Annuities can be a retirement safety net to prevent outliving savings

· The Fresno Bee

For many retirees and near-retirees, the greatest financial fear isn’t market volatility or inflation—it’s the creeping dread of simply running out of money. This is known as longevity risk.

As life expectancies stretch into our 80s, 90s, and beyond, traditional retirement planning rules of thumb—like the classic 4% withdrawal rule—face unprecedented strain. Market downturns early in retirement, volatile sequences of returns, and persistent inflation can deplete a nest egg decades before expected.

While annuities often carry a controversial reputation in the financial advisory world due to high fees, surrender periods, and complex structures, a specific subset of annuities can serve a powerful purpose: guaranteed lifetime income.

So, when does an annuity actually make sense for your portfolio? Let’s break down the mechanics, the trade-offs, and how to evaluate whether one belongs in your retirement strategy.

Understanding the core problem longevity risk

When you build a retirement portfolio of stocks, bonds, and mutual funds, you are subject to market forces. If a severe bear market strikes in the first five years of your retirement—while you are actively withdrawing funds—you risk locking in losses (sequence of returns risk).

Pensions used to insulate retirees from this risk, but with defined-benefit pensions largely a relic of the past, the burden has shifted entirely to individuals. Social Security provides a vital baseline, but for many households, it doesn’t cover all essential living expenses.

This is where guaranteed income products enter the conversation.

Annuities can help remedy longevity risk in retirement but care is needed in reviewing all related fees and expenses.

More Retirement:

When an annuity makes sense

Annuities are, at their core, insurance products rather than pure investments. You pay a lump sum to an insurance company, and in exchange, the insurer promises to make periodic payments—either immediately or starting at a future date.

Annuities make the most strategic sense in specific scenarios:

1. Covering essential fixed expenses

The primary rule of thumb for incorporating an annuity is the floor-and-ceiling strategy. Your essential monthly expenses (housing, utilities, healthcare, groceries, insurance) should ideally be covered by guaranteed income sources—such as Social Security, any remaining pension, and a plain-vanilla income annuity (like a Single Premium Immediate Annuity or SPIA).

If your guaranteed income covers your essential baseline, your remaining portfolio can be invested more confidently in equities to fight inflation and fund discretionary goals like travel and hobbies.

2. Longevity insurance for advanced age

For retirees worried about living past age 90 or 95, a Deferred Income Annuity (DIA) or a Qualified Longevity Annuity Contract (QLAC) can be a tax-efficient tool. By purchasing a contract that doesn’t start paying out until age 80 or 85, you lock in a lower upfront cost while ensuring you have guaranteed cash flow in your very late years, when cognitive or physical decline may make managing an investment portfolio difficult.

3. Behavioral peace of mind

For risk-averse retirees, market drops trigger immense anxiety. Watching a portfolio swing by tens of thousands of dollars in a week can lead to panic-selling at the worst possible time. Knowing that a baseline check will hit your bank account every month, regardless of what the S&P 500 is doing, provides invaluable psychological comfort.

When annuities do not make sense

Objectivity requires acknowledging the severe pitfalls associated with certain annuity products:

  • High fees and complexity: Variable annuities and indexed annuities often come wrapped in layers of administrative fees, mortality risk charges, and rider costs that can erode returns significantly.
  • Illiquidity: Most annuities tie up your principal with steep surrender charges (often declining over 5 to 10 years) if you need to withdraw lump sums early. Once you annuitize a contract, you lose access to the underlying capital.
  • Inflation risk: Unless you purchase an inflation-adjusted rider (which lowers your initial payout), fixed annuity payments lose purchasing power over time as the cost of living rises.

The bottom line

Annuities should rarely represent 100% of a retirement portfolio. However, dismissing them entirely ignores their primary value proposition: insurance against outliving your money.

If you find yourself lying awake at night worrying about market crashes or the sustainability of your nest egg, allocating a modest portion of your assets to a low-cost income annuity to cover your essential baseline expenses might be the ultimate purchase of peace of mind.

Related: Why an annuity might be a costly mistake for your portfolio

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This story was originally published September 26, 2026 at 9:47 AM.