Are Annuities Worth It? An Honest Analysis for Retirees

Annuities are one of the most debated financial products in retirement planning. Supporters say they provide irreplaceable guaranteed income that protects against the risk of outliving your savings. Critics point to high fees, complexity, and limited access to your money. The truth is somewhere in between, and the answer to whether an annuity is worth it depends entirely on your individual situation.

This article provides an honest, balanced analysis of when annuities make sense, when they do not, and how they compare to alternatives. This is for educational purposes only and does not constitute investment advice. Consult a qualified financial advisor before making any decisions about annuities.

When Annuities Make Sense

Annuities solve a specific problem: the risk of outliving your money. This is called longevity risk, and it is a real concern. According to Social Security Administration actuarial data, a 65-year-old woman today has a life expectancy of approximately 19.4 more years (to age 84.4), and a 65-year-old man has a life expectancy of approximately 17 more years (to age 82). But life expectancy is an average. Roughly half of all 65-year-olds will live longer than their life expectancy, and many will live into their 90s.

An annuity is most likely to be worth it in the following situations.

• You have no pension. Traditional pensions are becoming rare. If you do not have one, Social Security may be your only guaranteed income source. An annuity can act as a personal pension, covering essential expenses that Social Security alone does not.
• You worry about outliving your savings. If longevity runs in your family or the thought of running out of money keeps you up at night, a lifetime annuity provides peace of mind. Knowing that a check will come every month no matter how long you live has both financial and emotional value.
• You want to cover essential expenses with guaranteed income. A common strategy is to use an annuity to ensure that your basic monthly expenses, such as housing, food, utilities, and healthcare, are covered by guaranteed income from Social Security and the annuity. This allows you to invest the rest of your portfolio more aggressively for growth.
• You have maxed out other tax-advantaged accounts. Annuities have no contribution limits, unlike 401(k)s and IRAs. If you are a high earner who has already maxed out those accounts, an annuity offers additional tax-deferred savings.
• You want a higher guaranteed rate than CDs offer. In the current rate environment (February 2026), fixed annuity rates of 6 to 7+ percent significantly exceed most CD rates, which hover around 4 percent. The higher rate plus tax deferral can make a meaningful difference over time.

When Annuities Do Not Make Sense

Annuities are not the right fit for everyone. Here are situations where an annuity is likely not the best use of your money.

• You already have a pension. If your pension plus Social Security already covers your essential expenses, adding more guaranteed income through an annuity may not improve your situation. You might benefit more from keeping your savings liquid and invested for growth.
• You have limited savings. If your total retirement savings are modest, locking a large portion into an illiquid annuity could leave you without enough accessible cash for emergencies, healthcare costs, or unexpected expenses.
• You need access to your money. Annuities are not liquid. Surrender charges can lock up your money for six to ten years, and the IRS charges a ten percent penalty on earnings withdrawn before age 59 and a half. If you may need the funds in the near term, an annuity is not appropriate.
• You are in poor health. Lifetime income annuities pay out based on average life expectancy. If your health is poor and you are unlikely to live long enough to reach the break-even point, you may receive less in payments than you originally invested.
• The fees are too high. Variable annuities with total fees exceeding two to three percent per year can significantly erode your returns. If the fees wipe out most of the benefit, the annuity may not be worth the cost compared to lower-fee alternatives.

Break-Even Analysis: When Do You Come Out Ahead?

One of the most important questions to ask about any lifetime annuity is: how long do I need to live to get my money back? This is the break-even point.

Consider this simplified example. A 65-year-old invests $100,000 in a single premium immediate annuity (SPIA) and receives approximately $570 per month for life. At $570 per month ($6,840 per year), it takes approximately 14.6 years to recover the $100,000 investment, putting the break-even point at around age 80.

If you live to 85, you would have received about $136,800 in total payments, a gain of $36,800 over your original investment. If you live to 90, total payments would be approximately $171,000, a gain of $71,000. On the other hand, if you die at age 75, you would have received only about $68,400, losing approximately $31,600 compared to keeping the money yourself.

These are simplified calculations that do not account for the time value of money, taxes, or what you could have earned by investing the $100,000 differently. A financial advisor can run a more detailed break-even analysis that factors in alternative investments, tax implications, and your specific health profile.

Comparing Annuities to Alternatives

To determine whether an annuity is worth it, you need to compare it to what else you could do with the same money. Here is how annuities stack up against common alternatives.

