in the form of regular tax-free income and a line of credit, without selling or renting the house they’ve lived in for years. While there is no requirement to repay the mortgage loan balance or even loan interest, too much borrowing can reduce the line of credit later in retirement, when there could be significant long-term care costs and a reduction in any legacy from the house passed on to heirs. HECM rules prohibit using the amounts borrowed to purchase an annuity product.

HECM and QLAC could have continued in their own orbits, except conditions here on Earth have changed over the past decade or two, bringing a perfect opportunity for the combination of the two products.

During the period from the launch of HECM:

• Home values increased by nearly 300%
• Longevity increased by 2.5 to 4.5 years (pre-COVID)
• Cost of long-term care insurance increased by up to 400%
• Pensions mostly disappeared, now covering only 15% of private-sector workers
• Higher Social Security benefits created higher tax rates

How to think about a combination

When QLACs came on the scene in 2014, they appeared to be a natural addition to retirement income planning, and we figured that there’d be a meet-up with HECM during this process. However, the industries of mortgages (HECM) and annuities/insurance (QLAC) work in silos. They don’t see each other or talk about how they might together benefit the consumer. Unlike with H2O, though, we didn’t need an asteroid to crash into Earth to bring about change.

The way to combine is more art than science. It starts with meeting retiree objectives around income, liquidity and legacy. And income is further defined by lifetime payments, low taxes and low risk. Liquidity is defined by the ability to have access to savings to cover unplanned expenses. For retirees, that’s likely to be expenses related to long-term care or modification of your home for those who want to age in place. Legacy is self-explanatory — it’s what you leave to a spouse or beneficiaries after loans are paid off.

Importantly, the HECM/QLAC combination must be aided by a planning methodology that looks at all major asset classes while attempting to make planning understandable to investors and planners alike. In our case, we began to look at how best to include the equity in the home with savings from a rollover IRA to meet these retiree objectives.

What are the considerations in designing H2I?

While you might adopt different criteria in defining the combination, here are the ones we used:

• Meet governmental regulatory constraints
• Make it understandable to the market
• Deliver outcomes matched to retiree objectives

The first challenge is that the regulatory world wants to keep certain products separate — for various reasons — while a real-life person wants to see a total plan and not one made of two or more components separately managed. The answer comes through a planning method that combines these components and an implementation that is, unfortunately, separate.

The second challenge is to make that plan understandable. While different approaches are possible, our view is to share easy-to-understand graphics, based on deterministic assumptions, and focus on retiree objectives, rather than focusing on product components. In addition to all the technical questions being answered by product experts, the planning should answer this question: “What does it do to my plan for retirement income?”

The third challenge is meeting the retirement objectives and to recognize how they change based on life stages. As we said above, the basic retiree objectives include:

• Income. Meet budget, be predictable and last a lifetime
• Liquidity. Focus on larger amounts in middle stages of retirement
• Legacy. Provide funds for surviving spouse and then for beneficiaries
  

Meeting retiree objectives

Set out below is the plan presented to our sample investor, a 70-year-old female, with $1 million in the value of her home and $1 million in her rollover IRA. She wants more income plus liquid savings to address long-term care costs. She considers an H2I plan but is also aware of her option to subsequently insert H2I into a Go2Income plan.

1. Income objective

Her income from H2I comes from two sources:

• During Stage 1, she is drawing tax-free amounts from her HECM line of credit.
• During Stage 2, her income comes from QLAC annuity payments, after paying tax-deductible interest on HECM.

H2I planning creates a seamless income connection between Stages 1 and 2. She can spend this income any way she wants, add to her investments, or use it to buy health, LTC or life insurance as part of her planning.

2. Liquidity objective

During Stage 1, her liquidity in the form of a line of credit (LOC) starts at $330,000, grows with a HECM interest rate, and then is reduced as her loan balance grows from her drawdowns and interest.

After Stage 1, the LOC grows dramatically when drawdowns stop and interest is being paid via QLAC payments.

3. Legacy objective

Her legacy from H2I is the value of her home less the loan balance on the HECM. The gain or loss vs. the original value of the home is the market appreciation less the loan balance. In Stage 2, with interest being paid, the legacy grows dramatically. If the appreciation is reduced by half, however, the amount passed at 95 will be reduced from $2 million to $1 million.

