Are Annuities Worth It? A Plain Look

Are annuities worth it?

It depends on whether you already have guaranteed income from Social Security, a pension, or CPP and OAS. An annuity buys the same thing those programs give you for free: a monthly check that does not stop until you die. If you already have that safety net, paying an insurance company to sell you more of it often means high fees for little extra peace of mind.

If you have savings but no pension and no guaranteed income, an annuity can fill a real gap. The question is whether the trade is fair, and that comes down to one number: the payout rate after fees.

What an annuity actually is

An annuity is a contract with an insurance company. You give the company a pile of money, either all at once or over time. In return, the company promises to send you a set payment every month for the rest of your life, or for a set number of years.

The key word is "promises." The insurance company keeps whatever is left of your money when you die. If you die two years after signing, the company keeps the rest. That is the trade.

You do not pay Social Security-style payroll taxes to get an annuity. You buy it directly, with after-tax dollars or from a retirement account.

The three types, in plain words

Fixed annuity. The company promises a set monthly payment. No more, no less. Simple to understand. The payment does not grow with inflation unless you pay extra for a cost-of-living adjustment rider.

Variable annuity. You pick from a menu of investment funds, similar to mutual funds inside a 401(k) plan. Your payment goes up or down based on how those funds do. More room to grow, more room to lose. Fees here are the highest of the three.

Indexed annuity (a fixed index annuity). The company ties a small part of your payout to a stock-market index like the S&P 500. If the market goes up 10%, you might get a 5% credit, capped and floored by the contract. If the market drops, you lose nothing, but you gain nothing either. The "cap" and "participation rate" are where the fees hide.

A worked example: $200,000 at 65

Say you hand an insurance company $200,000 at age 65 and buy a straight-life fixed annuity (payments for life, stop at death, no survivor benefit). The company offers a 4.0% payout rate.

• Yearly payment: $200,000 x 4.0% = $8,000 per year
• Monthly payment: $8,000 ÷ 12 = about $667 per month

Now compare that to keeping your own $200,000 and withdrawing with the 4% rule, where you pull out 4% in year one and adjust for inflation after that.

What you compare	$200k fixed annuity	Keep the $200k, 4% withdrawal	Social Security
Upfront cost	$200,000	$0	$0 (paid via payroll tax)
Monthly (year 1, example)	$667, fixed forever	$667, grows with inflation	Set by SSA from your earnings record
After 20 years	$160,000 paid, $0 left	$160,000 paid, portfolio still has most of it	Ongoing, cost-of-living adjusted
When you die	Payments stop, money gone to insurer	Whatever is left goes to heirs	Spouse may get a survivor benefit
Inflation protection	Usually none, unless you pay extra	You adjust the pull-up yourself	SSA adjusts yearly automatically

The annuity is simple: one number, one contract, done. The trade is that your $200,000 is gone after roughly 25 years of payments, and no one inherits it. With your own savings, the money stays yours.

When an annuity can genuinely help

You will likely have no pension and no employer guarantee. You have savings, but the thought of outliving them at 91 keeps you up at night. A small, fixed annuity that covers your basic bills (housing, food, utilities) removes that fear for a set chunk of your spending, while your own savings cover the rest.

This is sometimes called a "longevity hedge." You are not trying to live off the annuity. You are trying to make sure the first $600 or $1,000 a month is bulletproof no matter how long you live.

When it usually does not

You already collect Social Security, or in Canada, CPP and OAS, which are inflation-protected, lifetime payments that cost you nothing extra. Buying another guaranteed stream on top can be redundant, especially when fees eat 1% to 3% a year inside the contract.

You are younger than 60 and might want that money for a move, a medical cost, or your kids. Most annuities lock your money for 5 to 10 years. If you need to pull out early, you pay a surrender charge, often 5% to 10% of your balance.

You are in a variable annuity with fund fees, a mortality-and-expense charge (a yearly fee the insurer charges just for promising payments for life), a rider fee, and a surrender schedule stacking up. The contract might advertise a 7% "potential return" while the actual payout rate to you lands near 3%.

What the tax rules say

In the US, if you bought the annuity with money that has already been taxed (what the IRS calls a non-qualified annuity, meaning not inside an IRA or 401(k)), the growth inside the contract is tax-deferred. You pay ordinary income tax on the earnings portion when you withdraw, and the IRS calls the growth part "gain" while the part you put in is "basis." The rules and brackets shift every year, so check the IRS page on annuity contracts for current treatment.

In Canada, annuity payments from a non-registered plan are taxed as ordinary income. If the annuity sits inside an RRSP, it becomes a RRIF withdrawal and follows the same tax rules as any RRIF draw-down.

None of this changes whether the annuity is a good deal. But it does change the after-tax number, so always compare net dollars.

How it compares to what you already get for free

Social Security is, in a plain sense, a free annuity the government runs for you. You paid in through payroll taxes on most of your working wages. You get an inflation-adjusted monthly check for life starting at 62 or full retirement age 67. Your spouse can claim a survivor benefit. No fees, no surrender charges, no caps.

If you have not yet decided when to start those payments, the timing matters more than any annuity pitch you are hearing right now. Our guide on when to take Social Security walks through the trade-off step by step.

In Canada, CPP and OAS work on a similar principle: you paid in, you get a lifetime check that adjusts for inflation, and there are no contract fees layered on top.

Seeing the whole picture

If you want to see where a guaranteed monthly income fits alongside your Social Security, your savings, your spending, and the years before benefits start, When Can I Retire works out the age you can retire and shows every step of the math, so you can check whether that guaranteed chunk actually changes the answer.

Five questions to ask before you sign

And before you compare answers: get the same contract terms in writing from at least two companies. The person selling the annuity earns a commission, so the quote you hear is not neutral.

1. "What is the payout rate after all fees, riders, and caps? Give me the dollar-per-year number on this paper."
2. "If I die in year two, does my spouse or child get anything? For how long?"
3. "What happens to my payments if inflation runs at 5% for ten years?"
4. "If I need my money back in four years, what is the exact surrender charge in dollars?"
5. "What does this company's financial rating look like today, and who insures the guarantee if they go under?"

Get those answers in writing before you initial anything. A sales brochure that says "guaranteed" is not the contract. The contract is the contract.