Key Takeaways:
- Annuities are not all the same. Fixed indexed annuities are a meaningfully different product from the variable annuities that shaped the category’s reputation, and understanding that distinction is the starting point for any informed conversation
- Sequence of returns risk and longevity risk are two retirement planning challenges a growth portfolio alone may not reliably solve
- Certain annuities may provide income that is not dependent on market performance or continued portfolio withdrawals, which can reduce pressure on your portfolio at the moment it matters most
- Whether an annuity belongs in your plan depends on your specific situation, and at Prosperity Capital Advisors, that evaluation is always made within the context of a comprehensive financial plan, never as a starting point or standalone recommendation
If you are within five years of retirement, the decisions you make about your income plan carry more weight than at any other point in your financial life. The portfolio you have built is no longer just a growth vehicle. It is about to become your paycheck.
That shift creates a risk many investors do not fully account for until they are already living it. The term for it is sequence of returns risk, and for high-net-worth families approaching retirement, it may be the most consequential planning consideration you have not yet had a direct conversation about.
Why a Growth Portfolio Alone May Not Be Enough for Retirement
When markets are performing well, the instinct to stay fully invested can feel like the right call. For investors approaching retirement with significant wealth in market-linked accounts, that instinct may be worth a second look.
A well-built portfolio is designed to grow by staying invested through market cycles. That works because time absorbs volatility. A downturn in year three of a 30-year accumulation phase is a footnote. A downturn in year three of retirement, when you are already drawing income from that portfolio, is a different problem entirely.
The challenge is not how much you have saved. Many high-net-worth families enter retirement with more than enough on paper. The challenge is that drawing income from a portfolio while it is also declining in value can do lasting damage, even if markets eventually recover. The shares sold during a downturn to fund your living expenses do not come back when prices rise.
This is why retirement income planning often calls for at least one source of income that is not dependent on what the market is doing in a given year, not to replace a growth strategy, but to reduce how much your income plan depends on market cooperation at the moment you can least afford uncertainty.
Three Sources of Protected Income in Retirement
There are three primary sources of income not tied to market performance available to retirees:
- Government programs such as Social Security and pension income
- Bank and savings products such as CDs and money market accounts
- Insurance-based products designed to provide protected income over a defined period or for life
Most people approaching retirement have at least one of these in place. The challenge for high earners is that Social Security was designed to replace a portion of average wages, not a high-income lifestyle. Without a pension, the gap between what you receive in guaranteed income and what you actually need to spend can be significant.
That gap matters for another reason. People are living longer than ever, which means retirements need to last longer too, though many plans were not built with that reality in mind. A plan designed for 20 years may now need to carry you for 30 or more. A source of income that does not diminish with age or market conditions becomes more valuable the longer retirement lasts.
Annuities are one of the most commonly used tools in this category. For many investors, however, they carry a contentious reputation that deserves a closer look before drawing any conclusions.
The Annuity Reputation: What Is Earned and What Has Changed
High-profile disputes between wealthy investors and financial product providers have made headlines in recent years, and the pattern is often the same: a complex product sold on the promise of safety and growth, with costs and risks that were not fully understood at the time of purchase. That experience is real, and it shaped how many sophisticated investors think about insurance-based financial products today.
Much of the skepticism around annuities traces back to variable annuities, which were widely sold in earlier decades. These products tied your account value directly to market performance, and they came with high fees, complicated structures, and surrender periods that could lock up your money for 20 years or more. In many cases, they were sold based on how much commission the advisor earned, not on what they actually solved for the person buying them.
The annuities most commonly used in retirement income strategies today are a different product. Fixed indexed annuities (FIAs) offer the potential to earn interest based on a market index, while contractually protecting your principal against market loss. If the market declines, your account value does not. If it rises, you participate in a portion of those gains. Most FIAs carry contract terms of five, seven, or ten years, which is a meaningful shift from the decades-long commitments that gave the category its reputation.
They are not appropriate for everyone, and they are not designed to be. But understanding what they are today, rather than what annuities were 20 years ago, is the right starting point.
How Do Annuities Fit Into a Coordinated Retirement Income Plan?
A reliable income source that is not tied to market performance, whether Social Security, a pension, or an annuity, can reduce how much pressure your portfolio is under to produce consistent income year after year. For households whose guaranteed income does not fully cover essential living expenses in retirement, that additional layer of protection can play a meaningful role.