4. Long-term care objective

Like a lot of retirees, our investor hasn’t purchased LTC insurance and is relying on her retirement savings to cover the cost of nursing or other costs. She is thinking she might have to downsize or sell her home. With H2I, she may be able to avoid that. To illustrate, if she needs an additional $75,000 per year for nursing care starting at age 85 and continuing for 5 years, she can pull that from H2I and still pass $1 million to her heirs at age 95 — and have a line of credit if costs are higher. All the while, she can be aging in place. See the example below that captures income, liquidity and legacy in one graph, while also reflecting home care costs.

H2I as part of a complete retirement income plan

H2I is an approach that helps retirees access the 25% to 40% of their net worth that homes in many cases represent. That’s an asset that can allow you to stay in your home, even when the cost of long-term care for a married couple might average as much as $750,000.

You won’t hear about HECM and QLAC from most financial advisers or planners. That’s because they focus on splitting retirement assets among different buckets, like stocks, bonds and cash. If they consider equity in your house, it’s the cash you get after selling it.

Your next step could be just to consider how H2I might benefit you and your family. It could also become a core component of a holistic retirement approach (Go2Inome) that considers all your assets and how they best fit together. As we pointed out in our previous article, Things Change: Is It Time to Update Your Retirement Plan?, here’s how H2I could fit into your plan.

In the grand scheme, H2I is not more important than H2O. But for retirees, it’s a pretty good leap forward. We know that most retirees want lifetime income, liquidity and legacy. Combining two products — QLAC with HECM — can provide that retiree trifecta.

Visit Go2Income Personal Planning to start a plan risk-free. You can ask one of our analysts to help you make adjustments, and then decide whether you want the peace of mind that lifetime income and greater liquidity can provide.

Related Content

• Is Your Retirement Solution Hiding in Plain Sight?
• How to Add Home Equity to Your Retirement Income Planning
• How Your Home Can Fill Gaps in Your Retirement Plan
• Annuities and Tax Planning Boost Retirement Income and More
• How a Fixed Index Annuity Can Manage Retirement Income Risks

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Two problems with money market yields

If the money market is held in a taxable account, the interest earned is taxed as ordinary income. For an investor with a money market account paying 5.3% and paying a combined 30% federal and state income tax rate, he or she will have an after-tax yield of 3.71%. However, that is before inflation. The U.S. inflation rate — measured by the CPI — as of the end of June was 2.97%. If we subtract the inflation rate from the after-tax yield, we get a real after-tax yield of 0.44%. In other words, a 5.3% yield looks enticing, but after taxes and inflation, we’re not really accomplishing much.

The other problem is today’s current income tax rates are set to expire at the end of 2025. What tax rates will be in 2026 is hard to forecast, but several provisions are set to expire. The Tax Foundation notes, “Without congressional approval, most taxpayers will see a notable tax increase.” That may mean more taxes owed on money market interest.

A further problem with money markets is today’s “hot” rates may not be around for that much longer. We haven’t seen rates this high since 2006- 2007. Even then, higher rates didn’t last that long. After 2008 rates stayed low for the next 14 years. How long will rates stay high is up for debate. A recent Financial-Times Chicago Booth poll has the Fed making one quarter-point interest rate cut this year. CNBC recently reported the “dot plot” of rate cuts indicates four reductions in 2025 totaling 1 percentage point. Still, it is anyone’s guess, and forecasts will be adjusted as the data comes out. The point is don’t get too comfortable with today’s rates, because we might have reached peak money market yields.

One solution

All this points to the two major concerns with money markets right now — taxes and variable rates. Of course, investors can buy long-term certificates of deposit to lock in the yield for longer, but the interest is still taxable. Municipal bonds can pay tax-free interest, but there is principal risk. A better approach may be a fixed deferred annuity.

A fixed deferred annuity is an insurance product that guarantees an interest rate for a set number of years. An example may be a fixed deferred annuity with a guaranteed rate of 4.9% for five years. The investor can lock in today’s rates for longer.

The other advantage of a fixed deferred annuity is the interest is tax-deferred. The interest accrues and no taxes are paid until withdrawn. This is unlike a CD or money market where both are fully taxable if held in taxable accounts.

