Annuities Pros & Cons: Buying a Paycheck (or Buying a Problem)

If you’re middle class, you don’t think about annuities when life is smooth.

You think about annuities when the mortgage is due, the car is acting funny, insurance jumped again, and you’re staring at your retirement account asking a question you don’t even want to say out loud:

That’s the whole annuity pitch in plain language: trade money now for a promise of income later. Sometimes the income starts immediately. Sometimes it starts years from now. Sometimes it’s simple. Sometimes it’s wrapped in so many “features” you feel like you’re buying a contract with a secret basement.

And yes—annuities are having a moment. According to LIMRA, total U.S. annuity sales were $434.1 billion in 2024 (a record), and $225.8 billion in the first half of 2025 (another record pace).

That doesn’t mean annuities are “good.” It means a lot of people are tired of guessing.

Disclosure: This is educational content, not individualized financial advice. Always read the contract and confirm fees, surrender periods, and tax rules for your situation.

What an annuity actually is (no sales voice)

An annuity is a contract with an insurance company. You put money in. In exchange, the insurer offers one or more of these:

• Income now or later (sometimes for life)
• Tax-deferred growth (earnings grow without annual taxes until you withdraw)
• Some protection depending on the product type
• Riders (add-ons that usually cost extra)

FINRA’s investor education summary says it straight: annuities can be popular for predictable income, but they can also be complex and confusing, with costs and restrictions you need to understand first.

Why annuities are getting attention right now

Pensions mostly disappeared (so people are trying to buy stability)

In March 2024, only 15% of private-industry workers had access to a defined benefit plan (the traditional pension-style plan).

So millions of people are building retirement on a 401(k), a brokerage account, and the hope that “the market will cooperate.” That’s not a plan. That’s a prayer.

Social Security helps—but it usually doesn’t carry the whole house

In November 2025, the average monthly benefit for retired workers was about $2,013.

Helpful? Absolutely. But “covers mortgage, groceries, utilities, insurance, and healthcare”? For a lot of households, no.

Inflation made “guaranteed” sound sexy again

The Social Security Administration announced a 2.8% COLA for 2026.

That’s a raise. It’s also a reminder: prices don’t stand still. So people are chasing anything that looks like a steady paycheck.

Which annuity is which (plain-English cheat sheet)

Most annuity mistakes happen because people don’t know what they’re buying. They just know what they were promised.

Middle-class rule: if you can’t explain the product to a friend in 30 seconds, you’re not ready to sign anything.

The case for annuities

They can rebuild the pension feeling we lost

A pension is a check you can plan around. Middle-class people don’t need “exciting.” We need stable.

When pensions are rare, a straightforward income annuity can replace a piece of that missing structure.

They can help close the monthly gap

Social Security often won’t cover everything by itself. And when the gap is real, people do desperate things—sell investments at the wrong time, carry debt into retirement, or work longer than their bodies want.

Annuities can help cover essentials: housing, utilities, groceries, and basic insurance. Not the whole lifestyle. The floor.

They can protect you from the “bad timing” problem

Retirement isn’t only about how much you have. It’s also about when you start pulling money out.

A steady income stream can reduce pressure to sell investments in a down market just to keep the lights on.

They can add guardrails for real humans

Some people don’t need more options. They need fewer ways to blow up a plan.

A monthly annuity check can act like a paycheck you can’t impulse-spend into oblivion.

The case against annuities

Many annuities are sold, not chosen

This is the uncomfortable truth: annuities live in a world where incentives matter. Complexity can be a feature, not a bug.

FINRA’s own language is a warning label: annuities can be complex and confusing, and you should understand costs and restrictions first.

Fees can be a slow bleed (especially with variable annuities)

The SEC’s educational materials show how variable annuities can include a mortality and expense risk charge at an annual rate like 1.25% (example) before other charges.

Middle-class translation: if your product is shaving off “just 1% here, 1% there,” that’s not small. That’s retirement-changing.

Liquidity gets tight right when life gets real

Many annuities have surrender charges. Consumer guides often note you may be able to withdraw a small amount each year (commonly up to about 10%) without a surrender charge, but beyond that you can pay.

Life does not care about your surrender schedule. Roof leak. Layoff. Caregiving. Medical deductible. Your contract will still enforce its rules.

Taxes and penalties surprise people

The IRS explains that a 10% additional tax can apply to early distributions from a deferred annuity contract before age 59½ (unless an exception applies).

Fees + fine print decoder (where the money leaks out)

If you’re middle class, this section is not optional reading.

Surrender charges: the “break glass” penalty

Surrender charges are what you pay for accessing your own money “too soon.”

• Ask for the surrender schedule in writing.
• Ask how much you can withdraw annually without surrender charges.
• Ask what happens if you need more.

Variable annuity fee stacking: what to ask for

Start with the basics:

• What is the M&E fee? (SEC notes this is typically around 1.25%.)
• What are administrative fees?
• What are the underlying investment expenses?
• What do riders cost per year?

Ask one sentence: “What is the all-in annual cost in a normal year, as a percent of my account?”

