Pros and cons of annuities that experts say to know now

CBS News

19-05-2025

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An annuity could be a smart addition to your retirement plan, but you'll want to understand the full picture before investing in one.
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The recent economic ups and downs have left many Americans worried about their retirement savings. As they face issues like market uncertainty, persistent inflation and longer lifespans, more retirees and pre-retirees are turning to annuities for financial stability.
What exactly are annuities, though? "[They] are financial products designed to help you grow your retirement income and protect you from outliving it," says Craig Hawley, president of Nationwide Annuity at Nationwide Financial. In practice, they involve investing money with an insurance company, which then provides you with regular income payments that can help supplement your retirement income.
But while annuities can be a smart way to earn more during retirement, they also come with a few benefits and downsides you should consider before investing. Here's what to know.
Learn more about the annuity options available to you now.
Pros and cons of annuities that experts say to know now
As pensions become rarer and Social Security seems less certain, more people are looking at annuities. "[They] can fill that retirement income gap," notes Christopher L. Stroup, a certified financial planner and founder of Silicon Beach Financial. Below, industry experts share insights to help you decide whether annuities could fit your retirement strategy.
Pros of annuities to know now
Experts point to a few annuity pros to know today:
Guaranteed lifetime income: "Annuities are the only investments that can guarantee income for life," says Hawley. This matters more as people live into their 90s and beyond.
"Annuities are the only investments that can guarantee income for life," says Hawley. This matters more as people live into their 90s and beyond. Market volatility protection: Fixed and indexed options protect your money when markets fall. "Many annuities provide some stock market upside or a guaranteed fixed rate while providing buffers on the downside," says Brandon Goldstein, ChFC, a financial planner at Prudential Advisors.
Fixed and indexed options protect your money when markets fall. "Many annuities provide some stock market upside or a guaranteed fixed rate while providing buffers on the downside," says Brandon Goldstein, ChFC, a financial planner at Prudential Advisors. Tax-deferred growth: Your money grows tax-free until you take it out. "This allows savings to accumulate," Goldstein notes. "And [you can] recognize gains in retirement when tax brackets might be [lower]."
Your money grows tax-free until you take it out. "This allows savings to accumulate," Goldstein notes. "And [you can] recognize gains in retirement when tax brackets might be [lower]." No limits on contributions: Unlike 401(k)s or IRAs, you can contribute large sums to annuities. Stroup says this is "ideal [if you've] maxed out other retirement accounts and need another place to shelter assets."
Unlike 401(k)s or IRAs, you can contribute large sums to annuities. Stroup says this is "ideal [if you've] maxed out other retirement accounts and need another place to shelter assets." Customizable options: "You can choose income now or later, fixed or variable payments and even add protections for a spouse or heirs," says Stroup.
Find out more about the benefits of investing in annuities today.
Cons of annuities to know now
Here are a few potential annuity cons experts say to know before buying one:
Fees: "Annuities often come with administrative fees, expense risk charges and [costs] for [extra] features," says Hawley. These can reduce your returns over time.
"Annuities often come with administrative fees, expense risk charges and [costs] for [extra] features," says Hawley. These can reduce your returns over time. Limited access to your money: "Some annuities limit how much you can withdraw in the initial years, as many are designed for longer-term ownership," Goldstein explains.
"Some annuities limit how much you can withdraw in the initial years, as many are designed for longer-term ownership," Goldstein explains. Early withdrawal penalties: Goldstein warns that taking money out before age 59.5 can result in a 10% penalty plus income tax.
Goldstein warns that taking money out before age 59.5 can result in a 10% penalty plus income tax. Complex terms: "Annuities aren't set-it-and-forget-it," Stroup points out. "The contracts can be hard to understand, with surrender charges and opaque investment options."
"Annuities aren't set-it-and-forget-it," Stroup points out. "The contracts can be hard to understand, with surrender charges and opaque investment options." Inflation risk (for fixed annuities): "Fixed income can lose purchasing power, especially [during] high inflation if the contract doesn't include a cost-of-living adjustment," cautions Stroup.
Key considerations before buying an annuity
Retirement and savings experts say it may help to keep these tips in mind as you explore annuities:
Balance your investments: Avoid putting all your retirement savings into annuities. Keep some money in easily accessible accounts to cover unexpected expenses or emergencies.
Avoid putting all your retirement savings into annuities. Keep some money in easily accessible accounts to cover unexpected expenses or emergencies. Research the company's strength: Goldstein emphasizes that the issuing company backs annuities — not the government or the Federal Deposit Insurance Corporation (FDIC). Review ratings from independent agencies to ensure the annuity company is financially solid.
Goldstein emphasizes that the issuing company backs annuities — not the government or the Federal Deposit Insurance Corporation (FDIC). Review ratings from independent agencies to ensure the annuity company is financially solid. Make a financial plan first: Figure out your retirement budget. Goldstein recalls a client who, after proper planning, found that an annuity combined with their Social Security gave them confidence they'd have enough monthly income to cover bills.
Figure out your retirement budget. Goldstein recalls a client who, after proper planning, found that an annuity combined with their Social Security gave them confidence they'd have enough monthly income to cover bills. Review current economic conditions: Interest rates and inflation outlook impact annuity returns. Higher interest rates generally lead to better annuity payouts. Meanwhile, high inflation can erode the value of fixed payments over time. Ask your advisor how today's economic environment might influence annuity rates
The bottom line
So, is an annuity worth it? It can offer valuable retirement security for some people, but it's not for everyone. "Be clear about your goals and how they fit into your broader retirement plan," advises Hawley. Some retirees need income before Social Security kicks in, while others prioritize protection against market swings or outliving their savings.
Before making decisions, speak with a qualified financial advisor who understands your finances. They can determine if an annuity makes sense and which type might work best. With professional guidance, you'll find the right balance between guaranteed income and flexibility for whatever your future holds.