For retirement, in what situations is an annuity superior to index funds

I guess the only situation I can think of is if you expect to live a very long time (90+), then an annuity may be the better option.

Are there situations where an annuity is the better idea than index funds? I’m kind of confused as to which is a better retirement vehicle to supplement social security.

I’m thinking I may need $1000-1500 a month in investment income to supplement SS to feel comfortable. I believe buying a $100,000 annuity at 50 will give me nearly 1k a month when I start collecting on it in my mid 60s. but I’m wondering if just putting 100k in index funds at 50 is the better option.

I am not an investment or finance professional, but think of it this way. The annuity option puts the risk of poor investment decisions on the annuity provider. On the other hand, if you invest the $100,000 wisely starting at 50 and don’t start to draw down on the money until you turn 65, you could very well have a larger income stream. But if you invest poorly or make panicked decisions?

I AM an investment professional.

Very infrequently are annuities superior to investing. But for a decision in which guaranteed income is required or in which the client has a very high risk sensitivity it can make sense.

There’s a few clients that I’ve placed in variable annuities because one of the couple really wanted some form of guaranteed income supplement but it’s rare.

I can’t answer in clear on a message board like this. I could lose my license. But iif you’ll send me a PM I’ll be glad to answer whatever questions you might have. I’m not your broker, you’re not my client and so on and so forth.

If I did invest myself, I’d probably just use index funds.

But my understanding is you shouldn’t withdraw more than 4-5% a year of index funds in retirement. So even if that 100k becomes 200k over the 15 year interim, aren’t I right where I started at a $1000 a month subsidy?

Also at least with the annuity, if I live an extra long time (I’m not planning on it but who knows) the annuity will still be there whereas my index funds will run out.

If you’re close to retirement and you fear another Great Recession, it makes a certain amount of sense to put some of your savings into something like a variable-rate annuity. But if you’re younger, your mutual funds can ride out those market swings over the long run.

At age 50 are you hoping to retire in five years, or planning on working until 65 or later? It makes a big difference in what to do with your money.

I’m almost 40. My plan was to downshift to seasonal or part time work in my early 50s, then full retirement in my late 50s or early 60s.

By downshift I mean that I would make enough to pay for my living expenses, but wouldn’t need to save/invest anymore. My plan was that by my early 50s I have enough in savings and investments to fund full retirement in my 60s.

I am not a financial advisor, but I was faced with the same question 10 years ago.
The most important thing to me to understand and accept is that an annuity is two things: an investment vehicle and insurance. You are paying for insurance through lower returns on you investments. So, the decision to buy an annuity depends on whether you thing the insurance is worth the cost. In general it isn’t. But in my case we had just come out of the 2009 crash and I along with everyone was skittish. I decided to buy a couple of annuities just to be feel better in the future. Turns out I would have been better off investing in an index fund, where most of my retirement remained, but I wasn’t confident of that 10 years ago. If the market had tanked a second time, the annuity would have been a comfort to have. As it was, I am OK with the decision simply because I recognized up front that I was paying for piece of mind. I got what I paid for.

While this doesn’t cover the OP, for some people the issue is taxes on things with an IRA type flavor of tax-deferment (and there’s several besides the classic IRA).

Many of these have an RMD- Required Minimum Distribution. Once you hit 70 1/2, you have to start withdrawing a certain amount annually based on your age. You have to then pay taxes on all the withdrawl (remember: tax deferred). For the first decade+ it’s not too bad then it zooms up. So the account is going to get drained completely if you live long enough.

If you convert it to an annuity, you get and pay taxes on a steady amount (depending …). So if live quite a long time you’re still getting money out of it.

Oh, taxes. So the tax thing is that with an RMD you tend to pay more taxes earlier and little to none later. So deductions and all that get wasted when you’re older and you could be in a higher tax bracket early on. With an annuity you might be in lower tax bracket and get to use your deductions, etc. when you’re much older.

The annuity business also has a problem of having a large percentage of shady characters, high fees that hurt your income, etc. But not all are bad.

Depending on what rate the annuity is offering, you might do just as well putting the principle in medium-to-long-term Treasurys. In which case, you get the guaranteed income, but can reclaim the principle at maturity (or leave it to your heirs).

I am not an investment advisor, but I am retired. If I had to choose, I would definitely go the investment route. But an annuity - or maybe something equally safe - could be useful for diversifying your portfolio if you have a reasonably big one.
I do have an annuity, but I bought it from the proceeds of a pension buy out. I haven’t taken anything out of it (or from social security) yet since I have a reasonable amount of investment income. But it and social security and dividend heavy stocks should handle most of our needs after I turn 70.


Stay away from annuities.

Assuming the historic 7% return every year for the index fund, 100k at 50 means 1,600 a month at 65 (assuming you take out exactly the amount that would leave the fund at the same value each year, and you get the historic 7%). That is of course a heavy assumption, and ignores year to year variation, so it is a very fuzzy baseline.

If you actually want a guarantee, you’ll want a fixed annuity. Variable annuities make no sense. In addition, they’re highly unethical. People buy them thinking that they’re buying protection, when actually they’re buying a mutual fund in disguise–and one that’s loaded to the gills with performance-sucking fees.


If you consider an annuity, a single premium, immediate annuity seems to be the way to go. At least on all the retirement help boards I have read.