Are Annuities a Good Investment?
You’re Asking the Wrong Question
If you’ve searched this question, you’ve probably already run into the answer everyone gives: it depends. That’s true, but it’s not very useful. Here’s the more useful version.
An annuity was never built to be an investment. It’s insurance. Comparing it to the stock market is like judging a fire extinguisher by how fast it goes zero to sixty. It’s not that kind of tool.
Why the comparison keeps happening anyway
Every year, thousands of pre-retirees search some version of “is an annuity a good investment.” Then they pull up a chart comparing annuity returns to the S&P 500 over the last ten years. The S&P wins. They conclude annuities are a bad deal.
The math in that comparison isn’t wrong. The comparison itself is.
Stocks are priced to compensate you for taking on risk. There’s no floor. A bad decade can wipe out years of gains, and if you’re already retired, you don’t get that time back to recover. An annuity works differently. With most types, fixed, fixed indexed, or MYGAs, your principal can’t go backwards from market losses (surrender charges aside), and if you add an income rider, the insurance company is contractually on the hook to pay you for as long as you’re alive.
Two different tools, doing two different jobs.
What annuities are actually built to do
Every annuity is a contract with an insurance company. In exchange for your premium, they guarantee something: a fixed interest rate (MYGA), a return tied to a market index with no downside (FIA), or an income stream that lasts as long as you live (income riders and immediate annuities).
That last piece is where a lot of the confusion happens. A high payout rate on a lifetime income rider isn’t performance. It’s a return of your own principal, plus interest, plus what actuaries call mortality credits. That last part is what makes annuities genuinely unique. Because the insurance company pools risk across everyone in the contract, people who don’t live as long help subsidize the payments for people who do. No stock, bond, or mutual fund can replicate that. Only an insurance company issuing an annuity can.
What the research actually says
This isn’t just an industry talking point. It’s been studied for over a decade.
Economist Roger Ibbotson, known for the “Stocks, Bonds, Bills, and Inflation” research used across the financial industry, published a widely cited 2018 study comparing fixed indexed annuities to bonds. His conclusion: in a low-rate environment, FIAs deserve a real look as a bond alternative, since they avoid downside from index losses while still capturing some upside. Like most annuity research, the study drew some pushback over its ties to the annuity industry. But its core thesis, that low bond yields open room for products with income guarantees, has held up across other independent researchers too.
Michael Finke and Wade Pfau, two of the most cited names in retirement income research, ran a Principal-funded study using 10,000 Monte Carlo simulations. They found that retirees who added a guaranteed income annuity to their plan, rather than relying on investments alone, saw better odds of their money lasting, along with more spending confidence and less financial stress. When they interviewed actual annuity owners, the same theme kept coming up: people with guaranteed income felt more comfortable spending and investing the rest of their money, not less.
That’s the opposite of what most people assume annuities do to a retirement plan.
The other options, honestly
None of this means an annuity is right for every dollar or every person. Before you consider one, it’s worth ruling out the alternatives.
- CDs and Treasury bonds offer safety and liquidity, but at today’s rates, they may not keep pace with what you’ll actually need ten or twenty years from now.
- Staying fully invested can work if you already have enough guaranteed income, pension or Social Security, to cover your essentials, and you can stomach the swings on the rest.
- Delaying Social Security is often the single best guaranteed income move available, since your benefit grows for every year you wait past full retirement age, up to 70.
- Self-funding your own retirement income can work if your portfolio is large enough that even a rough sequence of returns early on wouldn’t put your essentials at risk.
An annuity earns its place when none of those options fully close the gap between what your guaranteed income already covers and what your actual expenses will be.
The real question to ask
Not “will this beat the market.” Ask instead: does part of my money need to do a job the market can’t do?
If your essentials, housing, food, healthcare, are already covered by Social Security and a pension, you may not need one. If there’s a gap, an annuity can be the piece that closes it with certainty, freeing up the rest of your portfolio to grow instead of sitting in cash out of fear.
That’s the real decision. Not whether an annuity beats stocks. Whether your money is set up to do the two different jobs retirement actually requires.
Want to see where your own numbers land? Schedule a free 30-minute review, or grab the free Guaranteed Lifetime Income Guide [link to guide].