What to know

One of the biggest downsides with a fixed annuity is the illiquidity. Generally speaking, fixed annuities come with surrender penalties. A surrender penalty is assessed when you withdraw money early — within the first five years if you purchased a five-year contract. Surrender penalties vary and can range from 7% of the pre-mature withdrawal in the first year to 3%-5% in year five and zero after year five. For this reason, you want to make sure you won’t need the money for the time period. Most carriers offer a 10% free annual withdrawal, which allows you to withdraw 10% of the contract each year without surrender penalties. 

For qualified annuities (those purchased with pretax funds, such as 401(k)s and IRAs), withdrawals are taxed as ordinary income. For non-qualified annuities (purchased with after-tax funds), the earnings portion of your withdrawal is taxed as ordinary income. In both cases, there are also IRS penalties if you withdraw from an annuity prior to age 59½.

Money in a fixed deferred annuity is not FDIC insured, but backed by the insurance carrier, so picking a good quality insurance company is important.

Most fixed annuities have costs designed into the contract. These costs are not netted from the guaranteed rate, but rather built into the contract, so 100% of the money you put into a fixed annuity goes to work from day one. Beyond the surrender penalties, there may be other administrative fees or charges for optional benefits. It’s best to consult with a qualified professional before making any purchase, and shopping around can help ensure a competitive rate.

Final thoughts: Building a diversified fixed-income portfolio

Don’t get me wrong, I still believe in municipal bonds, Treasury bonds and other fixed income investments, and I use them with my clients, but I wouldn’t bank on money markets being the sole source of return. If you peel back the onion, the after-tax and after-inflation yields may not be that attractive. Fixed annuities at least have the ability to defer taxes and lock in today’s rates for longer, unlike money markets whose rates are not guaranteed and can be fully income taxable. CDs may pay similar rates to fixed annuities, but the interest on CDs is taxable each year.

All in all, deferred fixed annuities can be worth considering as part of a diversified fixed-income allocation for tax-conscious investors wanting to lock in today’s interest rates for longer.

For questions or more information, please email the author at maloi@sfr1.com.

Michael Aloi, CFP, is an independent financial advisor with 25 years of experience in helping clients achieve their financial goals. He works with clients throughout the United States. For more information, please visit www.michaelaloi.com.

Investment advisory and financial planning services are offered through Summit Financial LLC, an SEC Registered Investment Adviser, 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600 Fax. 973-285-3666.

This material is for your information and guidance and is not intended as legal or tax advice. Clients should make all decisions regarding the tax and legal implications of their investments and plans after consulting with their independent tax or legal advisers. Individual investor portfolios must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investment time horizon, tax situation and other relevant factors. Past performance is not a guarantee of future results.

The views and opinions expressed in this article are solely those of the author and should not be attributed to Summit Financial LLC. Links to third-party websites are provided for your convenience and informational purposes only. Summit is not responsible for the information contained on third-party websites. The Summit financial planning design team admitted attorneys and/or CPAs, who act exclusively in a non-representative capacity with respect to Summit’s clients. Neither they nor Summit provide tax or legal advice to clients. Any tax statements contained herein were not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state or local taxes.

Related Content

• Using a Fixed Annuity for Fixed Income
• Pros and Cons of Fixed Index Annuities as Retirement Tools
• How to Plan for an Early Retirement
• Money Market Account vs High-Yield Savings Account
• Is an Annuity Right for You? Here’s What You Should Know

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

The sheer number of annuity options can be dizzying, making it difficult to determine if an annuity is right for you. Allow your personal objectives to be the driver before you make a selection and sign a contract. Your trusted financial adviser can help you work through the range of options.

What is an annuity?

Annuities consist of a written contract between you and an insurance company, where the insurance company provides a series of payments in return for a premium you pay. Products are regulated by the SEC, and FINRA requires any brokers selling annuities to hold a state-issued life insurance license. For variable annuities, they must also hold a securities license.

Annuity contracts generally involve a variety of players that include:

• Provider. While annuity providers consist of insurance companies, financial advisers, banks and brokers who hold a state-issued life insurance license, only an insurance company can issue the contract.
• Owner. The person who purchases the annuity and pays the premiums.
• Annuitant. The individual whose life expectancy will be used to calculate the benefits and payment.
• Beneficiary. If you pass away before the payments begin, some annuity providers may offer death benefits to a beneficiary.

Annuities can be categorized in several ways, such as how you pay your premiums, how you receive your payout and how the annuity grows in value. These options can even be combined, helping you select an annuity that meets your specific goals.

