Investors are buying annuities at a remarkable pace. U.S. annuity sales reached a record $464 billion in 20251, marking the fourth consecutive year of record sales, and the momentum has continued into 2026. During the second quarter of this year, annuity sales reached a record $124 billion.2
I think those numbers deserve attention because record sales do not necessarily tell us that annuities have suddenly become better investments, but it does tell us that investors are buying more of them, which raises the question why.
Understanding the why is particularly important for people approaching retirement, when the appeal of words such as guaranteed, protected, and lifetime income becomes considerably stronger. It’s certainly understandable that after decades of accumulating wealth, as you head into retirement, the prospect of losing money can suddenly feel more consequential than the prospect of making it, and that makes today's environment almost tailor-made for the annuity conversation.
But I worry that too many people are buying annuities based primarily on the benefits presented to them, without fully appreciating the tradeoffs. Guarantees, downside protection and lifetime income can be compelling, but surrender periods, liquidity restrictions, participation limits, fees, tax consequences and perhaps above all else, long-term opportunity costs deserve equal attention. Before committing a meaningful portion of your retirement assets to a long-term contract, I encourage you, consistent with guidance from FINRA’s Investor Insights, to understand both sides of the transaction, read the contract carefully, explore the alternatives, and seriously consider getting an independent second opinion before making the purchase.³
Why Are Annuity Sales So High?
You might be wondering why everyone is buying annuities. I’m quite sure several legitimate forces are contributing to the increase in annuity sales.
First, interest rates have made many fixed insurance products more attractive than they were during the ultra-low rate environment that followed the financial crisis. Of course, these rates are generally only fixed for a stated period, which is often shorter than the surrender period. So you could find the renewal rate lower while the penalties to exit remain significant.
Be especially careful when an annuity is marketed with a “bonus” rate. In my view, investors should treat these offers with the same skepticism they would any financial product using an upfront incentive to attract long-term money. The bonus may sound compelling, but it does not tell you whether the contract itself is competitive. You need to look at what happens after the promotional period, how renewal rates are determined, how long your money is subject to surrender charges, what restrictions apply and what you ultimately receive in exchange for committing your capital.
There is no free money in the financial markets. If an insurance company is offering an unusually attractive benefit upfront, I would want to know how the economics work on the other side of that offer.
Another reason sales are up, in my view, is that millions of Americans are reaching retirement without traditional pensions, creating greater demand for predictable income. Some annuity contracts offer income riders designed to provide guaranteed lifetime income, and it is easy to understand the appeal. Who wouldn't want a check they cannot outlive?
But once again, the word “guaranteed” deserves scrutiny. That guarantee comes with tradeoffs, and investors need to understand exactly what they are giving up in exchange for it. The income calculation may not work the way they assume, access to their money may be restricted, additional costs may apply, and the value they see on an illustration may not represent money they can simply withdraw. The guarantee may be valuable, but valuable and free are not the same thing.
Annuity sales are also likely benefiting from market volatility and economic uncertainty, which naturally increase the appeal of principal protection. When markets feel unpredictable, the promise of protecting your money from losses can be incredibly compelling, particularly for investors approaching or already in retirement. No one wants to watch a significant portion of their retirement savings disappear.
But here again, investors need to look beyond the headline benefit. Protection has a price. Further, protecting principal from a market decline does not protect an investor from every retirement risk. Inflation, lost purchasing power and insufficient long-term growth can be equally consequential over a retirement that could last 30 years or longer.
And then, finally, insurance companies have introduced new products, expanded indexed strategies and riders, and made annuities available through more financial channels. Registered index-linked annuities, commonly called RILAs, have been one of the fastest growing segments, while fixed indexed annuities have also attracted significant assets.
To me, there is nothing inherently surprising about this. After all, when investors become more concerned about risk, products promising some combination of protection and income become easier to sell. However, that is precisely where the analysis should begin, not end.
The Word "Guarantee" Deserves More Attention
One of the primary attractions of an annuity is the guarantee. Depending upon the contract, an insurance company may guarantee principal, a stated interest rate, a future income stream, or some combination of benefits. Certainly, those guarantees can have real value, but remember, guarantees are not free.
An annuity is an insurance contract. And as with any contract, buyer beware. When you buy a stock, bond or mutual fund, the investment itself is relatively straightforward. You own shares, their value fluctuates, and you can generally sell them at the prevailing market price. Annuities are different. You are entering into a contract with an insurance company, and the language of that contract determines how your money grows, when you can access it, how much you can withdraw, what guarantees apply and what those guarantees may ultimately cost you.
