An Annuities Q+A: Are These Investments Right For Your Retirement?

“Should I use annuities?” “I've heard so many bad things about annuities.” “I've heard people say I should never get an annuity,” or “I've heard people say annuities should be considered in retirement.”

Here at Chamberlin, we hear these questions and sentiments a lot. Annuities are a mystery to many retirees and pre-retirees, and we want to help you understand what they are and how they work — they’re not right for everyone, but once you’ve learned more about them, we hope you can make an informed decision about whether or not they’re right for you.

What is an annuity?

An annuity is just a tool that you can use in your retirement to potentially gain stability for your income and longevity for your assets. Annuities are contractual agreements, typically with an insurance company, in which you make a lump-sum payment or a series of payments, and in return the company agrees to provide you with a stream of payments over a specified period or for your lifetime². In today’s retirement landscape, guaranteed income streams like pensions are less common than they used to be, and in their absence annuities are often used in retirement planning to help generate a predictable income stream⁴. According to FINRA, an annuity is a contract between you and an insurance company where you make a payment or series of payments, and in return, the insurer agrees to make payments to you in the future¹.  

Are there different kinds of annuities?

Yes! Generally we lump annuities into two types: variable, and fixed. Both types are designed to generate stable, dependable income, but they go about it in a slightly different way.

Variable annuities (VAs) are similar to mutual funds, containing bundles of investments. They might include mutual funds, but can also tap into stocks, bonds or money market accounts. Because of this, the value of the annuity tends to fluctuate along with the performance of the financial markets.  

Fixed annuities are similar to CDs. You put in a certain principal investment, and the contract provider agrees to a certain fixed rate of growth. While CDs are backed by banks or other lending institutions, and then by the FDIC, the annuity is backed by the insurance company that issues the contract.  

In between, there are somewhat new “hybrid” investments called fixed index annuities (FIAs). These combine different types of investments, and can offer the benefit of the stable, fixed rate of a fixed annuity for a portion of the asset but the benefit of a variable annuity’s market growth for the other portion.

What are the benefits of these types of assets?

Variable annuities offer a high degree of flexibility and customization. Because they invest your money into other types of assets, you often have the ability to choose “subaccounts” of certain mutual funds or stocks that you are comfortable tying the annuity to. In periods of market growth, your annuity will mirror that and the value of your investment will grow as well.  

Fixed annuities offer stability and dependability. The interest rate and payout schedule are set for a certain period of time, often 10 years but up to 20. This stability allows you to factor that in to your retirement plan with confidence, knowing that income will be there when you need it. During times when the economy is not so good, and/or when interest rates are higher, you can lock in those high rates of return over longer periods of time.  

FIAs offer the best of both worlds. These investments often offer a guaranteed interest rate, as well as a rate tied to a market index, commonly the S&P 500. Each year, the annuity “resets” and locks in your gains for the year, allowing the growth to compound over time, while the guaranteed rate portion helps cushion against market downturns. You’ll still see some up-and-down variability with the market, but you have a safeguard in your back pocket to keep things a little more stable.

But what are the downsides?

For fixed rate annuities, there’s less customization and flexibility. If you decided to buy the annuity on a certain day, you’re stuck with the market interest rate on that particular day. You don’t get to pick the investment mix, and while the predictability is a positive, buying when rates are low can mean lower long-term gains. Fixed rate annuities also run the risk of being outpaced by inflation, lowering the purchasing power of your payouts over time if not planned wisely.  

Variable annuities have the downside of being exposed to greater market risk. There’s no guarantee of growth, so carefully picking your mix of investments is extremely important. You can actually lose money on a variable annuity if the circumstances line up in a negative way.  

FIAs can be complicated and hard to understand, depending on the structure of the guaranteed portion compared to the variable portion, the index or asset class the variable part is tied to, and the way interest and growth are credited to your account according to the rules and stipulations in the contract.  

And, as with any investment vehicle, you’ll want to take a close look at all the fees and stipulations associated with a particular annuity product.

Are there other factors to consider?

At Chamberlin, we take holistic planning seriously. That means looking at your retirement plan from the 30,000-foot, big-picture perspective, and making sure all the different pieces work together the right way. As part of a holistic plan, it’s important to consider how an annuity investment might affect your:

• Income and Taxes: Some annuities allow for tax-deferred growth, meaning that while you can avoid capital gains taxes on the growth of your investments, you will be taxed on the income you receive from the annuity in addition to any other income you bring in from your other accounts³.
• Legacy Plan: There are beneficiary designations and other death benefits associated with some annuity plans, and you’ll want to make sure to take that into account as you work through an estate plan to leave assets for your loved ones after you’ve passed away.
• Healthcare and Medicare: Additional income can affect your premiums for health insurance, which can alter your income flow over the course of a given year.  

Working with a certified holistic planner like our team here at Chamberlin can help you make sense of how all these gears turn together to churn out a balance sheet that works for you and your family.

FIAs sound great to me. Do you have an example of how they work?

Yes! Check out our video on annuities from earlier this year, where Certified Financial Fiduciary Don Chamberlin explains the annual reset, growth lock-in and annual income factors of FIAs.

Annuities and Bucket Planning

Chamberlin’s Bucket Planning approach to the retirement roadmap means setting up three buckets for your retirement assets: a near-term bucket for expenses in the next year, a medium-term bucket for the next few years beyond that, and a long-term bucket to grow your assets for long-term income availability.

As you can probably tell from the descriptions of the various types of annuities, the type, structure and particular investments, rules and details of each annuity mean they might make sense in more than one of your buckets.

Chamberlin is here to help you navigate the options and create a plan tailored to your needs, goals and dreams. Visit our online Learning Center for more resources on holistic retirement planning, and Schedule a Call Today and take the first step toward a confident financial future.

References

1. FINRA. (n.d.). Annuities. Retrieved May 9, 2025, from https://www.finra.org/investors/investing/investment-products/annuities
2. Insurance Information Institute. (n.d.). Annuities. Retrieved May 9, 2025, from https://www.iii.org/article/annuities
3. Internal Revenue Service. (2023). Publication 575 (2023), Pension and Annuity Income. Retrieved May 9, 2025, from https://www.irs.gov/publications/p575
4. Investment Company Institute. (2023, November). Retirement plan participation and asset allocation. Fundamentals, 32(5). Retrieved May 9, 2025, from https://www.ici.org/system/files/documents/2023-fundamentals-v32-n5.pdf