How to Choose the Best Annuity for Retirement Savings

How to Choose the Best Annuity for Retirement Savings

This question usually comes up when retirement is no longer theory, but reality. When reality hits, income reliability matters more than maximizing returns. Market declines feel more personal, as the thought of "my account has time to recover" is no longer the case. Many people approaching retirement hear of the term annuity, and the question of which type of annuity is best arises. The real question is not “Which annuity is best?” but “Which income problem am I trying to solve?”

Start With the Goal, Not the Product

Annuities are contracts designed to transfer specific risks away from your portfolio. They are not interchangeable, and they are not meant to replace an entire retirement plan, they are designed to compliment the plan. They are non-correlated assets that offer true diversification within a retirement portfolio.

There are three core goals that an annuity accomplishes, determine which is yours:

Do you want income that lasts as long as you live?
Do you want market participation without market losses?
Do you want a predictable, bond-like returns outside the stock market?

Some people just want to accomplish once of these goals. Others want a blend of all three. The structure you choose determines what is guaranteed, what is variable, and what flexibility you keep.

The Three Most Common Annuity Uses in Retirement Planning

1. Income Annuity: Guaranteed Lifetime Income
   An income annuity converts a lump sum into a paycheck that lasts for life. Once income begins, it does not stop, regardless of market performance or how long you live.

How income is generated
Your allocation towards this contract is pooled with others, and payments are based on actuarial math, not market returns, and are backed by contractual guarantees with the issuing company.

What is guaranteed vs. variable
The income amount is contractually guaranteed. There is no market exposure with this contract. Income can either begin immediately or be deferred to begin at a later date.

Flexibility considerations
Once income starts, the decision is largely irreversible. Liquidity is traded for certainty, and what was once an asset becomes another form of a pension.

This is commonly evaluated when covering essential expenses alongside Social Security, especially when the priority is “income I cannot outlive.”

2. Fixed Indexed Annuity: Market Upside Without Market Losses
   A fixed indexed annuity credits interest based on a market index, with a floor that prevents losses during market declines.

How growth works
Returns are linked to an index, like the S&P 500 for example, subject to caps or participation rates, and zero percent floor. If the index is negative, the account does not lose value. On the other hand if the index is positive, a fixed indexed annuity participates in that upside. For example if an FIA has a 10% cap and a 0% floor and the S&P 500 returns 15% in a year, the FIA will be credited 10% interest, not 15%. Now if instead of the S&P 500 being positive on the year, it actually decline 10%, the FIA will be credited 0%, and incur no losses. That's why the upside is capped.

Now participation rates vary from caps. If this option is elected, the FIA has no cap, but participates up to a certain percentage of the index return. For example, is the S&P 500 returns 20% in a year, and your FIA has a 70% participation rate, your FIA would be credited 14% in interest.

What is guaranteed vs. variable
You are guaranteed to not loose principal due to market losses. The "variable" piece would be the interest credited to the FIA. It is predictable that there will be no losses, but being that the FIA follows a market index, returns can be as high as the cap or participation rate, as low as 0% or any where in between.

Income flexibility
FIA's offer income riders, for a charge, typically .6%-1.2%, comparable to AUM fees. The income rider functions like the income annuity. Income is guaranteed for life. However with the FIA, the income is more flexible in the sense that income can be turned off and on. Also the annuity remains an asset that retains liquidity. An income rider can be elected an not turned on for 20 years in some cases, the longer that income is delayed, the greater the guaranteed income payments will be.

This is often evaluated as a way to reduce sequence-of-return risk, allowing market exposure without forcing withdrawals during downturns.

Liquidity rules

FIA's have surrender charges for withdrawals exceeding 10% during a set term, typically ten years. This charge usually declines every year, and once the surrender charge period is over, there is no limitation for withdrawals.

3. MYGA: A Bond Alternative With Fixed Terms
   A Multi-Year Guaranteed Annuity (MYGA) functions similarly to a CD, but with longer terms and often higher fixed rates.

How interest is earned
The rate is fixed, currently in the 4-5% range, and terms vary from 2-10 years in most cases. Simple interest is applied annually

What is guaranteed
Principal and interest are contractually guaranteed for the term of the MYGA.

Liquidity rules
Most contracts allow up to 10% annual withdrawals without penalty. Full liquidity returns once the term ends.

These annuities are commonly evaluated when replacing bonds or CDs inside a retirement income system that prioritizes predictability.

Trade-Offs You Must Accept

There is no annuity without compromise, just like any other asset. Understanding these trade-offs can help you make an informed decision.

Liquidity
Most annuities have surrender schedules, often up to 10 years. Income payments are not penalized, but excess withdrawals may be.

Upside limits
If the market rises sharply, capped returns mean you will earn less than the full market gain. That trade-off exists because losses are avoided.

Concentration risk
Using annuities for everything limits flexibility. Most retirement systems work better when annuities are one component, not the entire structure.

Where Annuities Fit in a Retirement Income System

Annuities are not designed to “beat the market.” They are designed to stabilize the income side of retirement.

In a coordinated plan, annuities can:

1) Cover essential expenses alongside Social Security
2) Reduce reliance on selling investments during market declines
3) Provide income continuity regardless of lifespan
4) Allow remaining assets to stay invested with less pressure

This is where annuities tend to add the most value. Not as a replacement for diversification, but as a counterbalance to market volatility.

Seeing the Incorporation Clearly

The most effective way to evaluate annuities is to model them alongside your other income sources.

An annuity calculator allows you to compare:

1)Lifetime income versus liquidity
2)Capped growth versus market volatility
3)Fixed rates versus bond alternatives
4)Single-strategy use versus blended approaches

Modeling does not create answers. It clarifies trade-offs so decisions are made with eyes open.

The Bottom Line

There is no single “best annuity for retirement savings.” Each annuity addresses a different risk: income longevity, market volatility, or interest-rate uncertainty.

The better question is whether the annuity you are considering solves a specific problem in your retirement income system, without creating new ones elsewhere. Clarity comes from matching the tool to the goal, not the other way around.

To see how each type of annuity can perform in your retirement plan, click the button below to access our annuity calculator.