Annuities are not the answer for everyone. If your Social Security and pension income already cover your essential expenses comfortably, an annuity may not add much. But if there is a real gap between what you know you will receive and what you know you will need, that gap is worth addressing intentionally rather than leaving it to the portfolio to fill under any market conditions.
At Prosperity Capital Advisors, we created The Bucket Plan® to help organize assets by when you will need them, so long-term growth assets are never the source of short-term income needs. The preservation stage of that framework, where protecting what you have built becomes as important as continuing to grow it, is where the protected income conversation most often belongs.
Questions Worth Asking Before Any Annuity Decision
Whether an annuity makes sense for you comes down to your specific situation, not the product category. Here are four questions worth working through:
- What specific problem would this solve? If your guaranteed income sources do not fully cover your essential monthly expenses in retirement, a protected income source may help bridge that gap. If there is no clear gap to fill, that matters.
- What guaranteed income do you already have? Social Security and any pension income should be the starting point. The gap between those sources and your essential spending is where an annuity may have a role.
- How accessible does this money need to be? Annuities are not a good fit for money you may need in the near term. If you anticipate a significant expense, such as a home purchase, a healthcare need, or a gift to family, within the next several years, those funds are likely better kept accessible.
- What are the fees, surrender terms, and contract length? A fiduciary advisor can walk through each of these clearly as part of a planning conversation.
How a Fiduciary Advisor Can Help You Make an Informed Decision
One of the real risks in any annuity conversation is not the product. It is who is recommending it and why. An insurance agent working on commission has a financial incentive to sell a product. A fiduciary advisor is legally obligated to recommend what is in your best interest, and that distinction matters more with annuities than with almost any other financial product.
Not every financial advisor is a fiduciary. Some are held to a lower standard that simply requires a recommendation to be generally suitable, not necessarily the best option for your situation. A fiduciary goes further, and when the range of available products is as wide as it is with annuities, having someone in your corner who is not compensated based on what they sell can make a meaningful difference in the outcome.
At Prosperity Capital Advisors, our fiduciary advisors evaluate annuities within the context of your full plan across the Five Pillars of Holistic Wealth Management: Financial Planning, Asset Management, Tax Management, Protection Planning, and Legacy Planning. Whether an annuity belongs in your plan depends on your plan, and that is a conversation worth having with someone who is working for you.
Frequently Asked Questions About Annuities and Retirement Income Planning
Are annuities a good option for retirement income?
Annuities may serve a useful role when they address a specific need, such as creating reliable lifetime income or reducing how much your portfolio has to produce each year. Whether one is appropriate depends on your full financial picture, not on the product category alone.
What is sequence of returns risk, and why does it matter for retirees?
Sequence of returns risk is the danger that a market downturn occurs early in retirement, when withdrawals are already underway. Because you may be selling assets at reduced values to fund living expenses, a portfolio may not fully recover even when markets rebound, which can have a lasting effect on how long your money lasts.
How are fixed indexed annuities different from variable annuities?
Fixed indexed annuities offer interest crediting tied to a market index with contractual protection against market loss, meaning your principal does not decline if the market does. Variable annuities tie the account value directly to market performance. FIAs carry defined shorter-term contracts and are generally designed to address specific income planning needs.
When may an annuity not make sense?
An annuity may not be appropriate if you have significant liquidity needs during the contract period, if your existing guaranteed income already covers your essential expenses, if your primary goal is leaving assets to heirs, or if the contract terms do not align with your broader plan.
What is The Bucket Plan®, and how do annuities fit into it?
The Bucket Plan® organizes assets by when you will need them, helping ensure near-term income needs are never funded by long-term growth assets. For those who need a source of income that is not dependent on market performance, annuities may be a smart addition to the appropriate bucket within that structure.
Schedule a Retirement Income Planning Conversation
The considerations covered here work best when evaluated together by someone who understands your full financial picture. Whether you are approaching retirement, reassessing your current strategy, or revisiting a plan built years ago, a Prosperity Capital Advisor can help you determine whether annuities belong in your plan and where they may fit within a coordinated retirement income strategy.
Disclosure: Prosperity Capital Advisors delivers holistic wealth management through our Five Pillars framework: Financial Planning, Asset Management, Tax Management, Protection Planning, and Legacy Planning. This content is for educational purposes only and does not constitute individualized tax, legal, or insurance advice. See our full list of advisors by clicking here.
