Market volatility is not a new problem, but it has become a more urgent one. In 2022, the S&P 500 dropped roughly 19%, and many retirees who were heavily invested in equities watched years of savings shrink in a matter of months.
For workers nearing retirement, that kind of drawdown is not just stressful, it can permanently alter their income plan. There is a growing conversation among financial planners about building retirement income that does not depend on what the market does on any given day. Annuities are one of the most direct tools for doing exactly that.
Key Takeaways
- Annuities provide guaranteed income that is not tied to stock market performance.
- Fixed and fixed-indexed annuities protect principal while still offering growth potential.
- A diversified retirement income plan often includes both annuities and other stable assets.
Why Some Retirees Avoid the Stock Market Entirely
Sequence-of-returns risk is one of the biggest threats to a retirement portfolio. It describes what happens when a retiree experiences poor market returns early in retirement while simultaneously drawing down savings.
Unlike a younger investor who can wait out a downturn, a retiree making regular withdrawals during a bear market locks in losses. Once those shares are sold, they are gone, and the portfolio loses the ability to recover fully when markets rebound.
A 2023 report from the Employee Benefit Research Institute found that 40% of Americans say they are not confident they will have enough money for retirement. Of those, concerns about market risk and outliving savings ranked among the top worries.
The fear is not irrational. Average life expectancy in the United States is now around 77 years, and women who reach age 65 have a median additional life expectancy of roughly 20 more years. A portfolio that worked well at 65 needs to last until 85, or longer.
The traditional model of a 60/40 portfolio (60% stocks, 40% bonds) has historically been used to manage this risk. But in 2022, both asset classes lost value simultaneously, with the Bloomberg U.S. Aggregate Bond Index falling more than 13%, its worst year since the index was established.
That correlation breakdown left many retirees without the cushion they expected.
What Annuities Actually Are
An annuity is a contract between an individual and an insurance company. The buyer makes either a lump-sum payment or a series of payments, and in return, the insurer agrees to pay out a regular income stream, either immediately or at a future date.
The appeal is simple: the income does not depend on whether the stock market is up or down.
There are several types, and each works differently:
| Type | How It Works | Market Exposure | Best For |
|---|---|---|---|
| Fixed Annuity | Pays a guaranteed interest rate for a set period | None | Conservative savers who want certainty |
| Fixed-Indexed Annuity (FIA) | Growth linked to a market index (e.g., S&P 500) but with a floor of 0% | Limited, with downside protection | Those who want some upside without loss of principal |
| Variable Annuity | Invested in sub-accounts similar to mutual funds | Full market exposure | Investors comfortable with risk who want tax-deferred growth |
| Single Premium Immediate Annuity (SPIA) | Converts a lump sum into immediate monthly income | None | Retirees who need income right away |
For retirees looking to move away from market dependence, fixed annuities and fixed-indexed annuities are typically the most relevant options. Variable annuities still carry market risk and are a different conversation.
Fixed Annuity Rates in the Current Environment
Fixed annuity rates move with interest rates, and the rate environment since 2022 has been favorable for buyers. As of early 2025, competitive fixed annuity rates from highly rated insurers have ranged from approximately 4.5% to 5.5% annually for 3-to-5-year terms.
That is meaningfully higher than the average savings account rate of around 0.46% reported by the FDIC for the same period, and competitive with many CD rates.
For context, a retiree placing $300,000 into a fixed annuity at 5% would earn $15,000 per year in guaranteed interest. That money compounds inside the contract, and when the payout phase begins, the income stream is predictable regardless of what the Federal Reserve does next or how corporate earnings season plays out.
Fixed-indexed annuities offer a different trade-off. The growth is tied to an index, but the contract includes a floor, usually 0%, meaning the account cannot lose value due to market declines. Caps and participation rates determine how much of the index gain the contract captures.
A typical cap might be 10-12% annually, with full participation up to that cap. In a year when the S&P 500 returns 25%, the annuity might credit only 10-12%. But in a year when the index drops 20%, the annuity credits 0% and the principal stays intact.
How Annuities Fit Into a Broader Retirement Income Plan
Most financial planners do not recommend putting every retirement dollar into an annuity. What they do recommend is covering essential expenses with guaranteed income sources. The framework is sometimes called a “flooring” strategy.
The idea is to identify the monthly expenses that must be paid regardless of market conditions: housing, food, utilities, healthcare. Then, guaranteed income sources are layered to cover those costs. Social Security is the most common base. An annuity can supplement it.