Annuity premium options

Depending upon the type of annuity you select, you have several possibilities for paying your premiums:

• Single premium payment. You may choose to fund an annuity through a single premium payment. In this instance, your contract will require you to fully fund the annuity in one lump-sum payment.
• Multiple premium payments. Your annuity may allow funding through multiple premium payments that are either scheduled or flexible. With scheduled payments, funding is made through consistent payments made on a set schedule. With flexible payments, funding is made by paying the amount you wish on the date you want, within specific limits.

How is the money invested?

Money invested in an annuity is typically used to purchase a variety of investments, such as bonds, stocks and real estate. The specific investments used generally depend on the type of annuity and the investment options offered by the insurance company. The insurance company typically manages these investments and takes on any risk of investment loss.

Types of annuities

• Immediate annuities. As income annuities, these allow you to begin receiving payments within a year after purchase and are often funded by a retirement account.
• Deferred annuities. These annuities typically grow tax-deferred and include a specific delay where you receive payments later, often when you retire.

How benefits are paid to you

Depending on the type of annuity and contract terms, annuities can be paid out in various ways. Here are a few common annuities based on their payouts:

Immediate annuities. This type of annuity generally begins paying income right away. The individual exchanges a lump sum for a stream of income payments. Immediate annuities are popular because fees are often baked into the payout. The types:

• Immediate fixed. These annuities are less risky than variable because they are based on a guaranteed interest rate that remains unaffected by market volatility. Keep in mind that with immediate annuities, you are trading liquidity for a guaranteed income.
• Immediate variable. These may offer larger future payments, should the investments do well. Conversely, they can provide less stable cash flow if the investments do poorly.

Deferred annuities. These are popular because you can accumulate money on a tax-deferred basis, and unlike your 401(k) and IRA, there are no contribution limits. The types:

• Deferred fixed. One of the key features of a deferred fixed annuity is that the payments are guaranteed and not based on the performance of underlying investments. This can provide a predictable stream of income in retirement, which can be especially useful for individuals who are concerned about outliving their savings.
• Deferred variable. One of the key features of a deferred variable annuity is that the individual has a degree of control over the underlying investments, which can offer the potential for higher returns than a fixed annuity. However, the returns are not guaranteed and can fluctuate depending on the performance of the underlying investments.

How long are annuities paid?

The answer to this question depends on the type of annuity.

• Lump-sum payment. Some annuities can be cashed out in a single payment. This may be useful for individuals who need a large sum of money to pay for a specific expense, such as a home purchase or a medical procedure.
• Lifetime annuities. Some annuities are set up to provide income for the lifetime of the annuitant, regardless of how long they live. These types of annuities are known as life annuities.
• Fixed periodic payments. Many annuities are structured to provide a stream of periodic payments, which can be made on a monthly, quarterly or annual basis. These payments can continue for a set period of time, such as 10 or 20 years, or for the lifetime of the annuitant.
• Variable payments. Variable annuities pay out an amount that can fluctuate depending on the performance of the underlying investments.

Annuities based on growth potential

When choosing an annuity based on growth potential, consider your risk tolerance and anticipated return. Below are some additional things to consider:

• Fixed indexed annuities. The payout from this type of annuity is linked to a stock market index, such as the S&P 500. These types of annuities are typically marketed as a low-risk way to participate in the stock market, but they do have some downsides. One of the downsides is that the returns on indexed annuities are typically lower than the returns on a stock market index. Additionally, indexed annuities often have high fees and surrender charges, which can make them a less attractive option for some investors.
• Multi-year guaranteed annuity (MYGA). This type of annuity provides a fixed interest rate over a specific timeframe and is best suited or people nearing retirement or who are seeking a tax-deferred investment and guaranteed return.
• Variable annuity. This type provides periodic performance-based payments tied to sub-accounts that fund the annuity.
• Fixed annuity. This type offers a guaranteed set interest rate and is considered the least risky.

Pros and cons of annuity investments

Annuities can be a useful tool for retirement planning, but they also have many drawbacks. Below are some pros and cons you should consider before you dive into the world of annuities.

