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Like many financial products, annuities often get mixed reviews — not necessarily because of how they work, but because of how they're sold. Understanding annuities in the context of your overall retirement income strategy can help you decide whether they deserve a place in your financial future.
Think of an annuity as a pension you buy upfront. You're essentially trading a lump sum today for guaranteed payments tomorrow. When you look at retirement income, your only truly guaranteed payment is typically Social Security. Annuities offer another way to create predictable retirement income.
When you buy an annuity, you're making a deal with an insurance company to transform your investment into future payments. These payments can work in different ways, depending on what type of annuity you choose.
Fixed annuities are the simpler option — they work like a traditional pension. Once you start receiving payments, you'll get the same amount each month, regardless of what's happening in the market. While this predictability feels safe, remember that you're typically trading higher potential returns for that certainty.
Variable annuities take a different approach. Instead of fixed payments, your money goes into investment options similar to mutual funds. Your future payments can go up or down based on how these investments perform. Think of it as keeping one foot in the market while still having some income guarantees.
The timing of your payments matters, too. Some people need income right away — that's where immediate annuities come in. Others want to let their money grow for a while first, using a deferred annuity.
It's like the difference between starting Social Security at 62 and waiting until 70 — the longer you wait, the bigger your payments can be.
You won't pay taxes on your earnings during the growth phase — they grow tax-deferred. When you start taking payments, they're usually taxed as regular income. The exact tax treatment depends on whether you used pre-tax retirement money (like from an IRA) or after-tax dollars to buy the annuity.
Before you jump into any annuity contract, there are some important catches to understand.
Most annuities lock up your money for several years — if you try to take it out early, you'll face surrender charges. They also come with various fees for insurance features, administration, and investment management.
This is exactly why working with a fiduciary advisor instead of a commission-based salesperson makes such a difference.
A fiduciary can help you understand whether an annuity truly fits your retirement strategy and, if so, find one without unnecessary costs. Remember: the insurance company's financial strength matters too — they're promising to pay you for potentially decades to come.
The answer depends on your overall retirement strategy. Consider your income layers:
Annuities can be powerful tools when used correctly — particularly if you work with a fiduciary who can recommend commission-free options that match your timeline. However, they shouldn't be your only strategy. The key is building diverse income streams that work together for your retirement security.
While annuities have their place, modern retirement planning demands more flexible solutions. That's why we created Savvly — the world's first market-driven pension designed to provide financial security for life at a fraction of traditional annuity costs.
Unlike traditional annuities that require large upfront payments, Savvly lets you build your pension over time while enjoying market returns plus potential longevity bonuses. Ready to explore a more flexible approach to guaranteed retirement income? Join our waitlist and discover how Savvly can complement your retirement strategy.
Assumptions and Risk Disclosure
The information on this page is provided for educational purposes only and is not intended as investment, legal, or tax advice. It is designed solely to illustrate how longevity-based investment benefits may work under certain assumptions. Actual results will vary.
All illustrations, examples, and case studies are hypothetical and are intended to demonstrate potential scenarios—not to predict or guarantee actual outcomes. They do not represent the performance of any individual investor, portfolio, or account.
Key Assumptions Used in the Illustrations
- Life expectancy and mortality projections are based on the most recent Social Security Administration (SSA) tables available at the time of simulation.
- In the event of death or early withdrawal, hypothetical scenarios assume that beneficiaries may receive 75% of the lesser of the initial investment or current market value, plus 1% for each full year the account was active.
- Case studies assume standardized market growth of 8% annually and do not incorporate unexpected market volatility, inflation, changes in interest rates, or changes in an investor’s personal circumstances.
- Simulations may assume a 3% annual early withdrawal rate prior to payout or death.
- All figures shown are net of fees.
Risks to Consider
- Market Risk: Investment values will fluctuate and may be worth more or less than the amount invested. There are no guaranteed returns.
- Sequence of Returns Risk: The order and timing of market gains or losses—particularly near the payout phase—can materially affect results.
- Longevity Risk: Living longer than projected may reduce the pooled benefit per participant; shorter-than-expected lifespans may affect the amount received.
- Redemption Impact: Early or voluntary withdrawals by other participants can impact overall fund performance and distribution outcomes.
No forecast, projection, or hypothetical return should be relied upon as a promise or representation of future performance. Investors should carefully evaluate their own circumstances and consult a qualified financial professional before making any investment decision.
