Annuities Are Similar to a Pension You Purchase for Yourself
Company pensions are pretty much a thing of the past in corporate America. While the ubiquitous 401(k) plan might help workers save pre-tax or post-tax dollars for retirement, it's also shifted the responsibility for retirement planning to the individual. And as many people saw in the 2008 economic crisis, 401(k)s can be fraught with market risk, including the risk of losing too much value, forcing the retiree to go back to work.
Annuities can be thought of as a way to transform savings into income. When you purchase an annuity, you're exchanging a sum of money for an agreed-upon monthly payment, generating a predictable income stream in retirement similar to a pension.
Tax-Deferred, Qualified Annuities
Annuities can be purchased with pre-tax or after-tax dollars. Sometimes people perform a 401(k) rollover into an annuity with money from a previous employer, or after they turn 59½ years old, when they can access their money without a 10% federal tax penalty.
When purchased with pre-tax dollars, a properly structured annuity can offer 100% tax-deferred growth, similar to other qualified accounts. You're not taxed on interest earnings while your money stays in the annuity, but once you start receiving payouts, they're taxed as ordinary income based on your income tax rate at the time, just like a 401(k) or traditional IRA. When you hold annuities in non-qualified accounts purchased with after-tax dollars, there are no penalties or mandatory distributions based on age.
They're Not Right for Everyone
There are a number of reasons annuities might not make sense for some people. Surrender fees apply if you want out of your contract early, and you should learn about any other fees involved with an individual annuity policy before you purchase. A qualified financial advisor can spell out the pros and cons.
But most people are worried about how they'll make it through retirement without running out of money, especially given the increased longevity predicted for most Americans. For them, a portion of their portfolio containing annuities might make sense, depending on their situation and goals.
There Are Many Different Types of Annuities
There are many different types of annuities available, including variable, fixed rate, and fixed indexed, each with different features. While annuities aren't right for everyone, some are increasingly popular, including fixed rate immediate annuities, indexed annuities, and fixed rate deferred annuities. Annuity sales hit a record $464.1 billion in 2025, with fixed indexed annuity sales alone reaching $126 billion in 2024, according to LIMRA.¹
Many Types of Annuities Come With Guarantees
One of the most appealing things about annuities is the guarantee. Because annuities are contracts between you and an insurance company, the insurance company often guarantees that your principal will be protected, based on the company's financial strength and claims-paying ability. Some annuities also guarantee a certain amount will be credited to your policy based on contract terms, while many indexed annuities are designed to deliver "downside market protection" alongside "upside market potential." The exception is a typical variable annuity, which may be invested in the market and subject to losing value in a market downturn.
Some Experts Are Advocating Annuities as a Replacement for Part of Your Bond Portfolio in Retirement
The inverse relationship between a bond's price and its yield poses one of the main risks with bonds. In a rising interest rate environment, that risk can be even greater for retirees.
Researchers including Professor Wade Pfau, PhD, and Nobel laureate and Yale economics professor Robert Shiller have each studied bond performance versus annuities. Yale Emeritus Professor Roger Ibbotson published a widely cited study running hypothetical return simulations comparing stocks, bonds, and fixed indexed annuities (FIAs) from 1927 to 2016. He concluded that fixed indexed annuities have the potential to outperform bonds in the retirement portfolio.²
Frequently asked
How is an annuity similar to a pension?
Like a pension, an annuity converts a sum of money into a predictable, ongoing income stream, except you're funding it yourself rather than through an employer. In exchange for a lump sum or series of payments, an insurance company agrees to pay you income immediately or at a future date.
How big is the annuity market right now?
U.S. annuity sales hit a record $464.1 billion in 2025. Fixed indexed annuities specifically have grown fast, with sales reaching $126 billion in 2024, according to LIMRA industry data.
Are annuity earnings taxed?
Annuities purchased with pre-tax dollars offer tax-deferred growth: you're not taxed on interest while the money stays in the annuity, only when you begin receiving payouts, at which point withdrawals are taxed as ordinary income. Annuities held in non-qualified, after-tax accounts have no penalties or mandatory distributions based on age.
Can annuities replace bonds in a retirement portfolio?
Some researchers, including Yale Emeritus Professor Roger Ibbotson, have studied this question directly. Ibbotson's widely cited study running simulations from 1927 to 2016 found that fixed indexed annuities have the potential to outperform bonds in a retirement portfolio, particularly given the inverse relationship between bond prices and yields in a rising-rate environment.
Are annuities right for everyone?
No. Surrender fees apply for early withdrawal, and other fees vary by policy. These should be understood fully before purchasing. Annuities tend to make the most sense for people specifically concerned about outliving their retirement savings, as one piece of a broader portfolio rather than a full replacement for it.
Sources
- LIMRA, The 2026 Annuity Sales Outlook Remains Strong, limra.com/en/newsroom/industry-trends/2026/the-2026-annuity-sales-outlook-remains-strong (2026)
- Ibbotson, R., wealthmanagement.com/insurance/ibbotson-fixed-indexed-annuities-beat-out-bonds; additional research context via theamericancollege.edu/news-center/the-case-for-replacing-some-bonds-with-annuities and markets.businessinsider.com (Insurmark/Barclays/Shiller research)
This information is for educational purposes only and should not be taken or construed as legal, tax, or financial advice. In all cases, it is recommended that you consult with legal, tax, and financial advisors who can provide personalized advice based on your unique situation and circumstances.
Guarantees and protections of fixed indexed annuities are subject to the claims-paying ability of the issuing insurance company. Fixed indexed annuities are contracts purchased from a life insurance company, designed for long-term retirement goals, and intended for someone with sufficient cash and liquid assets for living expenses and unexpected financial emergencies. Depending on the product, fixed indexed annuities may include surrender charges, rider charges, and other fees.
A fixed indexed annuity is not a registered security or stock market investment and does not directly participate in any stock, equity, bond investment, or index. Gains on indexed accounts are based on participation rates and other conditions set by the issuing insurance company. Withdrawals may be subject to income tax, and withdrawals before age 59½ may be subject to a 10% early withdrawal federal tax penalty if the annuity was purchased with qualified money.
We are a financial services firm helping our clients prepare for retirement through the use of insurance products and strategies. We do not offer tax, estate planning, or legal advice. We are not affiliated with any US government agency. Insurance product guarantees are backed by the financial strength and claims-paying ability of the issuing company.