When an insurance company assumes a financial risk for you, whether that is market risk, longevity risk or some other risk, the economics of that risk do not disappear. They are simply transferred, and transferring risk has a cost. That cost may appear through fees, surrender restrictions, limitations on market participation, caps, spreads, credited rates, rider charges, reduced liquidity or the formulas used to calculate future benefits.
This is one of the most important things investors should understand about annuities: the contract is the product. The headline rate, bonus, income guarantee or downside protection may be what gets your attention, but the pages of contractual provisions behind that benefit determine what you actually bought.
Reducing Risk and Eliminating Risk Are Not the Same Thing
As already noted, risk is being transferred, not eliminated when you purchase an annuity, and transferring risk has a price. Before we talk about that price, or before purchasing an insurance product, the first question investors should ask is deceptively simple, but very important: What exactly am I protecting myself from?
If the answer is short-term stock market volatility, locking a substantial portion of a retirement portfolio into a long-term insurance contract may not automatically be the best solution. Yes, markets fluctuate. But that is not a defect of the capital markets. It is part of how they work, and it is also why investors have the potential to be rewarded with strong returns over time.
For those whose retirement is decades away, stocks can serve as the cornerstone of a productive long-term growth strategy. However, as retirement approaches, the role of asset allocation becomes increasingly important. Stocks should not have to carry the entire burden of a retirement portfolio. Bonds can provide income, diversification and varying degrees of stability. Cash and short-term securities can provide liquidity for near-term spending needs. Commodities and certain hedging strategies can provide another layer of diversification because they may behave differently, and at times move in the opposite direction, from stocks.
So when used appropriately, asset allocation can create something of a “see-saw” effect within a portfolio, helping offset many of the different risks. You may give up some upside potential, but in return, you may mitigate some of your downside risk and you retain control, liquidity and flexibility.
That raises an important question: Do you need an insurance contract to address the risk you are concerned about, or can that risk be managed within a thoughtfully constructed and diversified investment portfolio so you can maintain greater flexibility and access to your capital?
What Is the Objective in Retirement?
The objective in retirement should not necessarily be to generate the highest returns possible, nor should it be to eliminate risk. While no one wants to take on risk, unfortunately neither objective typically provides the stability and rising income most retirees require. Rather, the objective should be to manage risk. That means to first determine which risks matter, when they matter, and how much of each risk you can reasonably afford to take versus manage.
Market risk matters. Of course it does. But so do inflation risk, longevity risk, liquidity risk, interest-rate risk, purchasing-power risk, concentration risk and the risk of failing to participate sufficiently in long-term economic growth. This is where the conversation about “protection” becomes much more complicated. Because, you see, solving aggressively for one risk can sometimes increase another.
For instance, protecting against market losses may reduce one source of uncertainty, but if that protection also limits liquidity, restricts participation in market gains or reduces the long-term growth potential of your retirement assets, you have not necessarily eliminated risk. You have simply exchanged one type of risk for another.
And that brings me back to annuities. Protection should never be evaluated in isolation; it should be measured against the risks you retain, the flexibility you give up, and the potential return you sacrifice to obtain it.
Market-Linked Doesn't Mean Market Returns
Indexed annuities are particularly interesting because their appeal often centers on the ability to participate in some portion of market gains while also receiving some degree of downside protection. That proposition understandably attracts investors. Who wouldn’t find the idea of capturing some of the upside of the stock market while limiting much of the downside attractive?
Of course, investors need to understand what “participation” actually means, because participating in an index and owning the investments within that index are two very different things.
Depending upon the contract, returns may be affected by participation rates, caps, spreads, buffers, floors, index methodologies, crediting periods and other contractual provisions. Even the SEC's Office of Investor Education and Advocacy describes indexed annuities as “complex products” and cautions investors to understand how each feature may affect the annuity's potential return. As legendary Fidelity portfolio manager Peter Lynch once said, “Know what you own, and know why you own it.”
The bottom line is that an investor may receive a return that is linked to an index without receiving the return of that index. And that distinction can become very significant over time. Why might there be a disparity, you ask? Well, first dividends are generally excluded from the index return used in the calculation. And, as the SEC's own investor guidance explains, participation rates, caps and spreads can also reduce the return credited to the contract. In fact, the SEC provides an example in which a 10% calculated index return results in just a 4.5% credited return in an index annuity after applying a 75% participation rate and a 3% spread.4
Keep in mind that when stocks are producing unusually strong gains, an indexed annuity can post what appears to be an attractive return while still capturing only a fraction of what an investor participating directly in the market may have earned. However, the “cost” can become consequential during more ordinary market environments. If the market produces a moderate positive return and the contract limits how much of that return is credited to the investor, there may be considerably less upside available after applying the contract’s crediting methodology. I’ve seen where, over many years, this can have a meaningful effect on retirement savings.