Pros:

• Guaranteed income. Annuities can provide a guaranteed stream of income in retirement, which can be especially useful for individuals who are concerned about outliving their savings.
• Tax-deferred growth. Annuities grow on a tax-deferred basis, which means that the earnings on the investments within the annuity are not subject to taxes until they are withdrawn. This can help the annuity to grow faster than a taxable investment.
• Death benefit. Some annuities include a death benefit that can provide a payout to beneficiaries if the annuitant dies before all of the payments have been made.

Cons:

• Penalties for early withdrawal. Annuities often have penalties for early withdrawal, which make them less flexible than other types of investments.
• Complexity. Annuities are often complex products that contain a lot of fine print, making it difficult for many investors to understand.
• High fees. Some annuities have high fees and expenses, which can eat into the returns earned on the investment.
• Low returns. Some annuities may have low returns compared to other types of investments, especially if they are fixed annuities.

Taxes and fees for annuities

Another key consideration before investing in annuities is the associated taxes and fees. Annuities are taxed differently depending on how and when the money is withdrawn from the annuity.

• Tax-deferred growth. Earnings on the investments within the annuity are not subject to taxes until they are withdrawn. This means that the money in the annuity could potentially grow faster than it would in a taxable investment.
• Taxable withdrawals. When money is withdrawn from the annuity, it is taxed as ordinary income. This means that the money is taxed at the individual's marginal tax rate for that year.
• Penalty for early withdrawal. If money is withdrawn from the annuity before age 59½, there could be a penalty imposed by the IRS of 10% on the amount withdrawn.
• Required minimum distributions (RMDs). Once the annuitant reaches age 72 they are required to take RMDs from their annuity each year. These distributions are taxed as ordinary income.

If you decide an annuity is for you, it’s important to carefully read the entire contract and understand the effect your annuity may have on your tax burden and whether the potential for income makes it worth the risk.

The last words

When it comes to annuities, it’s buyer beware. Annuities often have penalties for early withdrawal, which can make them less flexible than other types of investments. They also have complex rules and regulations, making them difficult for some individuals to understand. As with any retirement and financial planning strategy, it's important to consult with a financial professional before considering an annuity, as the tax implications can be complex and may change depending on the individual's unique circumstances.

Guarantees are subject to the claims-paying ability of the issuing insurance company.

Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Variable annuities are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information, can be obtained from a financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

Related Content

• How Are Annuities Taxed?
• How Annuities Can Help You Retire Early and Delay Social Security
• Fixed Indexed Annuities Can Be a Potent Diversifying Tool
• Are Bonus Annuities a Good Deal?
• REITs Unveiled: A Comprehensive Guide for Investors

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

The reality is that there is no such thing as a perfect investment, product or strategy. You cannot avoid risk. Even the guaranteed lifetime income stream from an insurance company has inflationary risk. If taxes were to go up, the net income you would get from your annuity income, assuming it was funded with pre-tax dollars, would go down. Those are two risks among many others that are associated with that one strategy. The point here is we are all subject to risk in one way or another.

In an attempt to bring balance to the retirement income conversation, I want to share 10 common income strategies you can consider when putting together your retirement plan.

You do not need to go all in on one or two strategies. In many situations, it makes sense to blend multiple strategies. Just like you would diversify a portfolio to help lower your risk, you may want to consider diversifying your income strategies to help lower risks associated with your desired quality of life in retirement.

1. The encore career

If we define retirement as the ability to spend your time how you want, then you may consider taking a full-time or part-time job in retirement that gives you purpose. Instead of working for money, consider working for the cause.

Benefits: Twenty-eight percent of retirees report they feel depressed. Whether you need the money or not, the encore career, also called a second act, may be able to help you emotionally transition into retirement. For those who may not have enough savings to retire, the encore career may be able to bridge the gap so you can spend your time doing work you enjoy.

Drawback: You’re working in retirement when you might prefer to relax, travel and spend more time with family, friends and hobbies.

2. Social Security benefits

Social Security is not intended to take care of all your needs in retirement. It is important to understand that when you file will affect more than just your income. It can also affect your taxes and estate. (For more about this, read my article Social Security Optimization If You Save More Than $250,000.)

Benefit: Social Security supplements your retirement savings. You can collect it if you’ve worked and paid Social Security taxes for at least 10 years (specifically, if you have earned at least 40 credits).

Drawbacks: Generally speaking, if you file for your benefit too early, your overall income could be hurting. However, if you file too late, you could hurt your overall estate.

