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.
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.
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.
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.
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.
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.
FREQUENTLY ASKED QUESTIONS
When does it make sense to buy an annuity?
When you want to convert assets into guaranteed income, especially for essential baseline expenses. Annuities make more sense when you’re concerned about longevity risk or want to reduce portfolio volatility during spending.
Who benefits most from annuities?
People with high longevity risk (long family history, good health), those without pensions, those who want to eliminate market timing risk from essential expenses, or those strongly averse to managing investments in retirement.
Should I annuitize my entire portfolio?
Rarely. Most people benefit more from annuitizing part of their portfolio (covering essential expenses) and keeping the rest for flexibility and growth. A smaller, focused annuity often works better than a large one.
How much of my portfolio should I annuitize?
Enough to cover essential baseline expenses. If essential expenses are $30,000 annually and guaranteed income sources are $15,000, annuitizing for $15,000 makes sense. Don’t annuitize discretionary spending.
What’s the right age to buy an annuity?
There’s no universal right age, but annuities typically make more sense later in retirement when you’ve reduced flexibility needs. Buying very young means decades of lost control. Buying very late means limited time to benefit.
Should I buy an annuity with a lump sum or gradually?
Some people ’ladder’ annuities, buying smaller amounts at different times and ages. This avoids committing everything at once and captures different interest rate environments. Laddering reduces concentration risk.
What if interest rates are very low—should I wait to buy an annuity?
Low rates mean lower future payments, which makes waiting seem logical. However, you also live those years waiting. If you need the security now, low rates don’t change that. The decision should focus on your needs, not rate timing.