Guide to Annuities
Annuities can play a role in retirement income planning when used appropriately. Explore the basics, common types, and key questions to consider before making a decision.
They’re Not All The Same
“I hate annuities.”
I hear that a lot. Usually from someone who was told to hate them by a stock-market-focused advisor or a TV personality.
But not all annuities are the same. There are different types built to accomplish different goals.
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1
Income annuities are designed to create a lifetime income stream you can’t outlive — that’s literally the point.
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2
Accumulation annuities are built to protect and grow money, sometimes with guarantees, sometimes market-linked, sometimes both.
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3
Fees, control, taxes, risk all change depending on which type you pick.
First, let’s define the two big goals
When people say “annuity,” they’re usually talking about one of two broad missions:
Income Annuity (SPIA / DIA)
You give a lump sum to an insurance company. They give you a guaranteed income stream, often for life.
- Pro: You can’t outlive the check.
- Con: You may trade away access to the lump sum depending on the payout option.
- Reality check: “Life only” can mean payments stop at death with little or nothing left for heirs.
Accumulation Annuity
Focused on keeping money safe (or mostly safe), getting growth, and doing it tax-deferred.
- Pro: Potential to protect principal while earning interest or index-linked growth.
- Con: Most have surrender periods and penalties if you withdraw too much too soon.
- Tax angle: Growth is tax-deferred until withdrawn.
“I want safety and a paycheck”
A common approach is to protect principal first, then create income later when you actually need it.
- Translation: You don’t have to “hand over everything forever” on day one.
- Control: Many designs keep an account value (not just a promise of checks).
- Spouse planning: Options can pay whichever spouse lives longer.
Now let’s zoom in on the 3 main accumulation styles you’re going to hear about — MYGA, Fixed Index Annuity, and Variable Annuity — plus how guaranteed income riders work.
The 3 main accumulation annuity styles
I’m going to sort them by “guarantee strength,” from most predictable to most market-exposed.
MYGA (Multi-Year Guaranteed Annuity)
Your principal won’t go down due to markets, and you know your rate in advance.
- Guarantees: No market loss + a guaranteed rate for the term.
- Who likes this: Conservative savers who want stability.
- Watch for: Surrender schedule / early withdrawal penalties.
Fixed Index Annuity (FIA)
With an FIA, your money is protected from market losses. If the index goes down, you don’t lose principal or previously credited interest. If it goes up, you get a slice of the upside based on contract rules.
- Downside protection: Principal is safeguarded even if the stock market falls.
- Upside rules: Growth is limited by a Cap, Spread, or Participation Rate.
- Fees: Many FIAs have no annual fee unless you add an optional rider.
Variable Annuity (VA)
A VA invests in subaccounts (mutual-fund-like). Your account value can go up or down with the market. Guarantees usually cost extra.
- Upside: Full market participation.
- Downside: You can lose value; no built-in floor unless added.
- Fees: It’s common to see total fees around ~2% to ~3%/yr (sometimes more).
IMPORTANT: None of these are “good” or “bad” in a vacuum. They’re tools. The question is: which tool fits your job?
How does a Fixed Index Annuity (FIA) actually grow?
The insurer is basically saying: “If the index goes up, we’ll give you some of that gain. If it goes down, you don’t go backwards.” You’re trading unlimited upside for downside protection.
Cap
A ceiling. If the cap is 8% and the index returns 10%, you’re credited 8%.
Spread
A haircut. If the spread is 2% and the index returns 10%, you’re credited 8%.
Participation Rate
A percentage of the gain. If participation is 80% and the index returns 10%, you’re credited 8%.
Whatever you earn in a crediting period gets “locked in.” Your floor is typically 0%, not –20%.
“I need income I can count on… but I don’t want to give up control.”
One approach is an immediate income annuity (SPIA): exchange a lump sum for a guaranteed paycheck stream based on the option selected.
Another approach: certain annuities offer an optional Guaranteed Lifetime Income Rider that can establish a separate “income benefit base” used to calculate future lifetime withdrawals.
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A
Why people like it: You may still keep an account value; beneficiaries may receive remaining value.
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B
Why people don’t: Riders add costs that can reduce net returns.
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Alternate move: In some cases, systematic withdrawals can be modeled against a “rider” strategy.
Example scenario (illustrative only): a client deposits $100,000. Strategy A uses an income rider with an added annual charge. Strategy B skips the rider and models withdrawals within contract rules. Results depend on caps/participation, age, term, and contract details.
The goal isn’t “always add a rider” or “never add a rider.” It’s to compare options and choose what fits your plan.
Don’t forget taxes and RMDs
Tax-Deferred Doesn’t Mean Tax-Free
Most annuities (unless inside a Roth) grow tax-deferred. You pay tax when you withdraw gains.
Deferral can help, but withdrawal planning matters.
RMD Rules Can Change
RMD requirements have been adjusted by recent law changes. Planning helps avoid surprises.
The first RMD is often due by April 1 of the following year after you reach the required age under current law.
Before you buy any annuity, ask these 5 questions
1. What problem is this solving?
Income? Protection? Tax deferral? If it’s not clear, pause.
2. How liquid is the money?
Know the free-withdrawal amount and surrender schedule.
3. What are the real fees?
Some are 0% internal-fee designs; others can stack to 2–3%+ per year.
4. Who backs the guarantees?
Guarantees are backed by the issuing insurer’s claims-paying ability (not FDIC/NCUA).
5. What happens for spouse/heirs?
Model the “income only” path vs. “keep account value” path before deciding.
Want help reviewing the options?
If you’d like, we can organize the pros/cons into a simple side-by-side and make sure the “rules” are clear before you commit to anything.
This material is educational only and not individualized tax, legal, or investment advice. Guarantees (including any lifetime income guarantees) are backed solely by the financial strength and claims-paying ability of the issuing insurance company and are not insured by the FDIC, NCUA, or any bank. Annuity withdrawals before age 59½ may be subject to IRS penalties. RMD rules may apply to tax-deferred accounts once you reach the applicable age under current law. Annuities are long-term products and may include fees and surrender charges.
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