Social Security optimization, in my opinion, should be treated as a holistic, or comprehensive, conversation and not an isolated strategy to try to get the most money back. You don’t want to jump over dimes to pick up pennies.

3. Pension

Pensions may be one of the lowest-risk retirement income strategies on this list, which is why many people who are offered a pension take it. However, a pension does have a few detriments. Since a pension is taxed as income, if taxes go up, your net-of-tax pension income would go down. Also, if inflation goes up, your pension may become less valuable over time.

Benefits: If you want a simple income strategy and are offered a pension, then taking the lifetime income may be right for you. If taxes or inflation are a concern, you may consider taking the lump-sum option, assuming it is being offered. The lump-sum option would allow you to be more proactive with your tax planning (e.g., IRA to Roth conversions, etc.). You would also have more control over your legacy intentions. The financial freedom the lump sum offers requires additional risk and responsibility.

Drawbacks: Those who take the pension option have tax and inflationary risks. Those who take the lump-sum option are subject to market risk, sequence of returns risk and more. Are you comfortable inheriting the additional responsibility and risks? (More about sequence of returns risk in No. 6 below.)

4. Lifetime income from annuities

The best definition I can give of an annuity, when used as a source of lifetime income, is the transference of longevity risk to an insurance company. If you live long enough, it may be financially worth it. However, the numbers are on the side of the insurance company. An annuity is not an investment. It is an insurance product. The annuity income stream is not intended to make you more wealthy.

Benefit: If you are more concerned about outliving your money and less concerned about your legacy planning, inflation risk and liquidity in case of expensive life events, annuities may be for you.

Drawback: If you are more concerned about maintaining flexibility while growing your assets, the annuity income strategy may not be right for you.

5. Real estate income

The three most common real estate investments I see are:

• Self-managed investment real estate
• Privately traded real estate investment trusts (REITs)
• Delaware statutory trusts (DSTs)

Publicly traded REITs don’t work for this group because they are structured and behave more like a mutual fund than a pure real estate investment, in my opinion.

Benefit: These three real estate investment options have the ability to offer cash flow while they can appreciate in value.

Drawback: It can be hard to sell a property, making liquidity a problem. Privately traded REITs can be redeemed only a few times a year, depending on the REIT, and even then, it may not go through. DSTs are illiquid, typically, for about six to 10 years.

6. The 4% rule

The 4% rule suggests that you can take about 4% from your portfolio each year and you should be fine. It is based on the idea that you can focus your portfolio on long-term growth and take the income you need from the growth.

Benefits: The 4% rule provides high growth potential overall and great flexibility. If you are focused on growing your wealth for legacy purposes, this may be for you.

Drawback: Sequence of returns risk is an issue. Basically, if you were to take income from your accounts during a time when they had lost money, you would amplify the loss, making it more difficult to recover. This is called sequence of returns risk. (For more about sequence of returns risk, read my article Many Retirees Don’t Know About This Major Market Risk: Do You?)

7. Dividends

The dividend portfolio is a traditional retirement income method that suggests you purchase positions that historically have offered competitive and consistent dividends. In this strategy, you hope to maintain the principal while living off of the dividends whenever they come in.

Benefits: The dividend strategy includes the potential growth of the position while it pays dividends. Also, when you pass, your positions could get a step-up in basis, potentially making your legacy planning more tax efficient. Lastly, if you put in enough time and research, you could probably put together a competitive dividend portfolio on your own and save yourself advisory fees.

Drawback: Dividends are not guaranteed. For example, during the COVID-19 pandemic, many companies known for dividends temporarily stopped paying them. That can put a lot of pressure on a retiree whose income strategy relies on dividends.

8. Option contracts

Selling option contracts (covered calls) can be an effective strategy to generate income in retirement, especially when markets are not moving.

Benefits: Selling calls against stocks you already own may help to provide income in retirement income while maintaining your overall portfolio positions.

Drawbacks: If the market moves too much in a certain direction, you could be forced to relinquish your shares and miss out on some of the growth potential. If you do not have experience in trading options, you may want to steer clear of this strategy altogether. I am writing about it here to acknowledge it, not to suggest it.

9. Limited partnerships

Limited partnerships can be an effective way to generate passive income in retirement if given the opportunity, and it makes sense from a risk/potential reward standpoint.

Benefit: Investing in a limited partnership makes you part-owner of a business venture without having to take on the day-to-day responsibilities of managing it.

