---
title: "Are Annuities Good Investments?"
description: "What is an annuity? Does it make sense to invest in an annuity? What options for retirement planning make sense for you?"
canonical_url: https://trendshare.org/how-to-invest/are-annuities-good-investments
markdown_url: https://trendshare.org/ai/are-annuities-good-investments.md
published: 2014-03-29
last_updated: 2018-03-28
content_license: https://trendshare.org/about/disclaimer
---
# Are Annuities Good Investments?

Source: https://trendshare.org/how-to-invest/are-annuities-good-investments
Updated: 2018-03-28
When you make any investment decision, you balance between expected risk and
potential reward. Time complicates this question; when can you expect to get
your payoff?  For example, if you won $100 million in the [Powerball](https://www.powerball.com/) lottery, would you prefer to
get $50,000 a month for the rest of your life or a $48 million lump sum right
now?

(An economist would likely [choose the lump sum over an annuity lottery payment](https://finance.zacks.com/lottery-annuity-vs-lump-sum-2136.html), because the [time value of that money](https://trendshare.org/how-to-invest/what-is-present-value) is better than the
fixed payment every month, especially if the monthly payments are
non-transferable.)

## What is an Annuity?

A very conservative investor may want to put his or her money in an
investment vehicle which has guaranteed regular payments at an agreed-upon
rate. *An annuity* is a contract with an insurance company where you
make a fixed payment now and receive future payouts. In other words, they get
the money now and you'll start getting (smaller) checks in the future.

A *deferred annuity* is an investment where you pay money during a
savings phase and receive money during a payment phase. If this sounds like a
401(k), you're right—it resembles a retirement account. (It's not the
same as a 401(k), however, but you can invest in a deferred annuity as *part
of* a 401(k).)

An *immediate annuity* is an investment where you pay a single lump
sum now and immediately start receiving disbursements. The larger the lump sum,
the greater the monthly payment. (This resembles the lottery winning example,
where you *don't* take the lump sum.)

## Types of Annuities

Annuities differ on how they pay out their disbursements. A *fixed
annuity* pays out a specified rate of return which never changes for the
life of the annuity. This is generally a very low rate of return. Think of it
like a CD (especially as CD interest rates are currently terrible.)

An *indexed annuity* ties its payments to the returns of a market
index, such as the [S&P 500 index](https://trendshare.org/how-to-invest/buy-the-s&p-index-fund). The
principal you've invested stays guaranteed, and the return you get reflects the
growth of the underlying investment.

A *variable annuity* invests your principal in one or more underlying
securities. This offers better potential for growth than a fixed annuity (no
potential for growth), but it has the risk (potentially losing your entire
investment).

## What is a Structured Settlement Annuity?

One special case of annuity is worth calling out explicitly. If you've
received a judgment in your favor in a lawsuit, you may receive a large
settlement reward. If this is the case, look into [setting up a structured settlement](http://injury.findlaw.com/accident-injury-law/structured-settlements-pro-s-and-cons.html). A *structured settlement annuity* is an
investment specifically structure designed to replace lost wages or to pay for
medical treatments. It's generally tax free. This isn't generally a retirement
investment; these vehicles exist to ensure a stream of income to make up for
damages suffered from a third party.

Yet it's an investment which pays out from a principal. As you might expect,
there's an entire industry dedicated to setting up these financial instruments
and plenty of money devoted to helping you cash out or to buy out a structured
settlement annuity.

Should you sell a settlement annuity? If you find yourself in this
situation, be careful. Your best option is to find a trusted fee-only financial
advisor to review your situation and recommend the best way to proceed. Don't
succumb to immediate pressure to sell your annuity, as this is a complicated
process and it's too easy to get forced into cashing out at a huge
discount.

## Are Annuities Good Investments?

Annuities can be good investments for extremely conservative investors who
want a guaranteed income stream and are willing to put up a large chunk of [liquid cash](https://trendshare.org/how-to-invest/what-is-liquidity) to ensure that.

If you prefer predictability over all else—including the potential for
growth, tax concerns, or beating inflation—then an annuity may make sense
for you. In other words, if your investment philosophy is "avoid risk at almost
any cost", an annuity is a good option.

## Why not Buy an Annuity?

Annuities aren't often good investments. Their fees can be high (certainly
higher than an [index fund](https://trendshare.org/how-to-invest/what-is-an-index-fund).  Furthermore,
though a fixed annuity preserves your principal and guarantees a return, that
return in real dollars will not change throughout the lifetime of the annuity.
In other words, inflation will slowly chip away at the value of the annuity.
$1000 in 1985 was worth more than $1000 in 2015. Sorry, *Back to the
Future* fans.

Worse, annuity disbursements tend to be taxed at income tax rates, while
securities invested for over a year are subject to capital gains tax rates.
These tax rates are currently a lot lower than income tax rates.

Finally, should you sell an annuity, you may face huge penalties (and have
structural difficulty doing so). The cash out process can be difficult and
troublesome.

## Guaranteed Income for Retirement Planning

Are there better alternatives to annuities? That depends on your financial
goals. Many investors prefer a laddered approach: some semi-liquid money easily
accessible in CDs, more money invested in tax-free municipal bonds, and the
bulk of the portfolio in index funds and value investing possibilities. It's a
little more work to manage all of these instruments, but it is a nice mixture
of safety, growth, and control—and it's rarely subject to tax penalties
or [inflated money management fees](https://trendshare.org/how-to-invest/broker-fees). That's a nice way
to build wealth.