How Annuities Compare to Other Retirement Income Options

Americans bought $461.3 billion worth of annuities in 2025, a record high, up 6% from 2024. For nine consecutive quarters, annuity sales have topped $100 billion⁽¹⁾. The market has nearly doubled in five years⁽²⁾. Something real is driving that shift. It is a growing recognition that building retirement income is harder than building retirement savings, and that a 401(k) balance alone does not come with instructions.

A 65-year-old couple today has a 50% chance that at least one of them will live past 90. That is 25-plus years of income to manage, through market cycles, inflation, and healthcare costs none of us can predict.

This article compares annuities directly against the four strategies most people use to build retirement income:

• 401(k) and IRA systematic withdrawals (the 4% rule)
• Dividend-paying stocks
• Bonds and CDs
• and Social Security optimization

What an annuity actually does (and what it does not)

An annuity is a contract. You hand a lump sum to an insurance company, and they contractually guarantee you income, sometimes for a set term, sometimes for the rest of your life, regardless of how markets perform or how long you live.

There are four main types worth knowing:

• Fixed annuities (including MYGAs): Lock in a guaranteed interest rate for a set term. Simple, low-fee, predictable.
• Variable annuities: Growth tied to market subaccounts. Higher potential, higher fees, less certainty.
• Fixed-indexed annuities (FIAs): Returns linked to a market index with a floor, so you cannot lose principal to market declines, but gains are capped.
• Income annuities (SPIA/DIA): Convert a lump sum into guaranteed income payments. The most direct tool for solving the need for income for life.

Annuities solve four specific problems:

• Principal protection
• Guaranteed lifetime income
• Legacy planning
• and in some cases long-term care funding

If you do not need one of those four things, you probably do not need an annuity. If you do need one of them, few other products can match it in that dimension.

The liquidity tradeoff

The price of that guarantee is access. Most annuities carry surrender charges, typically starting at 10% or lower in year one and declining to zero over a 6 to 8 year period⁽⁷⁾. Withdraw money before age 59.5 and the IRS adds a 10% penalty on top of income taxes⁽⁸⁾. Annuities are not a substitute for an emergency fund or liquid savings.

The other ways people build retirement income

Each of the four main alternatives to annuities has genuine strengths. Each also has a genuine weakness. Understanding both is what lets you decide whether an annuity fills a gap or duplicates something you already have.

401(k) and IRA with systematic withdrawals (the 4% rule)

The 4% rule is straightforward. You withdraw 4% of your portfolio in year one of retirement, then adjust that dollar amount for inflation each year. On a $1 million portfolio, that is $40,000 in year one. The rule was designed to give a retirement portfolio at least a 30-year runway so you don’t risk running out of money⁽¹¹⁾.

The appeal is real. You keep full control of your money, can access it if you need it, and your heirs inherit whatever remains⁽¹⁰⁾. If markets cooperate and your time horizon is 30 years or less, it holds up reasonably well.

The problem is that it breaks down at the edges. Research by economists Mark Warshawsky and Gaobo Pang, published in the Journal of Retirement and backed by the American Council of Life Insurers, found that the 4% rule has significant failure rates at older ages and provides the lowest level of income compared to strategies that incorporate annuities. A bad market in the first three to five years of retirement, a sequence-of-returns problem, can permanently damage the plan even if long-term averages eventually recover⁽⁹⁾. And because the rule does not guarantee income for life, someone who lives to 95 on a 30-year plan faces a real risk of outliving their money⁽⁴⁾.

Dividend-paying stocks

Dividend stocks appeal because they generate regular cash flow from assets you own outright. For investors with a long time horizon and the steadiness to hold through downturns, they can be a solid income complement.

The problem is that dividends are not guaranteed. In 2020, more than 200 publicly traded stocks, including 44 on the S&P 500, cut or suspended their dividend payments as pandemic disruptions hit corporate revenues⁽¹²⁾. In a downturn, both the income and the principal can decline at the same time. Dividend stocks work best as a complement to guaranteed income, not a replacement for it.

Bonds and CDs

Bonds and CDs are the closest structural comparison to fixed annuities, particularly MYGAs. Both offer fixed returns for a set term. You can learn more about how CD’s work here.

