Not all annuities are created equal. Understand the pros and cons of immediate, fixed, indexed, and variable annuities before making a retirement decision.
Want to Understand Annuity Pros and Cons? Start with the Basics
Before diving into the advantages and disadvantages, it’s critical to know that annuities vary by type. Each serves a different purpose—and has different risk-reward tradeoffs.
📌 What Are the Main Types of Annuities?
- SPIA (Single Premium Immediate Annuity): Income starts immediately after a lump-sum payment
- Deferred Fixed Annuity: Grow money at a guaranteed rate, then convert to income later
- MYGA (Multi-Year Guaranteed Annuity): Fixed rate for 3–10 years, similar to a CD
- Indexed Annuity: Linked to a market index (like S&P 500) but with principal protection
- Variable Annuity: Market-based with potential for growth—and risk of loss
🔍 SPIA – Single Premium Immediate Annuity
- ✅ Pros: Guaranteed lifetime income; simple to understand; protects against longevity risk
- ❌ Cons: Irrevocable; less effective if you die early (unless refund rider is added)
Best For: Retirees who want guaranteed monthly income starting now.
🔍 Fixed Annuity / MYGA
- ✅ Pros: Higher rates than CDs or bonds; tax-deferred growth; principal protection
- ❌ Cons: Money is locked in; early withdrawal penalties (especially before age 59.5)
Best For: Conservative savers who want safe growth over 3–10 years.
🔍 Indexed Annuity
- ✅ Pros: Market-linked upside; principal protection; no downside losses
- ❌ Cons: Capped growth; complex formulas (cap rate, spread, participation rate)
Example: If the S&P 500 rises 20%, but your cap rate is 10%, your credited return is capped at 10%. If the market drops 15%, your return is 0%—not negative.
Best For: Near-retirees who want market exposure but fear losses.
🔍 Variable Annuity
- ✅ Pros: Unlimited market upside; optional income riders
- ❌ Cons: High fees (2–3%+); investment risk; complex structure
Best For: Experienced investors seeking growth with long-term income potential—but who can tolerate volatility.
📊 Summary Comparison Table
| Type | Growth | Principal Protection | Income Feature | Risk Level |
|---|---|---|---|---|
| SPIA | None | ✅ | ✅ Lifetime Income | Very Low |
| Fixed / MYGA | Fixed (3–6%) | ✅ | Optional (deferred) | Low |
| Indexed | Moderate (capped) | ✅ | Optional (riders) | Low–Medium |
| Variable | High (market-based) | ❌ | Optional (riders) | High |
🙋♂️ Which Annuity Is Right for You?
- 💰 Want guaranteed monthly income now? → SPIA
- 📈 Want fixed growth, tax-deferred? → MYGA
- 📊 Want market potential without downside? → Indexed
- 🎯 Want full market access + income riders? → Variable
⚠️ Things to Know Before You Buy
- 📄 Always read the contract details
- 🔍 Look out for surrender charges and rider fees
- 📅 Make sure the timeline fits your retirement horizon
- 🧾 Know how income is taxed (ordinary income vs. capital gains)
Final Thoughts
- ✅ Not all annuities are bad—or good. It depends on how you use them.
- ✅ Match the annuity type to your retirement need: income, growth, or protection.
- ✅ Talk to a licensed advisor before you lock in any long-term contract.
