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Most people have at least a little familiarity with annuities, which are attracting more attention.
Sales set a record for the first half of the year: $223.0 billion in total, up 3% from the same period last year and a record, according to LIMRA, an industry research group.
More people are concluding annuities are right for them. That doesn’t mean an annuity is right for you. Different types of annuities do very different things. One type might fit your needs precisely, while another might not at all.
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The best plan is to learn about annuities, decide if any might be right for you, then home in on which would be optimal.
Here are four key considerations.
1. Your age
Nonqualified annuities are funded with after-tax money. They’re not held in an IRA, Roth IRA or other qualified retirement account.
These annuities offer one of the few ways to get powerful tax advantages with nonqualified savings. As long as you don’t withdraw any interest or earnings from the annuity, you won’t be taxed on it.
With tax deferral, your money can grow faster. With an IRA or 401(k), you must start taking distributions, knowns as RMDs, by age 73. With nonqualified annuities, there’s no age requirement. You can let your money compound without taxes as long as you like.
Sound like a great deal? Sure. It’s such a great deal, the government puts restrictions on it. Any withdrawals of annuity earnings before age 59½ are taxed and penalized.
With a few exceptions (such as for permanent, total disability), there’s a 10% IRS penalty on withdrawals, along with regular income tax.
All accumulated interest must be withdrawn first before you can take out tax-free return of principal, according to IRS rules.
Because of that penalty, most annuities are bought by people who are in their 50s or older because they’re already exempt from the penalty or soon will be. Age is an important consideration.
2. How much you have in savings and investments
With few exceptions, annuities aren’t completely liquid. Those designed to build up your savings (deferred annuities), you’ll pay a penalty to the issuing insurance company if you make an excessive withdrawal or cancel your policy during the penalty period.
With almost all income annuities, once the free-look period is past, you’re committed and can’t get your principal back. You’re locked into a contract.
If you’re considering an annuity, it’s important to figure out how much access to your money you might need.
If your savings are minimal and you have a lot of credit card debt, you probably can’t afford to lock up money in an annuity. You’ll need unhindered access to your funds when expenses come up.
There’s no magic number for the amount of savings you need to make a nonqualified annuity feasible, but you don’t have to be wealthy. It depends a lot on your circumstances.
Can an annuity be a good idea if you have $250,000 total in savings and investments? You can probably move some of that safely into one or more annuities.
But people with less in savings can safely put money into an annuity. For instance, if you’re retired and have a good stream of income from a pension, Social Security and perhaps other sources, you might be able to safely sock away some money in an annuity.
3. Your asset allocation
Annuities of all types (except variable annuities) are designed to reduce risk because they come with guarantees. Income annuities guarantee payments for either a set period or life. Fixed deferred annuities come in various flavors, but (except variable annuities) guarantee your principal.
If you’re heavily invested in stocks and can afford to tie up some money in an annuity, it would make sense to use a fixed or income annuity to lower your risk and give you peace of mind.
4. Income generation
If you’re retired or semiretired, or about to be, you might need to generate income, especially if you want to delay taking Social Security benefits to maximize your payout.
An immediate income annuity can be a great answer. Most people choose the lifetime option. This lets you create your own lifetime private pension and helps assure you’ll never run out of money. It’s “longevity insurance.”
I’m a big advocate of income annuities, but I know they don’t appeal to some people because you’re signing over your money to an insurer in exchange for a stream of guaranteed income.
Those folks might want to use a fixed-rate annuity — a multi-year guarantee annuity or MYGA — instead to generate income.
A MYGA is a CD-like vehicle that provides a set rate for a set period, and rates are typically higher than bank CD rates for the same term. For instance, as of November 2025, you can get up to 6.30% on a five, six or seven-year MYGA. Most MYGAs allow penalty-free withdrawals of interest.
If you put $100,000 into a 10-year contract earning 5.75% with that feature, you’ll receive $5,750 a year for the next 10 years. If you withdraw all the interest each year, you’ll still get your $100,000 principal back at the end of year 10.
Flexibility is a big advantage. Let’s say during years one to five, you need to take out all the interest.
In year six, you start receiving Social Security payments and no longer need the income. You can let the interest compound tax-deferred in the annuity for the remaining five years. After five years, the principal will have grown to $132,252.
Determining if an annuity might be right for you takes some thought and planning. Consider your situation in total, and if an annuity can help you meet your goals, act now.
Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at www.annuityadvantage.com or by calling (800) 239-0356. The firm also offers an income- annuity quoting service. There are no fees or charges for the firm’s services; 100% of the client’s money goes to work for them in their annuity.
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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
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