Is “Annuity” Really a “Four-Letter Word”?

“I hate annuities — and you should too.”

That infamous line, popularized by financial entertainers and clickbait headlines, has shaped a generation’s perception of annuities. But let’s be honest: most people who say it don’t actually understand how annuities work—or why they exist in the first place.

As a financial advisor, I regularly hear the same objections:

• “I hear they’re bad, but I’m not sure why.”
• “I can get a better return in the market.”
• “There’s no death benefit—what if I die early?”
• “Aren’t my funds locked up for 10 years?”
• “Annuities are full of high fees.”

These concerns sound logical on the surface. But when you dig deeper—especially in today’s economic environment—they don’t always hold up. In fact, they often distract from the very real value annuities can bring to a retirement plan.

The Market Has Spoken: A Wake-Up Call for Retirees

Over the past 90 days, the stock market has delivered a wake-up call. Unexpected events—from tariff announcements to inflation spikes to weaker GDP data—have once again reminded us how quickly markets can shift. For retirees and near-retirees, that kind of volatility isn’t just stressful—it’s dangerous.

That’s especially true for the 78 million baby boomers either in or approaching retirement. Unlike their parents’ generation, many boomers don’t have the safety net of a pension. Baby Boomers are also the first generation to retire with 401(k) plans—an investment vehicle that was never designed to be a retirement solution. It was not back-tested to determine how much money you needed to save, what rate of return would be required, or what a safe withdrawal rate would look like to ensure your money actually lasts through retirement. The burden of generating stable income now falls entirely on their investments—which are increasingly exposed to forces outside their control. If you want to learn more about this issue, check out the documentary The Baby Boomer Dilemma by Doug Orchard—it does a compelling job of illustrating the retirement challenges this generation faces.which are increasingly exposed to forces outside their control.

This environment makes a strong case for rethinking how we build retirement income. And it’s exactly why annuities, when used properly, can play a powerful and stabilizing role in a modern retirement plan.

Biggest Risk Factors Facing Retirees Today

Annuities are not a one-size-fits-all solution. But when used thoughtfully, they can help address five of the biggest risks facing retirees:

• Sequence of Return Risk – the danger of drawing income during a market downturn, which can permanently damage a portfolio.
• Longevity Risk – the risk of outliving your assets, especially as life expectancies continue to rise. The U.S. Census Bureau reports that individuals aged 90 and over now constitute 4.7% of the population aged 65 and older, a significant increase from 2.8% in 1980. This shift presents new planning challenges around how long retirement income truly needs to last.
• Behavioral Risk – the tendency to make emotional decisions during market drops that lock in losses and derail long-term plans.
• Inflation Risk – the rising cost of goods and services, which can erode your purchasing power and compromise your standard of living over a long retirement.
• Taxation Risk – the uncertainty of future tax rates and how they might affect retirement income and distributions. Changes in tax law or rising tax brackets can significantly reduce the net income available to retirees if not planned for properly. Even if the Trump-era tax cuts are extended, what will tax rates look like beyond 2030? The long-term direction of tax policy is unknown, which creates additional pressure to plan proactively.

These risks are real—and left unaddressed, they can have a significant impact on your ability to maintain financial independence throughout retirement.

What Annuities Actually Do

Rather than being the enemy, annuities can actually serve as a powerful buffer—a tool to ensure your essential income needs are met, regardless of market conditions.

It’s important to understand that not every dollar in retirement has the same purpose. Some dollars are meant to provide monthly paychecks, helping you maintain your lifestyle with consistency and confidence. That’s the job annuities do exceptionally well—similar to how pensions provided previous generations with a sense of financial security in retirement.

By earmarking a portion of your savings to generate reliable income, you allow other assets in your portfolio to ride out market volatility with patience. Those growth-oriented dollars can then continue working for your long-term goals—whether that’s future flexibility, healthcare needs, or creating a legacy for your heirs.

There are many types of annuities available—some behave like CDs but offer higher returns, others are built for safe and productive growth, and some are designed to generate guaranteed lifetime income. Annuities can also play a valuable role in managing taxes during retirement. Because they grow tax-deferred, they allow you to control when income is recognized. In some cases, certain annuity contracts even allow for internal partial Roth conversions—enabling you to shift income into tax-free territory before activating lifetime payouts. At their core, annuities are about providing safety, structure, and strategic purpose within a diversified retirement plan.

Lifetime income annuities, in particular, are designed to help address the four core retirement risks mentioned above. They create a predictable, guaranteed income stream that you can’t outlive—no matter how long you live or how the markets perform. Some lifetime income annuities also provide the opportunity for that income to increase over time, helping to mitigate the long-term effects of inflation and preserve your purchasing power throughout retirement.

Certain types of fixed indexed or registered index-linked annuities (RILAs) can even serve as bond alternatives in your portfolio—delivering similar or better returns than traditional bonds, but with significantly less volatility and interest rate sensitivity. As bond yields struggle to keep up with inflation, annuities offer a compelling way to generate income with protection built in.

And it’s not just theory. A study by Ernst & Young, titled “Benefits of Integrating Insurance Products into a Retirement Plan”, found that retirement plans incorporating insurance-based solutions like annuities performed better overall—in terms of both income sustainability and legacy potential—than those relying exclusively on stock market investments. Their research affirms what many experienced planners already know: when used properly, insurance products can actually enhance both stability and outcomes in retirement.

The Right Four-Letter Words

Yes, “annuity” often gets treated like a “four-letter word.” But when integrated properly into a financial plan, I believe it deserves to be associated with a few different four-letter words—ones that actually reflect its potential benefit:

• Safe – Many annuities offer no market risk, and some can provide a lifetime income stream you can’t outlive.
• Gain – They give your other investments room to grow by reducing pressure to sell during down markets.
• Plan – When part of a comprehensive retirement plan, annuities increase your chances of long-term success.
• Free – They offer freedom from financial anxiety, much like a personal pension.
• Calm – They reduce emotional stress by providing income you can count on, no matter what the market does.

The Bottom Line

Are annuities perfect? No. Are they misunderstood? Absolutely. And in today’s volatile, uncertain economic climate—where many retirees lack the pension safety net—they may be more relevant than ever.

There are two distinct phases of retirement planning:

1. The accumulation phase, when the focus is on saving and growing your money, and
2. The decumulation phase, which is all about making sure your money lasts throughout retirement—no matter what happens with the stock market, tax rates, healthcare costs, or inflation.

My recommendation: Work with a financial planner who specializes in the decumulation phase of retirement—someone who understands how to turn your life savings into reliable, tax-efficient income. And most importantly, work with a fiduciary—a professional legally obligated to put your best interests first.

Because if an annuity can give you the confidence to retire on your terms, sleep better at night, and live with more freedom—maybe it’s time to rethink that “four-letter word.”

About the Author Victoria Larson is an independent, fiduciary financial advisor with over 20 years of experience helping clients build purpose-driven retirement plans. She specializes in holistic, tax-efficient strategies that protect and grow wealth while aligning with each client’s unique goals, values, and lifestyle.

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