The four basic types of annuity, what each one is for, and which ones deserve more skepticism than others. Honest about a product category that's been mis-sold for decades.
"Are annuities a scam?" is one of the most common questions I hear from people approaching retirement. The honest answer is: some annuities are excellent retirement tools that pension-poor Americans should be using more; others are wildly mis-sold complexity machines that deserve every bit of skepticism they get. The trick is knowing which is which. This is the plain-English version.
An annuity is a contract with an insurance company. You give them a sum of money (or a series of payments). In exchange, they promise to pay you a sum of money in the future — either a guaranteed lump sum at a future date, or a stream of payments for a defined period or for life.
That's the basic structure. Everything else is variations on the theme: when do you pay, when do they pay, how is the payment calculated, what happens if you die, what happens if you change your mind. The variations are where the simple ones become useful and the complex ones become problematic.
You hand the insurer a lump sum (typically $100K to several hundred K) and they immediately start sending you a monthly check, for life, or for a defined period, or for life with a guaranteed minimum number of payments to a beneficiary if you die early.
SPIAs are the simplest, oldest form of annuity. They're essentially do-it-yourself pensions. For a 70-year-old in Connecticut today, $100,000 into a life-only SPIA buys roughly $700–$800/month for life. The math is straightforward: the insurer is pricing your life expectancy, paying you a portion of your principal back plus a guaranteed yield, and keeping the longevity risk.
Where they fit: Retirees who want guaranteed income they can't outlive. Particularly useful for the portion of your retirement spending that needs to be locked-in regardless of market conditions (the "income floor" approach).
Where they don't: If you have meaningful pension income or want flexibility on the principal. SPIAs are largely irrevocable once issued.
Same idea as a SPIA, but the income payments don't start for years. You hand over a lump sum at, say, 65 and the income starts at 80 or 85. The deferral magnifies the eventual payment.
The most useful flavor is a QLAC — Qualified Longevity Annuity Contract — which lets you carve out a portion of your IRA into a DIA that defers required minimum distributions (RMDs) on that portion until age 85.
Where they fit: Specifically the longevity-tail-risk piece of retirement planning — the worry that you live to 95 and run out of money. A relatively small DIA at 65 funded for income at 80 or 85 can be a powerful longevity hedge.
Where they don't: If you're worried about not living long enough to use it. There are usually limited death benefits compared to a SPIA-with-period-certain.
The annuity-world equivalent of a CD. You commit a lump sum for a defined period (3, 5, 7, 10 years) at a guaranteed interest rate. At the end, you get your principal back plus the accumulated interest, or you can roll into a new MYGA, or annuitize into a SPIA.
MYGAs typically pay rates competitive with or slightly above bank CDs, and the interest grows tax-deferred until withdrawn. They have surrender charges if you cash out early, but most allow free annual withdrawals up to about 10% of value.
Where they fit: The fixed-income portion of a retirement portfolio, especially in a tax-deferred or modest-bracket setting. Good substitute for a CD ladder if you don't need the liquidity.
Where they don't: If you'll need the money before the surrender period ends, or if you're in a very high tax bracket where the deferral isn't doing as much work.
This is the category that has earned the rest of the annuity world a bad name. Variable annuities link returns to underlying mutual-fund-like sub-accounts. Indexed annuities (often called "fixed indexed" or "equity indexed") credit interest based on a stock-market index, with caps, participation rates, and floors.
The pitch is usually some combination of "market upside with downside protection" and "guaranteed income riders." The reality is that the products are layered with fees (often 2–4% annually for VAs, plus rider charges), surrender periods of 7–10 years, complex crediting formulas, and benefit riders whose actuarial value is much smaller than the dollar value the marketing implies.
Some are reasonable. Many are not. The honest version: a low-cost variable annuity from a reputable carrier with no riders can be a useful tax-deferral vehicle for someone who has maxed out 401(k) and IRA. Almost everything else in this category deserves much more skepticism than it usually gets.
If the salesperson can't explain to you on a single sheet of paper exactly how your money will be credited each year, what fees you'll pay, and what happens if you die or cancel — the product is too complex for you to buy. That rule alone disqualifies a large share of the indexed and variable products on the market.
For a typical Connecticut retiree without a pension, a sensible role for annuities looks like:
If you've been pitched an annuity and aren't sure what to make of it, send it to me. I'll read the contract and tell you straight: does it fit, or doesn't it.
Second-opinion review →If anything in this piece applies to your situation, the fastest way to figure out what to do is one short conversation. Free, 30 minutes, no pressure and no follow-up calls you didn't ask for.
In person · By phone · By video