That is the part of downside protection that deserves considerably more attention, in my view. The cost is not necessarily a check you write. It may be the return you never receive.
And remember what the insurance company is offering. It is offering some degree of protection from losses in exchange for limiting something somewhere else. The economics do not disappear simply because the cost is embedded in a formula rather than presented as an explicit fee.
This is why annuity analysis should go considerably deeper than looking at an illustrated rate, a participation percentage or an income benefit. Investors need to understand not only what the contract promises to provide, but what portion of the capital market return they may be giving up in order to obtain that protection.
Liquidity Becomes More Important in Retirement, Not Less
Of course, retirement can last 20, 30, or even 40 years. And during that time, life rarely follows a spreadsheet perfectly. Homes need repairs. Cars need replacing. Families need help. Health care expenses change. Travel plans evolve. Tax laws change. Investment opportunities appear. People move. In other words, capital has value beyond the return or even income it earns. Your 401(k) and retirement savings provide flexibility. Annuities may offer less flexibility, depending on the contract.
Many contracts contain surrender schedules or other restrictions that can make accessing capital impossible or quite expensive, especially during the early years of the contract. Some contracts provide annual withdrawal provisions, such as 10% of the account, but those provisions need to be understood in the context of the entire contract. For someone with substantial assets elsewhere, sacrificing liquidity on a portion of a portfolio may be perfectly reasonable. But for someone whose annuity would represent a significant percentage of investable assets, the calculation can look very different.
This is why the question should rarely be, "Is this a good annuity?" The better question is, "What role does this contract play within my entire retirement strategy?"
Income Riders: Guaranteed Income Sounds Great, But Understand What Is Being Guaranteed
Income riders may be one of the most appealing features offered with some annuities. After all, the proposition sounds difficult to argue with: I can receive a guaranteed stream of income for the rest of my life, retain access to my account value and benefit from guaranteed income even if my account eventually runs out of money? That sounds pretty good.
And for some retirees, guaranteed lifetime income can solve a very real problem. Many retirees today do not have a pension, which means their only guaranteed income may be Social Security. It can also be uncomfortable managing withdrawals from an investment portfolio, so safeguarding some income in a guaranteed contract may make sense.
But guaranteed income should still be evaluated alongside the alternatives. Social Security already provides an inflation-adjusted lifetime income stream, retirees with pensions may not need additional guarantees, and those with substantial portfolios capable of supporting systematic distributions while maintaining liquidity and growth potential may not need them either. The question is not whether guaranteed income sounds attractive. Of course it does. The question is how much guaranteed income the household actually needs beyond its existing resources, what it costs to obtain it and, perhaps most importantly, what that income need may look like 10 or 20 years into retirement.
This is where I would say, pause and slow down. The word “guaranteed” can get considerably more attention than the mechanics behind the guarantee.
One of the first things investors need to understand is that the value used to calculate an income benefit may not be the same as the actual account value available to withdraw. A contract might show an “income base” or “benefit base” growing according to terms specified in the rider, but that does not necessarily mean your actual money has grown by the same amount or that you can simply cash out that benefit base. An income rider is not necessarily creating an investment return equal to the growth shown in the income benefit base. It is an insurance feature designed to provide income according to the terms of the contract.
It is also important to understand where that “guaranteed income” initially comes from. With many income riders, while contract value remains, the payments you receive are withdrawals from your own contract value. Investment or credited returns, along with applicable fees, charges and other contractual provisions, affect what remains. If withdrawals and costs exceed the returns credited to the contract, the account value can decline even while you continue receiving guaranteed income.
And this is where investors need to pay close attention. The account value may decline not because the market crashed or because the investor took excessive market risk, but because of underperformance risk. If the underlying account does not earn enough to offset withdrawals, rider fees and other contract charges, the account value can continue to decline even while the income guarantee remains fixed. If the account value is eventually depleted, the lifetime income guarantee may continue according to the contract terms and subject to the insurer's claims-paying ability. At that point, however, there may be no remaining account value available for supplemental withdrawals or a legacy.
