Are Annuities a Retirement Lifeline—or a Trap?

According to LIMRA, annuity sales reached a record $385 billion in 2023—driven largely by near-retirees seeking stability amid market volatility (LIMRA, 2024). Many see annuities as a safety net: guaranteed income, protection from market losses, and peace of mind for the long haul. But there’s another side: fees, complexity, illiquidity, and a loss of flexibility.

For some, annuities feel like a safety net—but they can also quietly drain wealth through fees and inflexibility. This article examines whether annuities are truly a lifeline—or a well-marketed trap.

Key Takeaways

Some annuities offer guaranteed income—but that protection may come with high fees and limited access to funds.
The complexity of riders and contract terms can make it hard to compare or fully understand what a person is buying.
Annuities may help with longevity risk but could leave less money available for heirs or unexpected needs.
For some retirees, annuities may offer peace of mind—but they should be weighed carefully against simpler alternatives.

Why Annuities Appeal—Especially in Uncertain Times

Volatility, inflation, and longer life expectancies have all contributed to rising demand for annuities.

Some investors are drawn to the concept of a “retirement paycheck.” Others fear outliving their savings or having to sell investments in a down market. Annuities aim to address those emotional concerns—especially for those without a pension.

But not all annuities are alike. And the fine print often matters more than the pitch.

Building on that idea, the next section unpacks the core tradeoff: predictability vs. control.

Predictable Income, But at What Price?

Annuities promise reliability. But that security often comes with tradeoffs.

Fees: Variable annuities carry the highest fees—often between 2% to 4% per year, driven by mortality, expense, and rider charges.
Surrender periods: Many contracts restrict withdrawals for 3–10 years.
Riders: Optional add-ons—like income guarantees or death benefits—can increase complexity and cost.

Hypothetical: Imagine a 60-year-old who invests $500,000 into a variable annuity with multiple riders. Over time, they receive steady income—but realize their actual returns are far lower than a balanced portfolio would have delivered net of fees.

Hypothetical: Now consider a retiree who pays 3% per year in fees on a $400,000 annuity. Over a decade, they withdraw predictable income—but inflation steadily erodes their purchasing power. By age 75, they find themselves needing cash for medical costs and face penalties for early withdrawal.

So what? Even if an annuity delivers peace of mind, the cost of that peace can quietly erode long-term wealth.

The Behavioral Pull: Why Annuities Feel Safer Than They Are

Many retirees value simplicity—especially after decades of managing finances.

The emotional appeal of annuities often stems from:

Fear of outliving savings
Desire for autopilot income
Aversion to market volatility

However, these instincts can sometimes lead to overpaying for perceived stability. Empirical work finds that framing and choice-bracketing limit annuity demand, even when theoretical welfare gains are high (Brown et al., NBER Working Paper 13537, 2007).

And once purchased, annuities are hard to unwind.

When Annuities Might Make Sense

Despite their drawbacks, annuities can serve a role—especially when used thoughtfully.

Some investors may consider using annuities for:

Covering basic living expenses beyond Social Security
Managing longevity risk later in life (e.g., with deferred income annuities)
Creating pension-like income in the absence of one

In these cases, simpler products like single premium immediate annuities (SPIAs) or qualified longevity annuity contracts (QLACs) may be more transparent and cost-effective than complex variable or indexed annuities.

Context matters. The right structure depends on a person’s time horizon, liquidity needs, tax situation, and overall asset mix.

The Power—and Danger—of Irreversibility

Annuities often require a significant upfront commitment. And unlike stocks or bonds, they can’t always be sold or transferred easily. This illiquidity introduces a hidden risk: locking into a decision that may no longer fit a person’s life.

A large unexpected expense
A major health event
A change in estate planning goals

All can clash with the rigid structure of some annuities. The lack of flexibility is a real risk—especially for investors who value optionality in retirement.

A helpful rule of thumb: if it feels like the product is solving an emotional problem, slow down and verify the economic tradeoff. Peace of mind is valuable—but not if it quietly costs more than it's worth.

Annuities — FAQs

How does inflation affect fixed annuity income?

If annuity payments are fixed and inflation rises faster, the purchasing power of those payments declines over time.

Why are annuities appealing to some near-retirees?

Many are drawn to the stability of regular income, particularly in uncertain markets, and to the concept of a “retirement paycheck.”

Why can annuities be difficult to exit once purchased?

Annuities generally have limited liquidity. Withdrawals can be restricted or penalized, and contracts cannot be easily sold or transferred like stocks or bonds.

How might annuities affect estate goals?

Because many annuities are structured to provide income during the holder’s lifetime, they may leave less flexibility for heirs compared with other asset types.

Which annuity types are usually less complex?

Products such as single premium immediate annuities (SPIAs) or qualified longevity annuity contracts (QLACs) are generally simpler in structure than variable or indexed annuities.

What behavioral factors influence annuity purchases?

Common influences include concern about outliving savings, desire for automatic income, and discomfort with market volatility.

What is the primary tradeoff in annuity design?

Annuities often trade liquidity and flexibility for predictability. Once purchased, access to funds may be limited in exchange for steady income.

How do high fees impact annuity outcomes?

Higher annual fees can reduce net returns over time. Even if income is steady, compounding costs may lower long-term wealth compared with lower-cost approaches.

In what situations might annuities create challenges?

Significant life events such as unexpected medical costs, large cash needs, or estate planning changes may be difficult to address if capital is locked into an annuity contract.

How long can annuity payments last?

Many annuities are designed to provide lifetime payments, though the exact terms depend on the specific contract selected.