As of mid-2026, competitive 5-year CD rates were running around 4% to 5% and 5-year Treasuries around 4% to 4.5%⁽⁶⁾. A-rated MYGA rates over the same term were ranging from 5.00% to 5.60%⁽⁵⁾. MYGAs also offer tax-deferred growth, meaning you do not owe taxes on interest until you take withdrawals, while CD interest is taxable each year it is earned.

The deeper structural difference is longevity. A bond matures. A CD matures. When they do, you get your principal back and the income stops. An income annuity can pay beyond the return of your principal if you live long enough. Bonds and CDs are excellent tools for predictable, medium-term income, but payments are typically fixed, which means inflation could eat into your purchasing power over time⁽¹³⁾.

Social Security optimization

Social Security is the most underused lever in retirement income planning, and it deserves to be addressed before any discussion of commercial annuities.

Delaying Social Security from age 62 to age 70 increases monthly benefits by approximately 8% per year⁽¹⁵⁾. That increase is permanent, inflation-adjusted every year through the annual cost-of-living adjustment, backed by the federal government, and comes with zero purchase cost, zero fees, and zero surrender charges. No commercial annuity product on the market can match that combination of terms⁽¹⁴⁾.

Social Security should almost always be maximized before buying a commercial annuity. If you are comparing whether to use $200,000 to buy an annuity or to bridge income while delaying Social Security by two years, the math generally favors delay for anyone with average or better health and a reasonable life expectancy.¹⁴

Retirement income options at a glance

As of 2026. Sources: LIMRA, Annuity.org, RetireGuide, Bankrate, SSA, Warshawsky and Pang (Journal of Retirement).

When an annuity actually makes sense

The strongest case for annuities is longevity. If you live to 90 or beyond, an annuity outperforms almost every other strategy on a per-dollar-of-income basis, because the insurance company keeps paying regardless of how long you live.

Beyond longevity, the sequence-of-returns protection matters. If a portion of your retirement income is guaranteed by contract, you can afford to leave your investment portfolio alone during a down market rather than being forced to sell at the worst time. That optionality alone can extend the life of a portfolio.

Research from Warshawsky and Pang is specific. For retirees with $250,000 or more in savings, combining systematic portfolio withdrawals with annuities outperforms the 4% rule applied in isolation. For those retiring with less than $250,000, the benefit of annuitizing a larger portion is even stronger⁽⁴⁾.

"This combination of using some of your money flexibly, annuitizing a chunk of it so you have some stability in the income, and then having Social Security is the best combined outcome for people."

— Warshawsky and Pang research, via InsuranceNewsNet⁽³⁾.

When an annuity probably is not the right move

If you have not maximized Social Security first, that should come before any commercial annuity purchase. Social Security is a better inflation-adjusted annuity than anything available commercially, at no purchase cost⁽¹⁴⁾.

If you are in poor health, income annuities price payouts around average life expectancy. A serious health condition may mean you never reach the breakeven point.

If you are younger than 55, buying an annuity means locking capital that would otherwise compound in the market for decades. The math shifts sharply in favor of annuities closer to or in retirement.

And if you need money to be accessible, for home repairs, healthcare emergencies, or helping family, an annuity cannot serve that role. Liquidity needs require liquid assets.

What annuities cost, and why it varies so much

The single biggest source of confusion about annuities is fees, because the range is enormous. A SPIA or MYGA can be one of the lowest-cost retirement income products available. A variable annuity with multiple riders can cost more than a hedge fund.

Fixed annuities and SPIAs have minimal fees. The insurer earns a spread between what it invests your money at and what it pays out. You do not see a line-item fee because it is built into the payout rate.

Variable annuities layer on mortality and expense fees (typically 0.5% to 1.5% annually), fund expense ratios (0.06% to 3%), and optional rider fees (0.25% to 1%)⁽⁷⁾. A variable annuity with a 1.25% M&E fee, a 0.90% average fund fee, and a 1.00% income rider costs 3.15% per year in total ongoing charges, before any surrender fees⁽¹⁶⁾.

Annuity commissions run from 1% to 8% of the contract value, built into the contract, not paid as a separate check. On a $200,000 annuity, that means between $2,000 and $16,000 embedded in the contract design⁽⁷⁾.

