What to Know Before Buying an Annuity in Retirement

Retirement planning comes with plenty of options, but few financial products generate as much buzz, or confusion, as annuities. Marketed as a way to secure lifetime income, annuities are often wrapped in bold promises and complex terms. Before you sign on the dotted line, it’s worth understanding how they really work and whether they fit your goals. 
At Emerald Asset Management, we believe clarity leads to better choices.

Here’s a closer look at the most common types of annuities—fixed, variable, and indexed—and how they may or may not fit into a thoughtful retirement strategy.

What Is a Fixed Annuity?

A fixed annuity is a contract you purchase from an insurance company. In exchange for a lump sum, the insurer agrees to pay a set interest rate for a defined period or provide guaranteed income for life or a specified number of years. Think of it like a certificate of deposit (CD) backed by an insurance company. It’s predictable, steady, and straightforward.

The main appeal is the guaranteed income. This can be especially attractive to retirees looking to supplement other sources of retirement income.

However, fixed annuities generally do not provide inflation protection. For instance, if you lock in 4 percent for 10 years and inflation averages 3 percent, your real purchasing power barely increases. Over time, that “guaranteed” income may not go as far.

We do not typically recommend annuities for our clients. But in those rare cases where someone values absolute certainty and is comfortable sacrificing growth and flexibility, we wouldn’t necessarily say they’re making a mistake to invest a reasonable portion of their portfolio in a fixed annuity. We just believe there are often more effective and flexible tools available.

What Is a Variable Annuity?

A variable annuity is a more complex insurance product that allows you to invest in a selection of subaccounts similar to mutual funds. The value of your annuity and the future income it could provide will rise or fall with market performance.

It may sound like a retirement account, and in some ways, it acts like one. But here is where we see a key issue.

Variable annuities are often sold inside IRAs, which already provide tax deferral. That means you aren’t gaining any additional tax benefit. So why give up liquidity and take on extra fees to place an annuity in an account that already offers tax advantages?

In our view, the answer is commissions. Variable annuities pay high commissions to the broker or agent who sells them, and we believe they’re often recommended more for the seller’s benefit than the client’s. In most cases, a diversified, low-cost mutual fund portfolio inside the IRA would be a more efficient, transparent, and flexible option.

That doesn’t mean variable annuities are always the wrong choice. But they are often marketed in ways that can be confusing. Fees tend to be high, optional riders add layers of cost and complexity, and the guarantees often fall short of expectations. Unless you have a very specific reason that supports using one, you may end up paying more while getting less.

What Is an Indexed Annuity?

This is where things get really tricky. Indexed annuities, also known as equity-indexed or indexed variable annuities, promise returns linked to a market index like the S&P 500, along with a built-in “floor” to protect against losses.

Sounds appealing, right? Market participation with downside protection. But here’s the reality: You don’t actually get the full market return. Instead, your return is limited by caps, spreads, and participation rates. For example, if the S&P 500 goes up 10%, your return might be capped at 4%. If the index drops, you might not lose anything, but you also don’t earn dividends, which make up a large part of long-term market growth.

In our experience, indexed annuities rarely deliver more than two to three percent annually over time. We have actually seen these investments structured in a way that the investor barely breaks even, even when everything goes right with the markets.

Why is that? Because they’re expensive. They pay enormous commissions to the people selling them, often 7% or more upfront. And they’re designed with long surrender periods (sometimes 7 to 15 years), which means your money is locked up unless you’re willing to pay a penalty to get it back.

Even if you’re convinced an annuity belongs in your retirement plan, it’s almost never wise to put your entire portfolio into one. These contracts are long-term commitments. Once you sign, you can’t undo it, especially if you’ve annuitized. You’ve given up liquidity, and that can become a real problem if your needs or goals change.

So, What’s the Better Way?

If your goal is to grow your savings, generate reliable income, and protect what you’ve worked hard to build, there are usually better tools than annuities—especially the more complex, sales-driven types.

We believe in a more transparent, flexible, and time-tested approach to retirement planning. Here’s how we typically construct portfolios for clients who want both growth and peace of mind:

• We start with dividend-paying stocks we consider to be high-quality. These companies tend to be more stable and offer the potential for long-term appreciation. Plus, the dividends can create a steady income stream. If you prefer a more hands-off approach, mutual funds built around these kinds of stocks can be a great fit too.

• We use U.S. Treasuries and municipal bonds to add stability. These aren’t the most exciting investments, but they’re dependable. They help cushion your portfolio during market downturns, and in the case of municipal bonds, they can offer attractive tax benefits—especially for retirees in higher tax brackets.

• For some investors, we introduce alternative investments. If you’re properly qualified, we may recommend private equity, private credit, or real estate strategies. These investments can offer diversification and the potential for higher returns, but only if they truly align with your goals, risk tolerance, and liquidity needs. We always make sure you fully understand the pros and cons.

And unlike many annuity products, our approach doesn’t require you to give up control of your money. Once you sign an annuity contract—especially if you annuitize—it’s hard to unwind. The long surrender periods and penalties make it difficult to adapt if your needs change.

A well-constructed, diversified portfolio gives you more flexibility. You can adjust, rebalance, or access funds without jumping through hoops. That kind of control can be especially important in retirement, when life often throws curveballs.

Quick Recap: What to Know About Annuities in Retirement

• Fixed annuities offer guaranteed income but usually lack inflation protection and flexibility.

• Variable annuities come with high fees and are often sold inside IRAs, offering little added benefit.

• Indexed annuities promise downside protection and market-linked returns, but in practice, they often underdeliver due to caps, fees, and long lock-up periods.

• Many annuities pay high commissions to the brokers that sell them, which may influence how they’re recommended.

• For most retirees, a diversified portfolio of dividend-paying stocks, bonds, and, when appropriate, alternative investments can offer more flexibility, transparency, and control.

• Always understand the full terms before committing to any annuity contract.

If you’re considering an annuity, make sure you fully understand what you’re getting into. Ask questions. Dig into the details. And remember, just because something promises “guarantees” doesn’t mean it’s the best fit for your retirement.

Emerald Asset Management is here to help you make smart, informed decisions about your future. Whether you’re evaluating an annuity, building a retirement income strategy, or just looking for a second opinion, we’d be happy to talk. Reach out to us today to schedule a complimentary consultation and take the first step towards a plan that gives you the clarity, confidence, and flexibility you deserve. 

Emerald Asset Management is an independent, boutique Registered Investment Advisory firm based in Rocky Mount, NC, serving successful executives, business owners, and high-net-worth individuals across Raleigh, Durham, and Chapel Hill. As a fiduciary-led firm with over 30 years of experience, Emerald provides research-driven investment management and strategic financial planning. The firm specializes in individually managed stock and bond portfolios, alternative investments, and risk management strategies. With a disciplined approach and a commitment to clarity, Emerald helps clients navigate complex financial decisions with confidence. They can be reached at (252) 443-7616 or on the web at www.emeraldam.com. 

This material has been edited with the assistance of artificial intelligence tools. The information presented is based on sources believed to be reliable and accurate at the time of publication. This material is for educational purposes only and does not necessarily reflect the views of the author, presenter, or affiliated organizations. It should not be construed as investment, tax, legal, or other professional advice. Always consult a qualified professional regarding your specific situation before making any decisions.

Emerald Asset Management is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Emerald Asset Management's investment advisory services can be found in its Form ADV Part 2 and/or Form CRS, which is available upon request.