Annuities are insurance products that promise guaranteed income, but they come in many varieties with very different costs and benefits. Here’s a clear look at what they actually offer.
Annuity Types at a Glance
| Type | How Returns Work | Guaranteed Income? | Risk | Fees | Complexity |
|---|---|---|---|---|---|
| SPIA (Immediate) | Fixed payments start immediately | Yes | Low | Low (built into rate) | Low |
| Fixed | Guaranteed interest rate | Yes | Low | Low | Low |
| Fixed Indexed | Returns linked to market index, with floor | Yes (with rider) | Low-Medium | Medium | Medium |
| Variable | Returns based on investment sub-accounts | Optional (with rider) | Medium-High | High (2-3%+) | High |
How Much Income Annuities Provide
Single Premium Immediate Annuity (SPIA) Monthly Income
| Premium Invested | Age 60 | Age 65 | Age 70 |
|---|---|---|---|
| $100,000 | $490-$540 | $550-$640 | $630-$750 |
| $200,000 | $980-$1,080 | $1,100-$1,280 | $1,260-$1,500 |
| $300,000 | $1,470-$1,620 | $1,650-$1,920 | $1,890-$2,250 |
| $500,000 | $2,450-$2,700 | $2,750-$3,200 | $3,150-$3,750 |
Ranges depend on current interest rates, gender, and whether any survivor benefits are included.
Fixed Annuities
| Feature | Details |
|---|---|
| How it works | Insurance company guarantees a fixed interest rate for a set period |
| Current rates (2026) | 4.5-5.5% for 3-5 year terms |
| Minimum investment | $5,000-$25,000 |
| Liquidity | 10% annual withdrawal typically penalty-free; surrender charges for more |
| Tax treatment | Tax-deferred growth; ordinary income when withdrawn |
| Best for | Conservative savers wanting CD-like rates with tax deferral |
Fixed Annuity vs. CD
| Feature | Fixed Annuity | CD |
|---|---|---|
| Interest rate (2026) | 4.5-5.5% | 4.0-5.0% |
| Tax on interest | Deferred until withdrawal | Taxed annually |
| FDIC insured | No (state guaranty funds, typically $250K) | Yes (up to $250K) |
| Early withdrawal penalty | Surrender charges (5-10% declining) | Lost interest (usually) |
| Minimum term | 3-10 years | 3 months-5 years |
| Required minimum distributions | No (unless in IRA) | N/A |
Variable Annuities
Fee Structure (Why Most People Should Avoid Them)
| Fee Type | Typical Amount |
|---|---|
| Mortality and expense risk charge | 1.00-1.50% |
| Administrative fees | 0.10-0.30% |
| Investment sub-account fees (expense ratios) | 0.50-1.50% |
| Guaranteed income rider | 0.75-1.25% |
| Total annual fees | 2.35-4.55% |
Impact of Fees on a $200,000 Investment Over 20 Years
| Investment | Annual Fees | Gross Return | Net Return | Value After 20 Years |
|---|---|---|---|---|
| Index fund (S&P 500) | 0.03% | 10% | 9.97% | $673,000 |
| Variable annuity (with rider) | 3.0% | 10% | 7.0% | $387,000 |
| Difference | $286,000 |
High fees can cost you $286,000 over 20 years on a $200,000 investment.
Who Should Consider an Annuity
| Candidate | Best Type | Why |
|---|---|---|
| Retiree wanting guaranteed income for life | SPIA | Simple, low-cost, guaranteed |
| Conservative saver (already maxed 401k/IRA) | Fixed annuity | Tax-deferred growth at competitive rates |
| Someone with pension envy | SPIA | Creates pension-like income |
| High earner seeking tax deferral | Fixed or indexed | Tax-deferred after maxing other accounts |
Who Should Avoid Annuities
| Situation | Why |
|---|---|
| Haven’t maxed 401(k) and IRA | Those are better (lower fees, possible match) |
| Under age 50 | Long time horizon = better off in market investments |
| Need liquidity | Surrender charges penalize early withdrawals |
| Sold an annuity by a commission-based agent | Agent earns 5-8% commission—motivation is misaligned |
| Variable annuity marketed for tax deferral | Fees negate the tax benefit for most people |
The Bottom Line
Simple fixed annuities and SPIAs can play a useful role in retirement income planning—they provide guaranteed income you can’t outlive. Variable annuities, however, are usually a poor choice due to fees of 2-4% that erode returns by hundreds of thousands over time. If you want guaranteed income, a SPIA is the simplest and cheapest option. If you want growth, low-cost index funds in tax-advantaged accounts come first. Only consider annuities after maxing out 401(k), IRA, and HSA contributions.