Drawback: Be mindful of the health of the company/partnership and the risks you are taking before you invest.

10. The reservoir

I teach “the reservoir strategy” in my book, How to Retire on Time. This strategy is intended to complement any of the strategies listed above. Just like a city has a reservoir of water in case of a drought, I believe that any retirement portfolio should have a “reservoir” of assets that have growth potential and principal protection. That way, if the markets go down, dividends dry up or something else happens, you can keep income coming in without amplifying losses.

There are seven investments or products that I have found work well with this strategy: CDs, treasuries, fixed annuities, fixed indexed annuities, indexed universal life insurance, buffered ETFs with a 100% buffer and principal-protected (structured) notes. They each have their place within the reservoir strategy. When implemented correctly, you would typically see a blend of these products based on your liquidity needs and overall retirement plan.

Benefit: You may be able to focus more of your overall portfolio on long-term growth. When implemented correctly, you should be able to maintain your income, even when markets are down, without accentuating your losses. Basically, the reservoir can help you hedge against market crashes and flat-market cycles.

Drawback: In order to get growth and protection in any investment or product, you’ll have to give up liquidity for a certain period of time. Make sure you always maintain enough liquidity so you can keep your income coming in regardless of market conditions.

Conclusion

It can be tough to try to figure out which strategies are right for you. If you talk with someone who is licensed only in insurance, chances are they will make the annuity sound like it is the best solution. If you talk with someone licensed only in securities, you may get a biased guide trying to persuade you to follow the 4% rule or something similar.

Instead of getting “sold” a product or portfolio, consider taking the following steps:

• Put together your lifestyle and legacy plan. Find a way to articulate what you want before anything else.
• Consider all the potential pitfalls and inefficiencies you may be facing. You may want to take time earmarking certain tax minimization or other strategies focused on efficiencies that may be able to help you get more out of your hard-earned money.
• Design a portfolio that supports your lifestyle and legacy goals and is able to implement a blend of the income strategies discussed above.

Related Content

• Roth Conversions: Convert Everything at Once or as You Go?
• Retirees’ Anti-Bucket List: 10 Experiences You Don’t Want
• Four Historical Patterns in the Markets for Investors to Know
• Five Things I Wish I’d Known Before I Retired
• Do You Have the Five Pillars of Retirement Planning in Place?

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

In part one of this series, we discussed how a prolonged downturn in the market during the fragile decade can derail withdrawal plans. The conventional approach to managing through market declines and loss years is to take the long view, keep investing and rely on long-term averages to eventually help the portfolio recover.

This approach can work well when you are younger and have salary income and decades to ride out the storm before taking withdrawals. For those of us near or in the fragile decade, the long view may not be the optimal course of action, or worse, it could be downright devastating, as we saw in part one.

As you approach your retirement date, you should have a more accurately defined and refined list of spending needs. This is when your investment strategy can (and likely will) diverge from the accumulation stage.

Balancing risk with returns

A lot of the investing concepts we discuss for the accumulation stage (and are put forth by financial advisers) are grounded in Modern Portfolio Theory (MPT), which seeks to optimize market returns and risk by asset class. Simply stated, as you invest for the long term, get as much of a return as you can, given your level of risk tolerance.

Harry Markowitz introduced the world to MPT in 1952, and his principles have influenced generations of financial thinking. In 1990, Markowitz shared the Nobel Memorial Prize in Economic Sciences for his efforts around MPT.

Finding this optimal balance of return and risk is what Markowitz describes as investing along the efficient frontier. MPT has been successfully used for decades by institutions such as endowments, pension plans and large trust funds, etc. The traditional approach to retirement planning has taken the principles of MPT and adapted them to individual investors.

But here’s the rub: Large institutions, like endowments, have an infinite time horizon without a fragile decade. Institutions are effectively in a perpetual accumulation stage. They do not need to plan for and manage through a significant and finite withdrawal stage, but you do.

“If you want something you’ve never had, you must be willing to do something you’ve never done.” — Thomas Jefferson

Enter goals-based planning. With origins going back decades, goals-based planning gained in popularity after the 2008-2009 financial crisis. It seeks to refocus our goals away from obtaining abstract market return rates and toward meeting specific personal goals (e.g., our monthly spending needs).

Making risk more tangible

As such, we should similarly reframe our risk profile, moving away from focusing on the volatility of market prices. We should describe our risk in a much more personal way: Our principal risk is the chance that we fall short of our spending goals.

