When Annuities Can Make Sense
This page is part of the Wealth Solutions Network educational library. It explains the circumstances in which annuities can make sense as part of a retirement income plan. This content is educational in nature and not advice.
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After understanding what annuities are—and why many people are skeptical of them—the next logical question is whether there are situations where annuities can make sense.
The answer is contextual, not universal.
Annuities are not broadly right or wrong. They can be appropriate in certain circumstances and poorly suited in others. The determining factor is alignment between the tool and the problem being addressed.
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WHEN ANNUITIES TEND TO MAKE SENSE
Annuities tend to make sense when the primary objective is reducing income uncertainty rather than maximizing flexibility or growth.
Common situations where annuities may fit include the following.
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ADDRESSING ESSENTIAL EXPENSES
Annuities can be useful when certain expenses must be met consistently regardless of market conditions.
Examples include:
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Housing costs
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Basic living expenses
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Healthcare-related spending
In these cases, predictability may be more valuable than optionality.
MANAGING LONGEVITY RISK
Annuities can help address the risk of outliving assets.
When retirement length is uncertain, transferring some longevity risk away from the retiree can provide structural support for income continuity.
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This is particularly relevant when:
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Life expectancy is difficult to predict
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Other income sources lack lifetime guarantees
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Longevity risk would materially affect lifestyle or security
REDUCING SEQUENCE OF RETURNS RISK
Annuities can reduce reliance on market timing early in retirement.
By providing income that is not dependent on portfolio performance, annuities may help:
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Preserve other assets during market downturns
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Reduce pressure to sell assets at unfavorable times
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Stabilize income during volatile periods
This can be especially relevant during the early years of retirement.
SIMPLIFYING INCOME MANAGEMENT
For some individuals, managing income from multiple sources creates cognitive or emotional strain.
Annuities can simplify income by:
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Providing regular, predictable payments
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Reducing the need for ongoing withdrawal decisions
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Lowering the burden of monitoring markets for income purposes
In this context, simplicity has practical value.
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WHEN ANNUITIES MAY BE LESS APPROPRIATE
Annuities may be a poor fit when:
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Liquidity needs are high or unpredictable
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Spending patterns are highly variable
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Flexibility is prioritized over certainty
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Growth potential is the dominant objective
In these situations, the trade-offs required by annuities may outweigh their benefits.
ANNUITIES AS PART OF A SYSTEM
When annuities are used effectively, they are typically one component of a broader income system.
Rather than replacing other tools, annuities often:
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Support essential spending
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Allow other assets to be used more flexibly
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Reduce pressure on variable income sources
Their value is contextual and relational, not standalone.
Understanding appropriate use cases is essential before comparing annuities to other income tools or addressing specific concerns such as inflation.
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