Sales of annuities have been booming in recent years. According to InsuranceNewsNet, “in the first nine months of 2024, total annuity sales increased 23% [year over year] to $331.2 billion and are on pace for another record-breaking year.” That’s on top of a 23% year-over-year gain in 2023, as well.

Here’s an introductory look at annuities that can help you decide whether you might want to buy one or more of them.

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What are annuities?

An annuity is basically a contract between you and an insurer, with the insurer promising to deliver regular income to you (or, in some cases, a future lump sum payment) in exchange for you paying them a relatively hefty sum.

Just to give you an initial idea of what an annuity might give you, check out the table. It reflects income for people in Indiana who spend $200,000 on an immediate fixed annuity.

Data source: immediateannuities.com.

The payments you might be offered can vary, depending on factors such as your age, gender, and where you live. You’ll see in the table that men tend to be offered bigger payments. That’s because, on average, they tend to live shorter lives. Payments for couples (same-sex or mixed-gender) will tend to be lower, too, because the insurer will keep paying as long as one spouse is alive.

For context, know that the average Social Security benefit for retired workers was $1,975 per month as of December — about $23,700 on an annual basis. You might more than double that with one or more annuities — or, if you spend enough, an annuity might provide all the income you need in retirement. (It might be best to set up multiple income streams, though, such as Social Security, annuities, dividend income, and so on.)

Annuities 101

There are different kinds of annuities:

• Fixed annuities are the most straightforward kind, offering defined payments for a defined period.
• Variable and indexed annuities can be more complex and sometimes risky and/or problematic, due to fees and restrictive terms.
• Immediate annuities start paying within a month or so, while deferred annuities can start paying you in a few or many years down the road. (For example, you might buy a deferred annuity now that starts paying at age 72 or 80 or even 85. The later it starts, the fatter the payments will be.)

Here are some more important things to know about annuities:

• Annuities can pay you for a certain period, or for the rest of your life — and even for the rest of your spouse’s life, too. You select the period and whether it’s a single or joint policy when you buy one.
• You’ll generally be promised more income from an annuity when interest rates are high. So, with many expecting interest rates to start coming down this year or next, it’s worth thinking hard about annuities sooner rather than later.
• You may be able to buy an annuity with money from a tax-advantaged retirement account or from your savings.
• Some annuities will let you pay a little more (or receive a little less) in exchange for annual increases in payments that can help you keep up with inflation.
• There are some annuities that can work as long-term-care insurance — paying more than the usual benefit if and when you need long-term care. (There are also hybrid life insurance policies addressing long-term care.)
• Since annuities aren’t protected by the FDIC or a similar agency, you should only buy them from highly rated insurers. Better still, consider splitting your purchase across a few insurers, to play it safer.

Pros and cons of annuities

There are many upsides to annuities. For starters, as long as the underlying insurer remains healthy, you’ll be receiving guaranteed income — potentially for life. That can help keep you afloat in retirement. A deferred annuity that kicks in later in life can help keep you from running out of money in your last years. Remember, too, that later in life, you may not have the interest — or ability — to manage your finances, so a regular income infusion can be very welcome.

There are, of course, some drawbacks to annuities, too. For one, once you buy an annuity, that sum will no longer be money you might leave to your heirs. If you die just a few years after buying an annuity, most of your purchase price could be lost — unless your annuity specified a certain minimum number of years of payments. Annuities with payments tied to the stock market’s performance or some other measure might disappoint if the relevant measure doesn’t perform as expected.

Should you buy annuities?

It’s up to you, of course. This is just a preliminary introduction to annuities. Read much more about them as you consider whether they have a place in your overall retirement plan. You might forgo them entirely, or you might consider loading up on them — but for lots of people, it could be effective for annuities to provide just some of your retirement income. There are many other possible retirement income sources, after all — such as from dividend-paying stocks or even a reverse mortgage.

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