That is a very different kind of risk, and one easily overshadowed by the word “guaranteed.” You may have protected yourself against running out of income, but that does not necessarily mean you have protected the value of your assets. Suppose other investments would have held their value or even increased. How would you feel about that “protection” you bought? Income riders can come with additional costs that can erode value, and you may be inadvertently forfeiting capital to achieve that income benefit.
This is also where flexibility can become a significant issue.
Suppose you invest $500,000 in an annuity providing a 5% guaranteed income benefit, or $25,000 per year. Depending on the contract terms, costs, investment options and actual performance, your account value could decline over time. Now suppose that after ten years you are disappointed with the outcome and want to move the remaining money into an investment portfolio with greater growth potential. But instead of $500,000, your account value is now $425,000. To continue generating the same $25,000 of annual income, you would need to withdraw approximately 5.9% of the remaining portfolio rather than 5% of your original investment.
That changes the economics considerably. You now have less capital available to generate the same dollar amount of income. Leaving the contract may require changing either your income expectations or the amount of risk you are willing to take elsewhere. And if you need additional money from the annuity for an unexpected expense, depending on the rider terms, that withdrawal could permanently reduce the future income benefit.
There is another important consideration: guaranteed lifetime income is not necessarily guaranteed rising income or guaranteed purchasing power. Many contracts offer the potential for rising income, but the guaranteed withdrawal amount may never increase. An illustration may show income continuing or increasing over time based on assumptions about future contract performance, index credits or other variables. An illustration based on assumptions is merely an example of what is possible. Investors need to understand exactly which number is guaranteed, which is merely a target, and what has to happen for the higher income to be maintained.
Inflation makes that distinction particularly important. A lifetime income stream that remains relatively flat may provide substantially less purchasing power 10, 20 or 30 years from now. If inflation increases your spending needs while the income from the annuity does not keep pace, you may need to rely more heavily on assets outside the contract.
So once again, we are talking about trading risks, not eliminating them.
An investor may ultimately receive exactly what the contract guaranteed: lifetime income. But that does not necessarily mean the other features that made the contract attractive will materialize as anticipated. Income may not rise as illustrated, account value may decline, additional withdrawals may affect future benefits, and there may ultimately be less capital available for flexibility or beneficiaries. None of this necessarily requires a market crisis. Depending on the contract, withdrawals, fees and charges, combined with investment or credited performance that does not sufficiently offset them, can gradually erode account value over time.
That is why “guaranteed income for life” should never end the analysis. If you see an illustration showing an income base growing over time or a future stream of guaranteed lifetime income, don't stop at that page. Look at the guaranteed illustration page and ask some harder questions: What is my actual account value? What is the income benefit base? How is my lifetime payment calculated? How much income is actually guaranteed? Does it increase? Is that increase guaranteed or merely illustrated? What am I paying for the guarantee? What happens to the account value if growth is far more modest? What happens if I need more money than the contract allows me to withdraw? And what happens to the remaining value when I die?
Most importantly, understand what you are buying.
Yes, there may be circumstances where transferring longevity risk to an insurance company makes sense. But a compelling lifetime income benefit should be thoroughly evaluated. Investors need to understand the cost of the rider, the restrictions that accompany it, the value of the assets they retain control over, and what other strategies beyond the annuity contract could potentially provide the retirement income they need.
Many people have a rule about getting three bids before hiring a contractor, comparing three proposals before making a major purchase or getting second and third opinions before surgery. Perhaps the same discipline should apply when deciding how to generate retirement income. Before making a decision based on the appeal of a “guarantee,” consider comparing the benefits, drawbacks, costs and tradeoffs of three different income strategies.
Guaranteed income can be valuable. But the size of the guarantee is only half of the analysis. The other half is what you paid, restricted or gave up to get it.
Because in retirement, income that lasts for life and income that keeps up with life are two very different things.
Tax Deferral Isn't Automatically Tax Efficiency
Tax deferral is a commonly cited annuity benefit. Investment earnings inside a nonqualified annuity generally grow tax-deferred until withdrawn, which can sound compelling. Who wants to pay taxes sooner than necessary? But tax deferral and tax efficiency are not synonymous.
With a nonqualified annuity (an annuity purchased outside of a qualified retirement account), investment earnings are generally taxed as ordinary income when distributed rather than at the long-term capital gains rates that may apply to appreciated investments held in a taxable account. The ultimate tax consequences depend upon the type of annuity, how it is funded, how distributions are taken and your individual circumstances. That does not make the tax treatment inherently bad, but the analysis needs to go considerably further than, “It grows tax-deferred.”
Tax deferral is also not tax elimination. At death, beneficiaries of a nonqualified annuity may inherit a tax obligation on the contract's taxable gain, and a nonqualified annuity generally does not receive a step-up in basis on those deferred earnings.