Tax treatment — what this audience needs to know

Annuity growth is tax-deferred, meaning you owe nothing to the IRS while the money is inside the contract⁽¹⁷⁾. That is an advantage over CDs and bonds, where interest is taxable in the year it is earned.

When you take withdrawals, they are taxed as ordinary income, not at the lower long-term capital gains rates that apply to appreciated stock or ETF holdings⁽¹⁷⁾. That distinction is important for anyone comparing annuities to a taxable brokerage account.

Qualified annuities, funded with pre-tax 401(k) or IRA money, are fully taxable on every withdrawal. Non-qualified annuities, funded with after-tax dollars, return your original principal tax-free and only tax the earnings portion. In both cases, withdrawals before age 59.5 trigger a 10% IRS early withdrawal penalty on top of income tax⁽⁸⁾.

The annuity mistakes people regret most

Mistake 1: Putting too much in. Use the minimum amount of capital needed to accomplish the contractual goal. Locking excess capital into an annuity means surrendering liquidity and market growth potential you may need.

Mistake 2: Not understanding what you bought. "The biggest mistake we see with prospective clients is they often don't understand what they were sold, how they work, what the fees are, and how they benefit from the product." — Tyler End, CFP, CEO of Retirable⁽¹⁸⁾.

Mistake 3: Buying a variable annuity for market upside. VA fee layers, often exceeding 3% per year, can eliminate most of the gains you are chasing. A diversified index fund in a taxable brokerage account typically delivers better after-fee returns without the complexity or surrender period⁽¹⁶⁾.

Mistake 4: Buying before maximizing Social Security delay. Delaying Social Security from 62 to 70 increases monthly benefits by 8% per year. That guaranteed, inflation-adjusted increase with no fees often outperforms any commercial annuity for people who have not yet claimed⁽¹⁵⁾.

Mistake 5: Confusing income rider projections with real returns. FIA income rider growth rates are not your account value. They are a hypothetical income base used to calculate future payout amounts and cannot be taken as a lump sum. Own an annuity for what it will do, not what it might do⁽¹⁹⁾.

Building the income plan that holds up

Annuities are a tool for a specific job, not a total retirement strategy. The best outcomes come from combining guaranteed income, Social Security first, then possibly an income annuity, with a liquid portfolio that provides flexibility, growth, and access to capital when needed.

The Warshawsky and Pang research is clear that for most retirees, the optimal structure is partial annuitization, not all-in and not zero. For those with $500,000 or more in savings, annuitizing roughly a third to half and applying a flexible withdrawal strategy to the rest tends to produce better income across the full retirement horizon. For those with $250,000 or less, annuitizing a larger portion makes sense given the heightened longevity risk⁽⁴⁾.

Key takeaways

• Annuities are the only retirement product that contractually guarantees income for life. That structural advantage is real and unmatched by any alternative.
• Social Security is a better inflation-adjusted annuity than anything available commercially. Optimize it first.
• The 4% rule works under favorable conditions but carries failure risk at advanced ages, especially when early-retirement market downturns hit⁽⁴⁾.
• Variable annuity fees can exceed 3% per year. Simpler products (SPIAs, MYGAs) cost far less.
• For most retirees with $250,000 or more, partial annuitization, not all-in, not zero, produces better long-term income outcomes than either extreme.
• Best fit: people without a pension, with a family history of longevity, or who want a guaranteed income floor that holds up regardless of what markets do.

Find the right retirement income mix for your situation

If you are weighing annuities alongside other income options, finding an advisor is the clearest next step, and all you need to do is answer a few questions to get started:

Nothing in this article constitutes investment advice. Annuity availability, payout rates, and terms vary by insurer, state, and individual circumstances. All investors and prospective annuity purchasers are encouraged to conduct their own research and consult a licensed financial advisor before making any financial decisions. Past performance is not a guarantee of future results. Greensprout's editorial team writes on behalf of the reader. Our goal is to provide clear, useful information to help you make better financial decisions. Our editorial content is not influenced by advertiser relationships. Greensprout is an independent, advertising-supported publisher and comparison resource. We may earn compensation when you click on links to products from our partners. This does not affect our editorial standards or recommendations.

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