Words that should slow you down

• Cap (your upside is limited)
• Participation rate (you get a fraction of the upside)
• Spread (a deduction from gains)
• Bonus (often comes with strings)
• Roll-up rate vs payout rate (not the same thing)

Taxes & withdrawal rules (the part that bites people)

Before 59½: know the IRS rule

Generally, early distributions from a deferred annuity contract before age 59½ can trigger an additional 10% tax unless an exception applies.

Tax-deferred does not mean tax-free

Tax-deferred growth means you’re postponing taxes until withdrawal. That can be helpful. But it’s not a cheat code.

And if you’re buying an annuity inside an IRA/401(k), don’t let someone sell you “tax deferral” twice. Understand what extra benefit you’re actually paying for.

Inflation reality check (a fixed check shrinks)

A fixed payment feels safe… until you live with it for a decade.

Social Security gets COLAs (2.8% for 2026), but many fixed annuities don’t automatically adjust.

Middle-class reality: groceries rise, insurance rises, property taxes rise, healthcare rises. Your check needs a plan for that. Usually that plan is a mix: some guaranteed income, plus assets positioned to grow.

Liquidity & emergency planning (what if life happens?)

Before you lock money up, answer this honestly:

Middle-class best practice:

• Build an emergency fund first.
• Only annuitize money you can truly commit long-term.
• Know the surrender schedule like you know your mortgage rate.

Who annuities fit (and who they don’t)

Likely a better fit

• No pension, decent savings, needs an income floor. You’re trying to cover basics, not win a return contest.
• Retiring soon and scared of bad timing. A floor can reduce forced selling in a downturn.
• One spouse needs certainty to sleep. A predictable check can reduce household stress.

Usually not a fit (or only a small fit)

• High-interest debt is still running your life. Don’t lock money up while you’re paying 18%–29% APR elsewhere.
• You need flexibility for caregiving or unstable income. Liquidity matters more than a “nice illustration.”

Shopping script (questions to ask)

If you walk into a meeting without questions, you’ll walk out with a product you didn’t fully choose.

Bring this list

• What’s the all-in annual cost? Every fee. Every rider. In writing.
• What’s the surrender schedule? How long does it last?
• How much can I withdraw each year without surrender charges?
• If I need more than that, what happens?
• If it’s variable: what is the M&E fee and what are total expenses?
• What happens if I die early? What does my spouse/beneficiary get?
• What does “guaranteed” depend on? (The insurer’s ability to pay.)
• Show me best-case, expected-case, and worst-case in dollars.

Middle-class rule: if they can’t explain it simply, don’t sign it quickly.

Red flags & pressure tactics

• “This is only available today.”
• “You can’t lose.”
• “Don’t worry about the fees.”
• “It’s too complicated to explain.”
• “Everyone your age is doing this.”

Pressure is a feature of bad deals. Not a sign of urgency. A sign of incentives.

Alternatives if you don’t need an annuity

Sometimes the best retirement “move” is not buying a product. It’s building a setup.

If your real need is stability

• Increase emergency cash.
• Lower fixed monthly expenses.
• Simplify your investment plan so you can stick to it.

If your real need is growth

• Prioritize low-cost, diversified investing aligned to your timeline.
• Keep fees low. Fees are guaranteed. Markets aren’t.

If your real need is income later

• Plan your income floor: Social Security timing + spending plan + reserves.
• Consider simpler tools before complex ones.

Mini case studies (middle-class math, not fantasy math)

Case 1: Retiring into a downturn

A couple has decent savings but not “extra.” The market drops early in retirement. Bills don’t. An income floor can reduce forced selling at the worst moment.

Case 2: The caregiver squeeze

Single worker supports a parent. Expenses spike unpredictably. Locking up too much money can turn a “safe” plan into an expensive scramble.

Case 3: The “we need calm” household

One spouse wants certainty, the other wants upside. A smaller, simple income slice can calm the house—if liquidity is protected first.

Decision worksheet (should you annuitize any of this?)

• Bare-bones monthly needs: $_____
• Guaranteed monthly income (Social Security, pension): $_____
• Monthly gap (needs – guaranteed income): $_____
• Emergency cash (6–12 months of needs): $_____
• Money you can truly lock up after emergency cash: $_____
• Do you still have assets positioned to grow against inflation? Yes / No

If you can’t protect liquidity and cover basics, pause. That’s not fear. That’s discipline.

Glossary (translate the insurance language)

• Surrender charge: Penalty for taking money out early during the surrender period.
• M&E fee: A common annual fee in variable annuities; the SEC provides examples around 1.25%.
• Rider: An add-on feature (usually extra cost).
• Tax-deferred: Taxes delayed until withdrawal (not tax-free).
• Cap / participation rate / spread: Contract terms that limit how much index upside you actually receive.

Related Reads:

The 10 strategies that actually lower your mortgage rate 

What credit score do you need to buy a house in 2026?

What Does Your Credit Limit Say About Your Financial Self?

Bottom line

The best argument for annuities is simple: they can turn a scary retirement question into a predictable check.

The best argument against annuities is also simple: too many of them are expensive, restrictive, and confusing—built to be sold, not understood.

And here’s the middle-class truth that should sit with you before you sign anything:

Back to top