Are annuities a safe investment?

Annuities are considered safe investments because they are guaranteed and backed by the financial strength of the issuing insurance company. However, it's important to note that variable annuities can lose value, as they are tied to market-based investments.

What is the average return on an annuity?

There is no such thing as the "average return" on an annuity. Fixed annuities pay current interest rates, although these may vary by term, company and product. Variable annuities, as the name suggests, offer variable returns.

Can you lose money with an annuity?

Although fixed annuities are backed by the guarantee of the issuing insurance companies, variable annuities can lose money.

How do annuities compare to other retirement options?

A fixed annuity can be a solid retirement option , due to their guaranteed income stream and low risk. Variable annuities offer more aggressive investors the opportunity for higher returns. However, annuities are generally more expensive and less liquid than most other retirement options, such as bonds, mutual funds or ETFs.

Are annuities a good investment for young people?

Annuities are typically best suited for older investors, as you'll face an early withdrawal penalty of 10% if you take money out before age 59 ½.

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Are Annuities a Good Investment? What To Know Before You Buy

July 2, 2025

7 min Read

Written by Caitlyn Moorhead

Edited by Elizabeth Constantineau

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Annuities can be a smart way to secure guaranteed income in retirement — but they’re not right for everyone. This guide is here to help you answer the question that investors often have: Are annuities a good investment? Read on to learn the pros, cons and key features so you can decide if an annuity is right for you.

What Is an Annuity?

An annuity is a financial contract between an individual and an insurance company, designed to provide a steady stream of income — typically during retirement.

In exchange for an upfront payment or series of payments, the insurer agrees to make regular distributions to you, either over a fixed period or over the course of a lifetime.

While all annuities share this basic structure, there are several types available to suit different risk levels and goals.

Types of Annuities

Here are the most common types of annuities and how they work:

Fixed annuity: This is when you get regularly scheduled payments over a period of time.
Variable annuity: You can get bigger future payments depending on whether the annuity fund does well, or smaller payments if it doesn’t. It’s riskier than a fixed annuity but can have a higher reward in returns.
Indexed annuity: Works by paying a rate of interest based on a particular market index. They allow you to benefit when the financial markets perform well which has the potential for higher returns.
Immediate payment annuity: This type pays immediately after the annuitant deposits a lump sum.
Deferred annuity: Deferred income annuities don’t begin payment after the initial investment. You’ll specify the date when you’d like to start receiving payments.

Pros and Cons of Annuities

Like any investment, annuities have both benefits and drawbacks, and it’s important to understand them before purchasing one.

Pros

Guaranteed income for life
Tax-deferred growth
Customization options like death benefits or inflation adjustments
Suitability for risk-averse investors

Cons

High fees and commissions
Limited liquidity and surrender charges
Complexity and lack of transparency
Returns may not keep pace with inflation

Are Annuities a Good Investment for Retirees?

Annuities can be a smart investment for retirees who want guaranteed income and reduced risk. Here’s why annuities tend to suit retirees:

No early withdrawal penalty: If you’re under 59½, any annuity withdrawals will trigger a 10% penalty — but retirees can avoid this.
Guaranteed lifetime income: Annuities can eliminate longevity risk by offering a steady stream of income for life.
Low-risk investment: Many retirees prefer stable, income-generating investments — and annuities fit that bill.

However, regardless of how well-suited an annuity may be for retirement income, it’s a good idea to diversify your portfolio. Consider combining annuities with:

Bonds or preferred stocks
Dividend-paying investments
Social Security, pensions or other retirement plans

Is Now a Good Time To Invest In Annuities?

2025 could be a good time to invest in annuities — here’s why:

Interest rates remain high. Locking in a fixed annuity now could secure a strong rate before the Fed cuts further.
If companies can continue posting strong earnings gains and the stock market jumps higher, the value of variable annuity portfolios should also rise.

Of course, the vast majority of annuities are by nature long-term investments. Ensuring that an annuity product is going to meet your retirement needs is more important than trying to “time” your entry point.

Alternative Investments to Annuities

Annuities are often marketed as a one-size-fits-all solution for retirement income, but they aren’t right for everyone. If you’re looking for ways to grow your money or generate income with more flexibility, there are several alternative investments to consider:

Dividend Stocks. Shares of companies that consistently pay dividends can be a powerful source of income. Unlike annuities, dividend stocks can grow in value over time, and you retain control of your investment. Just keep in mind that the income isn’t guaranteed and market fluctuations are part of the deal.
Bond Ladders. A bond ladder involves buying bonds with staggered maturity dates. As each bond matures, the funds can be reinvested or used for income. This strategy helps manage interest rate risk and offers a steady stream of payouts, similar to the predictable income some annuities provide.
Real Estate. Owning rental property can generate consistent monthly income, often with higher returns than traditional fixed-income products. While it requires more involvement and carries unique risks, real estate also offers tax advantages and potential long-term growth.
REITs (Real Estate Investment Trusts). For investors who want exposure to real estate without owning physical property, REITs are a more hands-off option. They often pay regular dividends and can be bought and sold like stocks.
Target-Date Funds. These funds automatically adjust their asset mix over time, becoming more conservative as you approach retirement. They’re designed to simplify long-term investing and provide a built-in income strategy without the restrictions of an annuity.
Structured Notes. For more experienced investors, structured notes offer customized payouts tied to the performance of an index or asset. Some offer downside protection, but they can be complex and aren’t as liquid as traditional investments.
Managed Portfolios. Robo-advisors and human advisors alike offer managed portfolios tailored to your goals and risk tolerance. With ongoing rebalancing and income strategies built in, these can mimic some of the benefits of annuities–minus the long-term contracts and high fees.

Bottom Line: Are Annuities a Good Investment?

Annuities can be a great fit for some investors — but they’re not for everyone. If you’re looking for long-term growth, a fixed annuity may not offer enough return. But if you’re retired and looking to lock in a guaranteed, lifelong income stream, an annuity may be the perfect choice. Here are a few key points to keep in mind:

Before you invest in any annuity, be sure that it matches your financial goals, risk tolerance and liquidity needs.
Keep an eye on fees and expenses that could diminish your return.
Annuities can be complex investments, so it’s worth speaking with a financial advisor before committing.

FAQ

Are annuities a safe investment?
- Annuities are considered safe investments because they are guaranteed and backed by the financial strength of the issuing insurance company.
- However, it's important to note that variable annuities can lose value, as they are tied to market-based investments.
What is the average return on an annuity?
- There is no such thing as the "average return" on an annuity.
- Fixed annuities pay current interest rates, although these may vary by term, company and product.
- Variable annuities, as the name suggests, offer variable returns.
Can you lose money with an annuity?
- Although fixed annuities are backed by the guarantee of the issuing insurance companies, variable annuities can lose money.
How do annuities compare to other retirement options?
- A fixed annuity can be a solid retirement option, due to their guaranteed income stream and low risk.
- Variable annuities offer more aggressive investors the opportunity for higher returns.
- However, annuities are generally more expensive and less liquid than most other retirement options, such as bonds, mutual funds or ETFs.
Are annuities a good investment for young people?
- Annuities are typically best suited for older investors, as you'll face an early withdrawal penalty of 10% if you take money out before age 59 ½.

Elizabeth Constantineau contributed to the reporting for this article.

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