A goals-based approach to planning can help make the risk more tangible. We take measured, personally defined risks and don’t endlessly ponder esoteric risks (such as standard deviation, alpha, beta, R-squared and the Sharpe ratio). Goals-based planning is focused on optimizing a limited pool of financial assets by matching assets and income with future liabilities and expenses (i.e., future spending needs).

If, for example, you can meet all your cash flow needs with a 5% return, then why take on a greater risk of loss to try to achieve a higher return? Why risk losing what you have and need to chase what you don’t have and don’t need?

Your goals, not just your risk tolerance, should drive investing decisions. During the withdrawal stage, income and capital preservation become much more important than stretching for outsized returns.

Under the umbrella of goals-based planning, the idea of a safety-first strategy has evolved. Briefly, a goals-based safety-first strategy looks at your spending goals in two broad buckets. The first, the safe bucket, seeks to cover your basic financial needs (e.g., housing, food, health care, emergency fund, etc.) with assets invested with as little risk as possible (the safety-first component).

Safety-first investments to consider

To start, you might think of safety-first investments such as bank CDs, money market funds, short-duration government bonds and bond ladders, etc. But don’t lose sight of other financial resources you might have beyond cash and bonds that could also provide safety-first withdrawals. For example, Social Security, a pension, rental income from real estate, income annuities and insurance products. The key is to build a stream of income that will cover your basic needs regardless of a declining stock market.

Once this safety-first basket is secure, you can then put the remainder of your portfolio in the second or aggressive bucket, to cover discretionary spending (wants), which can be invested as aggressively (or conservatively) as you see fit. When your basic needs are met, you can decide how much risk you want to take to achieve your aspirational wants — those items that would be nice to have (more frequent vacations, etc.), but in a falling stock market, you could do without.

In part three of this series, we’ll offer up some specific ideas for mitigating the impact of sequence of returns risk and protecting the retirement cash flow you have diligently worked to achieve.

As always, invest often and wisely. Thank you for reading.

This content is for informational purposes only. It is not intended to be, nor should it be construed as, legal, tax, investment, financial or other advice.

Related Content

• Nervously Nearing Retirement? Four Do’s, Four Don’ts and One Never
• To Create a Happy Retirement, Start With the Three Ps
• Five Things I Wish I’d Known Before I Retired
• Retirees’ Anti-Bucket List: 10 Experiences You Don’t Want
• The Five Stages of Retirement (and How to Skip Three of Them)

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Here, we look at how higher interest rates impact different types of annuities. 

Fixed index annuities

Fixed annuities are paying higher guaranteed rates to match current market conditions. Fixed index annuities have also become a better deal. Many now offer higher possible caps for your returns as insurers are earning more. 

The interest rate environment doesn’t matter as much for variable annuities, as the returns depend on the performance of the mutual funds they invest in rather than rates.

Initial bonuses

Many annuities also pay initial bonuses as a percentage of your deposit that can be worth 10% or more. 

“If someone bought an annuity years ago when rates were low, it could make sense to break a contract to get the better rates. A bonus would help offset the surrender charge,” says Mindy Oglesby, a certified financial planner and CEO of Oglesby Wealth Strategies in Watkinsville, Ga.

How old is the annuity holder?

High interest rates could help you earn more if you’re looking for income, but it depends on your age. “It matters much more the younger you are,” says David Blanchett, head of retirement research for PGIM DC Solutions, the investment management division of Prudential. 

If you’re 55, the amount of your payout is based on the insurer investing the money for the long term. High interest rates can help you lock in higher lifetime income. If you’re 85, high interest rates don’t matter as much. “At this point, payouts are mainly based on life expectancy.”

The possibility of rate cuts 

Interest rates could fall later this year, although higher-than-expected inflation in early 2024 may delay rate cuts from the Federal Reserve. The possibility of declining rates provides extra incentive to purchase some types of annuities sooner than later. 

But before you pull the trigger, make sure an annuity is appropriate for your long-term financial goals. If you cancel an annuity early, surrender charges could wipe out any benefit you gain by purchasing it when interest rates are high. 

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Related content

• Annuities: What They Are and How They Work
• What Is the Federal Funds Rate?
• Retirement Savings Calculator: How Much Do I Need to Retire?