5 Questions to Ask Before Buying an Annuity in Retirement

¹ Retirees are pouring money into these products, drawn by the promise of guaranteed income in an uncertain market. At Smart Money After 60, we see the same pattern: people approaching retirement want income certainty, and annuity agents are happy to provide it. But an annuity is a long-term contract, not a savings account. The wrong choice can lock up funds for a decade or erode returns through fees you did not fully understand.

The five questions below give you a framework for evaluating any annuity offer. They focus on the trade-offs that matter most after age 60: liquidity, cost, income timing, and how the product fits alongside Social Security and pension income you already have.

What Type of Annuity Actually Fits Your Retirement Income Gap

An annuity for retirees is a contract that converts a lump sum into guaranteed income payments, providing income certainty in retirement at the cost of limited liquidity and potentially high fees.¹ Retirees are pouring money into these products, drawn by the promise of guaranteed income in an uncertain market. At Smart Money After 60, we see the same pattern: people approaching retirement want income certainty, and annuity agents are happy to provide it. But an annuity is a long-term contract, not a savings account. The wrong choice can lock up funds for a decade or erode returns through fees you did not fully understand.

Start by listing your monthly Social Security benefit, any pension income, and other reliable payments. Subtract your essential living costs — housing, healthcare, food, utilities. The remainder is your income gap. That gap determines whether you need immediate income or future income, and whether you need inflation protection.

A single premium immediate annuity (SPIA) converts a lump sum into income that starts right away. It suits someone who retired this year and needs an extra $800 per month to cover expenses. A deferred income annuity (DIA) starts payments years later. It suits someone who plans to delay Social Security until 70 and wants a bridge of income from 65 to 69.

Fixed indexed annuities sit in the middle. They offer principal protection with upside capped at 6-8% annually.² The trade-off is complexity. Indexed annuities credit interest based on a formula tied to a market index, not the index's actual return. The cap, participation rate, and spread all affect your actual gain. If you cannot explain how the crediting formula works in one sentence, you probably should not buy it.

How Long Is the Surrender Period and What Happens If You Need the Money

Surrender periods are the most common source of buyer's remorse. A fixed annuity surrender period typically ranges from 3 to 10 years, with early withdrawal penalties of 5-10%.³ Those penalties decline by 1-2% per year and often reach zero by year 7 through 10.⁴

The question is not just the length. It is whether your life has a 3-to-10-year window without a large cash need. Suppose you are 66 and plan to move to a retirement community at 72. A 10-year surrender period means you cannot access that principal without a penalty when the move happens. A 5-year period might work if the move is at 70.

Most annuities allow penalty-free withdrawals of 10% per year.³ That covers small emergencies but not a major expense like a new roof or a medical bill. If your emergency fund is thin, a shorter surrender period or a product with a higher free withdrawal percentage matters more than a slightly higher crediting rate.

What Are the Rider Fees and Do They Justify the Benefit

Riders are optional add-ons that modify the annuity's payout structure. The most common is an income rider, which guarantees a minimum lifetime withdrawal amount regardless of market performance. Rider fees average 1.0% of account value annually, with costs ranging from 0.5% to 1.5%.⁵

That 1.0% fee compounds. On a $200,000 annuity, it is $2,000 per year. Over 10 years, that is $20,000 in fees before accounting for any growth. The rider only makes sense if the guaranteed income floor is meaningfully higher than what the base contract would produce.

Compare the rider's guaranteed withdrawal rate against the base annuity's projected payout. If the base contract projects $900 per month and the rider guarantees $1,100 per month, the extra $200 per month costs $2,000 per year in fees. That is a 10-year break-even. If you live past that, the rider pays off. If you do not, you overpaid.

Long-term care riders and death benefit riders add more cost. Evaluate each one independently. Do not accept a bundled "all-in-one" rider without knowing the line-item cost of each component.

How Does the Annuity Compare to Delayed Social Security

This is the question most buyers skip. Social Security offers a guaranteed, inflation-adjusted income stream with no fees, no surrender period, and survivor benefits. Delaying benefits from 62 to 70 increases your monthly payment by roughly 8% per year. That is a better "guaranteed income product" than most annuities.

Consider a hypothetical: you are 65 with $200,000 in savings and a full retirement age benefit of $2,400 per month. If you buy a $200,000 SPIA at 65, you might receive $1,100 per month for life. If instead you use that $200,000 to cover living expenses from 65 to 70 and delay Social Security, your benefit at 70 would be roughly $3,200 per month. The Social Security route provides more income, inflation protection, and no surrender period.

The annuity makes more sense when you have already maximized Social Security or when you need income before 70 and have no other bridge funds. It also makes sense for someone who wants to leave a legacy, since some annuities offer return-of-premium death benefits that Social Security does not.

What Is the Insurer's Financial Strength Rating

An annuity guarantee is only as strong as the company backing it. State guaranty associations cover annuity losses up to $250,000 per company per state, but the process can take years and does not cover the full amount if you hold multiple annuities with the same insurer.

Check ratings from AM Best, Moody's, and Standard & Poor's. Look for an AM Best rating of A or higher. Do not chase a slightly higher payout rate from a B+ rated company. The extra 0.25% in yield is not worth the default risk.

Also check the company's history of dividend cuts or rate resets on existing policies. Some insurers have reduced renewal rates on fixed annuities after the initial guarantee period, leaving policyholders with lower-than-expected returns. Read the contract language about renewal rates, not just the initial rate.

Your Next Step

Run the Social Security delay analysis before you talk to any annuity agent. Calculate your benefit at 62, full retirement age, and 70. Then calculate how much bridge income you would need to delay to 70. If you have enough savings to cover that bridge, delaying Social Security likely beats any annuity for retirees. If you need income before 70 and have maximized Social Security, compare quotes from three insurers with AM Best ratings of A or higher. Ask each agent for the surrender schedule, rider fee breakdown, and renewal rate history in writing. Do not sign until you can explain the crediting formula and surrender terms in one sentence each.