Annuity sales are strong, but not the best choice for lifetime income

People who save for retirement have a common goal. It’s about building a proper nest egg so you don’t run out of money in retirement.

One way retirees can do that is through a guaranteed source of income that doesn’t last forever, deposited into a bank account every month for the rest of your life like a paycheck.

At a time when workplace pension plans have all but disappeared, pensions could provide an alternative for retirees looking for pension-like income, financial planners say.

But financial planners say the types of annuities that are typically best suited for work — deferred income annuities (DIAs) and single premium immediate annuities (SPIAs) — aren’t ones that consumers buy frequently.

Scott Witt, an actuary and fee-only insurance advisor based in New Berlin, Wis., said the reason is largely consumer behavior.

“Americans have had a hard time accepting annuities as a form of (longevity) insurance and continue to think of annuities as investments,” Witt said.

Lee Baker, a certified financial planner and founder of Claris Financial Advisors in Atlanta, said he expects “anxiety” over the Iran war and stock market volatility to boost annuity sales.

“Whether we like it or not, some of the growth in overall pensions is definitely due to the uncertainty that many people are feeling right now,” said Baker, a member of CNBC’s Financial Advisors Council.

Immediate lump sum annuities and deferred income annuities share the same basic premise. That means the buyer hands over a lump sum of money, perhaps hundreds of thousands of dollars, to the insurance company, which guarantees regular payments for the rest of their life.

With SPIA, payments start immediately. Those who choose DIA will begin receiving income in the future at a predetermined age, perhaps 70 or 75.

Baker said these are generally the “easiest” and “cheapest” annuities, and compared to other types such as variable annuities and indexed annuities, they are “the most cost-effective,” meaning they typically have higher monthly payments.

“For the average consumer who is concerned about the possibility of outliving their income, SPIA and DIA make a lot of sense,” Baker said. “It provides some certainty at a low cost and definitely expands your (retirement) lifestyle.”

However, it is the least popular type of annuity.

Rimura said consumers purchased about $5 billion in DIA and $14 billion in SPIA in 2025.

Meanwhile, consumers bought $63 billion worth of variable annuities last year and a record $128 billion worth of indexed annuities, Rimura reported.

Variable annuities and index annuities are similar to investment accounts. Financial planners say the former is more like stocks and the latter more like bonds, limiting returns downward but also upwards.

But financial planners say consumers often buy these annuities with an optional rider that lets them choose whether to receive lifetime income later. These generally cost more and are more complex, he said.

However, flexibility is often a key selling point. Planners say these annuities typically allow consumers some access to their money after handing over the money to the insurance company, but there are limits that include fees and penalties for those who are careless.

Witt said the “fees are huge” and can be “quite punitive” if they go against the fine print.

However, by comparison, SPIA and DIA generally do not allow financial access once the consumer makes a lump sum payment to the insurance company, planners said.

“Most people are very reluctant to buy something that is inherently irrevocable,” said David Blanchett, CFP, head of retirement planning at insurance company Prudential Financial.

Similarly, the possibility of handing over a large sum of money to an insurance company and then dying with little to show for it is often a major behavioral hurdle for people, said Zach Teutsch, founder of Values ​​Added Financial in Washington.

“Depending on the[pension]structure, saying, ‘I’m going to give you my savings, and if I die tomorrow, you’re going to be way out there,’ is just a frightening prospect for most people when dealing with pension payment decisions, depending on the[pension]structure,” said Teutsch, a member of CNBC’s Financial Advisory Council.

But Witt says this is not a good way to think about choosing between buying SPIA and DIA.

Rather, consumers should frame their choices based on the concept of insurance. “You’re not going to die without money,” Witt said.

“I had the peace of mind that while I was alive, I wouldn’t outlive my money,” he says.

Witt said there is “nothing like” the longevity protection offered by SPIA or DIA, but they can’t always guarantee the best payout. He said certain income riders on indexed and variable annuities may offer better dividends in some cases.

Experts say there may be other uses as well.

For example, some consumers who are concerned about the risk of needing long-term care and want to avoid the costs and medical underwriting requirements of traditional long-term care insurance can purchase certain income riders that provide benefits similar to long-term care, Baker said. In this case, the pension could pay out a larger monthly amount if a long-term need arises, he said.

“We understand that there are additional complexities with some products that have lifetime income benefits,” Blanchett said. “But we can’t pretend that complexity should always be a barrier to doing something.”

Regarding lifetime income, Blanchett said that everyone should aim to cover basic living expenses with an income that is not enough to survive, as an “absolute minimum.” Don’t forget to take inflation into account.

The first step is to consider delaying your Social Security claim, he said.

People who delay claiming Social Security past full retirement age will see their benefits increase by 8% each year until age 70. They will lock in that high amount for the rest of their lives.

“But if you’re like, ‘What’s the next easy thing to do?’ It’s to buy SPIA or DIA,” Blanchett said.