Financial Basics · Investing Fundamentals

Annuities

Definition

An annuity is an insurance contract where you pay a lump sum or premiums and receive guaranteed income — either immediately or starting at a future date. The main flavors are fixed, variable, indexed, SPIA (single premium immediate), and QLAC (qualified longevity).

Why it matters in retirement

Annuities can solve a real retirement problem: longevity risk (outliving your money). But they're also one of the highest-commission products in financial services, and the wrong annuity at the wrong time locks up capital you can't get back. Know the difference between the four main types.

Key Numbers — 2026

SPIA payout at 65 (male)
~6.5%/yr
QLAC max premium (2026)
$210,000
Variable annuity avg fee
~2.3%/yr
Surrender period
5–10 yrs typical

Pros

  • Guaranteed income for life (SPIA/QLAC)
  • Tax-deferred growth
  • Longevity hedge
  • Protection from sequence-of-returns risk

Cons

  • High fees on variable/indexed products
  • Illiquidity
  • Surrender charges
  • Complexity — most buyers don't fully understand the contract

Common mistakes

  • Buying a variable annuity inside an IRA (tax deferral is wasted)
  • Confusing an indexed annuity with actual stock market returns
  • Not comparing SPIA payouts across multiple carriers
  • Annuitizing 100% of assets and losing flexibility

Related

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