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Like many financial products, annuities often get mixed reviews — not necessarily because of how they work, but because of how they're sold. Understanding annuities in the context of your overall retirement income strategy can help you decide whether they deserve a place in your financial future.
Originally published: March 4, 2025
Think of an annuity as a pension you buy upfront. You're essentially trading a lump sum today for guaranteed payments tomorrow. When you look at retirement income, your only truly guaranteed payment is typically Social Security. Annuities offer another way to create predictable retirement income.
When you buy an annuity, you're making a deal with an insurance company to transform your investment into future payments. These payments can work in different ways, depending on what type of annuity you choose.
Fixed annuities are the simpler option — they work like a traditional pension. Once you start receiving payments, you'll get the same amount each month, regardless of what's happening in the market. While this predictability feels safe, remember that you're typically trading higher potential returns for that certainty.
Variable annuities take a different approach. Instead of fixed payments, your money goes into investment options similar to mutual funds. Your future payments can go up or down based on how these investments perform. Think of it as keeping one foot in the market while still having some income guarantees.
The timing of your payments matters, too. Some people need income right away — that's where immediate annuities come in. Others want to let their money grow for a while first, using a deferred annuity.
It's like the difference between starting Social Security at 62 and waiting until 70 — the longer you wait, the bigger your payments can be.
You won't pay taxes on your earnings during the growth phase — they grow tax-deferred. When you start taking payments, they're usually taxed as regular income. The exact tax treatment depends on whether you used pre-tax retirement money (like from an IRA) or after-tax dollars to buy the annuity.
Before you jump into any annuity contract, there are some important catches to understand.
Most annuities lock up your money for several years — if you try to take it out early, you'll face surrender charges. They also come with various fees for insurance features, administration, and investment management.
This is exactly why working with a fiduciary advisor instead of a commission-based salesperson makes such a difference.
A fiduciary can help you understand whether an annuity truly fits your retirement strategy and, if so, find one without unnecessary costs. Remember: the insurance company's financial strength matters too — they're promising to pay you for potentially decades to come.
The answer depends on your overall retirement strategy. Consider your income layers:
Annuities can be powerful tools when used correctly — particularly if you work with a fiduciary who can recommend commission-free options that match your timeline. However, they shouldn't be your only strategy. The key is building diverse income streams that work together for your retirement security.
Annuities address one real problem in retirement planning: the risk of outliving your income. But they're not the only tool built for that job. If longevity risk is part of your planning conversation, it's worth knowing that other structures exist for building potential late-life income — without the surrender charges, health screening, or large upfront commitment that traditional annuities typically require.
Savvly's Longevity Benefit is designed to help investors build potential income for the later years of retirement. It adds a longevity-based reallocation layer to market-linked performance, creating the opportunity for additional payouts at ages 80, 85, 90, and 95 for investors who reach those milestones. Savvly is not insurance, not a guaranteed product, and not FDIC insured. For full details on fees, assumptions, risks, eligibility, and disclosures, visit savvly.com/disclosures.
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An annuity is a financial contract between a buyer and an insurance company. The buyer pays a lump sum or a series of payments, and the insurance company agrees to provide periodic disbursements beginning immediately or at a future date. Annuities are regulated as insurance products and are subject to state insurance laws. The National Association of Insurance Commissioners (NAIC) provides consumer resources on the different types of annuities and key contract terms.
Annuities can carry several types of fees, including mortality and expense risk charges, administrative fees, investment management fees for variable annuities, and charges for optional riders such as guaranteed income riders or enhanced death benefits. Surrender charges may apply to withdrawals made during an initial holding period, which can range from one to over ten years. FINRA provides a guide to annuity fees at finra.org.
The tax treatment of annuity payments depends on how the annuity was purchased. Annuities purchased with pre-tax dollars, such as those inside a traditional IRA or 401(k), are fully taxed as ordinary income when payments are received. Annuities purchased with after-tax dollars are taxed only on the earnings portion of each payment, calculated using an exclusion ratio. The IRS addresses annuity taxation in Publication 575 at IRS.gov.
A fixed annuity pays a guaranteed interest rate set by the insurer, with the insurance company bearing the investment risk. A variable annuity allows the owner to invest in subaccounts similar to mutual funds, meaning the account value and future payments fluctuate based on market performance. Indexed annuities credit interest based on the performance of a market index up to a cap rate, while offering some downside protection. FINRA provides additional comparison resources at finra.org.
This article is for informational purposes only and does not constitute financial, tax, or investment advice. Consult a qualified financial professional before making retirement planning decisions.
Disclosures
The information on this page is provided for educational purposes only and is not intended as investment, legal, or tax advice. It is designed solely to illustrate how longevity-linked investment benefits may work under certain assumptions. Actual results will vary. All illustrations, examples, and case studies are hypothetical and are intended to demonstrate potential scenarios — not to predict or guarantee actual outcomes. They do not represent the performance of any individual investor, portfolio, or account.
Key Assumptions Used in the Illustrations
Life expectancy and mortality projections are based on the most recent Social Security Administration (SSA) tables available at the time of simulation.
In the event of death or early withdrawal, hypothetical scenarios assume that investors who exit early, or their estate in the event of death, may receive 75% of the lesser of the initial investment or current market value, plus 1% for each full year the account was active. Case studies assume standardized market growth of 8% annually and do not incorporate unexpected market volatility, inflation, changes in interest rates, or changes in an investor's personal circumstances.
Simulations may assume a 3% annual early withdrawal rate prior to payout or death. All figures shown are net of fees. No forecast, projection, or hypothetical return should be relied upon as a promise or representation of future performance.
Past performance is not indicative of future results. The 8% annual market growth rate used in illustrations is a standardized assumption for modeling purposes only and does not represent the historical or expected performance of any specific investment. Note that early or voluntary withdrawals by other participants can affect fund performance and the size of distributions, and that a higher-than-expected number of participants reaching payout milestones may reduce the per-participant benefit received.
Savvly's Longevity Benefit is not a bank product, not FDIC insured, not insured by any federal government agency, not a guaranteed or insured investment, and not insurance. Investment values may decline.
Savvly's Longevity Benefit may not be suitable for all investors. Eligibility to invest is subject to qualification requirements and not all investors will be eligible. Investors should carefully consider their investment objectives, risk tolerance, time horizon, and financial situation before investing. See savvly.com/disclosures for current eligibility criteria, fees, risks, withdrawal terms, and fund assumptions.
This content is published by Savvly, Inc. Savvly has a financial interest in the products described and this content should not be interpreted as independent financial research or analysis. Investors should carefully evaluate their own circumstances and consult a qualified financial professional before making any investment decision.