Compare that with appreciated stocks, bonds, mutual funds or real estate held in a taxable account. Under current federal tax law, inherited property generally receives a basis adjustment to fair market value at death, subject to applicable rules and exceptions. That can eliminate some or potentially all of the unrealized capital gain accumulated during the original owner's lifetime, a potentially significant benefit when assets are intended to pass to the next generation.
So yes, tax deferral can be valuable. But before calling an annuity “tax-efficient,” ask a much bigger question: Tax-deferred for whom, for how long, and what happens to the tax liability in the end?
Annuities Are Insurance Products, not a Substitute for Portfolio Construction
This distinction gets lost surprisingly often. An annuity can address a specific insurance need but it does not eliminate the need to understand asset allocation, expected return, diversification, inflation, withdrawal rates, taxes, sequence risk, and long term capital market behavior.
A retirement strategy still has to work as a system. For investors with significant assets, the challenge is rarely finding a single financial product capable of solving retirement, no matter how tempting it might be.
The challenge is coordinating everything. How much capital needs to remain liquid? How much income must the portfolio generate? How much growth is necessary to maintain purchasing power over several decades? How much market risk can the financial plan tolerate? How much downside protection is actually needed? What happens during an extended bear market? What happens if inflation remains higher than expected? What happens if one spouse lives significantly longer than anticipated?
An annuity may answer one or two of those questions, but it rarely answers all of them.
Follow the Economics, Not the Sales Numbers
There is another reason record annuity sales deserve scrutiny. Financial products are manufactured, distributed, marketed, and sold. Of course, that does not make them inappropriate. Most financial solutions exist because companies have an economic incentive to provide them. But I believe investors should understand those incentives. How is the person recommending the annuity compensated? What does the insurance company earn? What surrender period applies? What happens if circumstances change? What are the ongoing costs? What return assumptions are embedded in the illustration? What alternatives were considered? And perhaps most importantly: Would this recommendation still make sense if no one were being paid to sell the product? I think that is a useful question for almost any financial decision.
So, Are Annuities Good or Bad?
There are differing opinions and thoughts, but my professional opinion is based on nearly forty years of experience, both working directly with annuity providers as well as buyers and beneficiaries. Probably the least exciting answer is they are neither good nor bad, but it is the more intellectually honest one. I believe they are a niche product that addresses specific needs. Indeed, some annuities can serve a legitimate purpose for some investors. But I am on the side of the camp that thinks these products introduce costs, complexity, restrictions, or opportunity costs that are difficult to justify relative to the problem they are supposed to solve. Still, at the end of the day, one simple fact remains: The product should follow the planning need, not the other way around.
As fiduciaries, that matters to us. We do not begin with an income strategy, investment allocation or any other financial product and then look for a reason to use it. We begin with the investor's financial position, goals, income requirements, risk exposure, tax situation, liquidity needs, time horizon, and underlying needs. Only after we prepare that analysis do we evaluate the available tools or investment strategies.
Sometimes insurance is appropriate. But in my professional view, the tradeoffs can often outweigh the benefits. Sometimes capital markets are the better solution. And in some occasional situations, the answer involves both. But one thing is for sure: record sales alone should never determine the conclusion.
I believe these record-breaking numbers tell us something important about investor behavior. Investors are searching for protection, predictability, and income as they approach retirement. And that makes sense. I just fear that some investors may ultimately find the outcome more disappointing than they expected. To find a strategy that supports you for the long arc of retirement requires considerably more analysis than the word guaranteed.
If you would like to explore alternative retirement income strategies or have an independent analysis of your existing annuity contract, contact us to learn more about our annuity analysis services and fees.
1LIMRA, Final U.S. Retail Annuity Sales Set New Sales High, Totaling $464.1 Billion in 2025, March 23, 2026. 2LIMRA, U.S. Annuity Sales Set New Quarterly Record, Totaling $123.9 Billion in the Second Quarter of 2026, July 27, 2026. 3FINRA, Annuities, Investor Insights. 4 U.S. Securities and Exchange Commission, Office of Investor Education and Advocacy, “Updated Investor Bulletin: Indexed Annuities,” Investor.gov. Annuity guarantees are subject to the claims-paying ability of the issuing insurance company. Annuity features, fees, surrender charges, crediting methods, income riders and other contractual provisions vary by product and insurer. Any hypothetical examples are for illustrative purposes only and are not intended to represent the performance or outcome of any specific investment or annuity contract.