Consider a retiree who receives $1,800 per month from Social Security but needs $3,000 per month to cover essential expenses. A $300,000 fixed annuity providing $1,200 per month in income would close that gap entirely, leaving investment accounts free to grow without the pressure of needing to generate immediate income.
Remaining savings can then be invested more flexibly, including in equities, with a longer time horizon and less urgency. This reduces the sequence-of-returns risk described earlier because the retiree is not forced to sell equities during a down market just to pay bills.
Other Non-Market Retirement Income Options
Annuities are not the only way to build income outside the stock market. Here are several other tools commonly used alongside them:
- Treasury Inflation-Protected Securities (TIPS): U.S. government bonds that adjust with inflation. As of early 2025, 10-year TIPS yields were around 2.1% real, meaning the return stays ahead of CPI regardless of market conditions.
- Certificates of Deposit (CDs): FDIC-insured and offering fixed returns. Rates in early 2025 were in the 4.5% to 5% range for 1-year terms at competitive banks. CDs lack the longevity protection of annuities but are useful for short-term income planning.
- I Bonds: U.S. government savings bonds that pay a combination of a fixed rate and an inflation adjustment. Capped at $10,000 per person per year from TreasuryDirect, but effective as an inflation hedge.
- Rental income: Real estate can generate consistent monthly income. It carries its own risks (vacancy, maintenance, illiquidity), but the income itself is not correlated with equity markets.
- Dividend-paying stocks: While still technically market-exposed, high-quality dividend payers (utilities, consumer staples) tend to be far less volatile than growth stocks and can generate income even when share prices are flat.
The common thread is predictability. Each of these tools offers income that can be calculated in advance, budgeted around, and relied upon without watching a ticker.
Who Should Consider an Annuity
Annuities are not the right fit for everyone. They are generally more useful for people who:
- Are within 10 years of retirement or already retired
- Have a pension gap, meaning Social Security alone will not cover essential expenses
- Have experienced anxiety or made impulsive decisions during past market downturns
- Are concerned about outliving their savings, particularly given family longevity history
- Want to simplify their financial lives and reduce the time spent managing investments
They are less appropriate for people who:
- Need full liquidity, since annuities typically have surrender charges during an initial period, often 5-10 years
- Are in poor health and may not live long enough to recoup the premium through income payments
- Have sufficient guaranteed income already from pensions or Social Security to cover all essential expenses
What to Check Before Buying an Annuity
Not all annuity products are equal, and not all insurance companies carry the same financial strength. Before committing, several factors deserve close attention.
Insurance company ratings from agencies like AM Best, Moody’s, and S&P Global reflect the insurer’s ability to meet its long-term obligations. A company rated A or above by AM Best is generally considered financially strong. State guaranty associations provide a backstop if an insurer fails, typically up to $250,000 per policy, though limits vary by state.
The contract terms also matter. Riders for lifetime income, cost-of-living adjustments, or death benefits can add meaningful value but also add cost. Surrender charge schedules determine how long funds are locked in and what penalties apply if withdrawals exceed a certain amount during that period.
Many contracts allow 10% free withdrawals annually without penalty, which provides some liquidity flexibility.
Fee transparency is another area to examine. Fixed annuities generally have no explicit fees since the insurer builds its margin into the crediting rate. Variable annuities, by contrast, often carry mortality and expense charges, administrative fees, and fund management costs that can add up to 2-3% annually.
Those costs directly reduce returns and deserve careful scrutiny.
Inflation and the Annuity Trade-Off
The most common criticism of fixed annuities is that a fixed payment loses purchasing power over time. A $1,200 monthly payment today will buy less in 20 years if inflation averages even 3% annually. After 20 years at 3% inflation, that payment would have the purchasing power of about $665 in today’s dollars.
There are a few ways to address this. Some annuity contracts offer cost-of-living adjustment (COLA) riders that increase payments by a set percentage each year, typically 1-3%. These riders come at a cost: the initial payment is lower than it would be without the rider.
An annuity that would otherwise pay $1,200 per month might pay $950 with a 2% annual COLA rider built in, with payments growing over time.
Another approach is pairing a fixed annuity with TIPS or I Bonds to handle the inflation exposure separately. The annuity covers the income floor; the inflation-protected bonds preserve purchasing power over the long term.
Conclusion
Retirement income planning does not have to hinge on whether the market cooperates. For retirees who want predictable, guaranteed income regardless of economic conditions, annuities offer a direct solution with real numbers behind them.