When does an annuity actually make sense?

When does an annuity actually earn its place in a retirement plan? When it buys you a guaranteed paycheck for life and nothing more. That narrow case is real and valuable. The trouble is that most of what gets sold under the word “annuity” is something else entirely, built more for the commission than for you.

The one kind that makes sense

The honest version is the plain-vanilla income annuity. You hand an insurer a lump sum, and they pay you a fixed amount every month for as long as you live. A single premium immediate annuity starts the checks now. A deferred income annuity, sometimes a QLAC, starts them later, say at 80 or 85.

What you’re buying is longevity insurance, protection against the one risk you can’t diversify away: outliving your money. By covering your baseline expenses with a paycheck you can’t outlive, you take the scariest scenario off the table and free the rest of your portfolio to stay invested.

The kinds to be careful with

Variable and indexed annuities are a different animal. They come wrapped in riders, caps, surrender periods that lock your money up for years, and fees that are often buried rather than disclosed. I don’t manage money for people who can live forever, and I don’t like products that tie your money up when you might need it most.

Here’s the tell I watch for. When one product gets recommended to almost everyone who walks in, by someone who earns a commission on the sale and won’t name that bias out loud, the recommendation is about them, not you. The genuine case for a complex annuity is narrow. The sales pitch treats it as universal.

If your accounts are large

For a $3M+ household, an annuity is usually a tool, not a rescue. You may not need longevity insurance at all if the portfolio alone covers your spending through any reasonable lifespan. Where it can still help is in covering your essential floor, your housing, food, and healthcare, with guaranteed income, so that a bad market never touches the bills that keep the lights on.

There’s a behavioral edge too. A guaranteed floor makes it far easier to stay invested and spend confidently with the rest, which is its own kind of return. Weigh it against simply holding more in cash and bonds through a bucket strategy, which keeps your money liquid and your heirs’ inheritance intact. Liquidity has a value the brochure never prices.

The right annuity is boring on purpose: money in, paycheck out, for life. If the pitch is more complicated than that, the complexity is usually working for the seller. Buy the paycheck, skip the rest.