Annuities vs. bonds. Bonds provide regular interest payments and return your principal at maturity. Unlike annuities, bonds offer liquidity since you can sell them before maturity, though possibly at a loss. Bonds do not provide lifetime income guarantees. When interest rates fall, bond prices rise, but new bonds pay less. An annuity locks in a guaranteed rate and guarantees income regardless of future rate changes.

Annuities vs. CDs. CDs are FDIC insured up to $250,000, making them extremely safe. However, CD rates in February 2026 are generally around 4 percent, compared to fixed annuity rates of 6 to 7+ percent. CD interest is taxed each year, while annuity earnings grow tax-deferred. CDs mature in one to five years, giving you regular access to your money, while annuities lock up funds for longer. For higher rates and tax deferral, annuities win. For safety and liquidity, CDs win.

Annuities vs. dividend stocks. Dividend-paying stocks can provide regular income and growth potential. Qualified dividends are taxed at lower capital gains rates, compared to annuity withdrawals that are taxed as ordinary income. However, dividend stocks carry market risk, and companies can cut or eliminate dividends at any time. Annuities guarantee income regardless of market conditions. The right choice depends on your risk tolerance and need for certainty.

Annuities vs. systematic withdrawals. Instead of buying an annuity, some retirees simply withdraw a fixed percentage from their investment portfolio each year (the classic "four percent rule"). This approach offers more flexibility and liquidity, and you maintain control of your assets. The risk is that a prolonged market downturn early in retirement could deplete your portfolio faster than expected. An annuity eliminates this sequence-of-returns risk for the income it covers.

The Role of Annuities in a Retirement Portfolio

Most financial professionals who recommend annuities do not suggest putting all your money into one. Instead, they suggest using an annuity for a portion of your retirement savings, specifically the portion needed to cover essential expenses that must be paid regardless of market conditions.

A common framework works like this. First, calculate your essential monthly expenses: housing, food, utilities, insurance, healthcare. Then add up your guaranteed income from Social Security and any pension. If there is a gap between your essential expenses and your guaranteed income, an annuity can fill that gap with additional guaranteed payments. The rest of your savings remains invested in a diversified portfolio for growth, flexibility, and discretionary spending.

This approach gives you the security of knowing your basic needs are covered no matter what happens in the market, while still maintaining flexibility and growth potential with the rest of your portfolio.

The Emotional Value of Guaranteed Income

Financial analysis often focuses on numbers, but there is a significant emotional component to retirement income that deserves attention. Research consistently shows that retirees with guaranteed income sources report higher satisfaction and lower financial stress than those who rely entirely on withdrawals from savings.

When the stock market drops 20 percent, retirees withdrawing from a portfolio feel anxious about depleting their savings. Retirees with guaranteed annuity income are insulated from that stress because their essential income keeps arriving regardless of market conditions. This peace of mind has real value that does not show up in a spreadsheet comparison.

How much you value that peace of mind is personal. Some people are comfortable managing market volatility and prefer maintaining control. Others strongly prefer the certainty of a guaranteed paycheck. Neither preference is wrong. The key is being honest with yourself about how you will feel during market downturns and adjusting your retirement plan accordingly.

Current Rate Environment: Why 2026 Is Notable

The value of a fixed annuity is heavily influenced by interest rates, and the current environment is favorable for buyers. As of February 2026, fixed annuity rates are near multi-year highs. The best multi-year guaranteed annuity (MYGA) rates exceed 7.65 percent for ten-year terms and 6.30 percent for five-year terms. These rates are significantly higher than just a few years ago, when rates were in the 2 to 3 percent range.

Higher rates mean higher guaranteed income from immediate annuities and better guaranteed returns from deferred fixed annuities. This is one reason annuity sales have surged, with 2026 sales projected to exceed $450 billion. However, rates can change, and future rate movements are uncertain. A financial advisor can help you evaluate whether current rates make an annuity a good fit for your timing and goals.

The Bottom Line

Annuities are worth it for retirees who need guaranteed income to cover essential expenses, worry about outliving their savings, do not have a pension, and can afford to lock up a portion of their money for the long term. They are especially attractive in 2026 given the historically strong fixed annuity rates available.

Annuities are not worth it for people who already have sufficient guaranteed income, need liquidity, have limited savings that should stay accessible, or are in poor health. Variable annuities with high fees may not be worth the cost compared to lower-fee investment alternatives.

The smartest approach for most people is to use an annuity for a portion of their savings, not all of it, creating a floor of guaranteed income while keeping the rest invested for growth and flexibility. Before making any decision, consult a qualified financial advisor who can analyze your complete financial picture, run break-even calculations, and recommend whether an annuity belongs in your retirement plan.