When Annuities May Make Sense — and When They May Not
Annuities are one of the more widely discussed — and often misunderstood — tools in retirement planning.
Some people hear the word “annuity” and think of high fees, limited liquidity, or complex contract terms. Others think of predictable income and added stability in retirement.
Both perspectives may be valid.
Like most financial tools, an annuity is not inherently good or bad. Its value depends on the investor’s goals, time horizon, need for liquidity, tax considerations, risk tolerance, and the specific product being evaluated.
At BDB Wealth Advisors, we believe annuities should be evaluated as part of a broader financial plan — not in isolation.
What Is an Annuity?
An annuity is a contract issued by an insurance company. Depending on the type, it may be designed to help address one or more of the following goals:
Providing income in retirement
Offering tax-deferred growth
Reducing exposure to certain market losses
Creating more predictability for part of a financial plan
In general, clients often consider annuities for three broad reasons:
Income — to create a stream of payments, sometimes for life
Protection — to reduce downside risk for a portion of assets
Tax deferral — to allow earnings to grow tax-deferred until withdrawn
Common types of annuities include:
Fixed annuities
Fixed indexed annuities
Variable annuities
Immediate annuities
Deferred annuities
Each type works differently and involves different tradeoffs related to cost, guarantees, growth potential, liquidity, and complexity. That is why it is important to evaluate the specific contract rather than making assumptions based on the term “annuity” alone.
When an Annuity May Be Worth Considering
1. You want more predictable retirement income
One of the main risks in retirement is the possibility of outliving your assets.
Certain annuities can provide income for a set period or for life, depending on the contract and payout election. For some retirees, this income may complement other sources such as:
Social Security
Pension income
Withdrawals from investment accounts
Used appropriately, this may help create a more stable income foundation in retirement.
2. You want more stability for part of your portfolio
Some investors are willing to accept lower growth potential in exchange for greater stability.
Depending on the product, certain annuities may offer features such as:
Principal protection
Guaranteed minimum interest
Limited downside exposure
More structured crediting methods
For some investors, this structure may feel more comfortable than remaining fully exposed to market volatility.
3. You have already maximized other tax-advantaged savings opportunities
If an investor has fully utilized accounts such as a 401(k) or IRA, a nonqualified annuity may provide an additional way to pursue tax-deferred growth.
This may be relevant for:
High-income earners
Business owners
Investors planning for future retirement income needs
That said, tax deferral alone does not make an annuity appropriate. Any potential benefit should be weighed against product costs, restrictions, and available alternatives.
4. You prefer a more structured income strategy in retirement
Some retirees prefer the simplicity of receiving a defined income amount rather than making ongoing withdrawal decisions from an investment portfolio.
In those situations, an annuity may help simplify one part of a retirement income strategy and reduce uncertainty around monthly cash flow.
When an Annuity May Not Be the Best Fit
1. You need liquidity and flexibility
One of the most important considerations with annuities is access to funds.
Many annuities involve:
Surrender periods
Withdrawal limitations
Potential surrender charges
Tax consequences for withdrawals
Possible additional tax penalties for certain withdrawals taken before age 59½
If access to principal is important, an annuity may not be appropriate for that portion of assets.
2. You are comfortable with market risk and want greater flexibility
Investors with a longer time horizon, a higher tolerance for market volatility, and a preference for flexibility may prefer traditional investment accounts.
In some cases, a diversified portfolio may offer:
More liquidity
More transparency
Greater flexibility
Higher long-term growth potential
Those potential advantages come with market risk and without insurance-based guarantees.
3. The costs or complexity outweigh the potential benefit
Not all annuities are structured the same way. Some are relatively straightforward, while others can be significantly more complex.
Depending on the contract, investors may encounter:
Insurance-related expenses
Administrative fees
Underlying investment expenses
Optional rider charges
Participation caps, spreads, or other crediting limitations
If a client does not clearly understand how an annuity works, what it costs, what benefit it is intended to provide, and what tradeoffs it creates, caution is warranted.
4. It does not improve the overall financial plan
An annuity should not be purchased simply because it sounds safe or because it is presented as a one-size-fits-all solution.
It should be evaluated in the context of the client’s broader financial picture, including:
Retirement income needs
Investment allocation
Tax considerations
Estate and legacy goals
Insurance needs
Liquidity needs
If it does not clearly improve the overall plan, it may not be necessary.
How BDB Wealth Advisors Evaluates Annuities
At BDB Wealth Advisors, we take a planning-first, product-second approach.
When evaluating whether an annuity may be appropriate, we help clients consider:
What goal the annuity is intended to address
Whether the potential benefits justify the costs and limitations
How it compares to other available strategies
Whether it fits within the client’s broader financial plan
Our role is to help clients make informed decisions based on their full financial picture.
Important Disclosure Regarding Insurance Products
BDB Wealth Advisors LLC is a registered investment adviser and does not receive commissions from the sale of annuities or other insurance products.
Danielle Bordenkircher may offer annuity products through BDB Insurance, a separate entity, and may receive commissions or other insurance-based compensation in connection with those transactions. Because Danielle Bordenkircher may receive compensation in her separate capacity through BDB Insurance, she has a financial incentive to recommend annuity or insurance products available through that entity.
Clients are under no obligation to purchase any annuity or insurance product through BDB Insurance or through Danielle Bordenkircher, and similar products may be available through other insurance professionals or providers.
Any annuity or insurance-related activity conducted through BDB Insurance is separate and distinct from the advisory services provided by BDB Wealth Advisors LLC.
Clients should carefully review all product costs, benefits, risks, limitations, and disclosures before purchasing any annuity or insurance product.
Final Thoughts
Annuities are not inherently good or bad.
In the right circumstances, they may help provide:
More predictable income
A measure of principal protection
Tax-deferred growth
Greater confidence around retirement cash flow
In other situations, they may introduce unnecessary cost, complexity, or illiquidity.
The key is not whether an annuity sounds appealing in theory. The key is whether it serves a clear purpose within a well-designed financial plan.
Considering an Annuity or Reviewing One You Already Own?
Disclosure: This material is provided for informational and educational purposes only. It is not intended as, and should not be construed as, individualized investment, tax, legal, or insurance advice, or as a recommendation or solicitation to purchase or sell any security or insurance product.
Annuities are insurance products issued by insurance companies. Guarantees are subject to the claims-paying ability and financial strength of the issuing insurer. Product features, benefits, costs, surrender charges, crediting methods, and tax treatment vary by contract. Withdrawals may be subject to ordinary income tax and, if taken before age 59½, may also be subject to an additional tax penalty.
Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. Clients should consult with their financial, tax, and legal professionals before making any financial decision.