Why it matters
- With more than 73 million Americans reaching age 65 or older by 2030, people of all ages are beginning to rethink how they’ll transform their nest egg into guaranteed income in retirement.1
- Right now, buying an annuity could help provide portfolio stability, investment growth potential, and a safeguard against market uncertainty.3
- If you’re seeking guaranteed lifetime income and tax-deferred growth potential, you may want to consider an annuity.
Annuities are having a moment right now. Annuity sales continue to soar to record-breaking highs, reaching $432.4 billion in 2024, driven largely by consumers’ interest in investment protection and guaranteed income solutions.2 If you haven’t considered them before, take a minute to learn how annuities work. In this article, we’ll go step by step through the process of buying one. It’s actually much easier than you might think.
What is an annuity?
An annuity is a long-term insurance contract that provides the opportunity to receive stable, guaranteed income for life. These contracts may offer tax-deferred growth, protection against market downturns, and a way to address the risk of outliving your savings. They can be a smart way to generate steady income in retirement. An annuity is backed by the claims-paying ability of the insurance company you’re buying it from, so be sure to check into the company’s financial stability and reputation before signing on the dotted line.
Benefits of an annuity
Here are some common reasons people buy annuities:
Premium protection in many cases
Unlike retirement accounts that invest in stock markets, many annuities can offer protection from market downturns.3 While it depends on your annuity contract, you typically can’t lose the money you’ve paid into it. That has the potential to appeal to anyone who’s worried about market volatility, especially those in or nearing retirement.3
Guaranteed income
After you’ve finished paying for the annuity (via a lump sum or installments), you’ll start receiving regular, guaranteed payouts for a predetermined length of time or until the end of your life, depending on your contract.4
And while annuity contracts vary, you’ll most likely continue to receive a steady stream of income no matter how long you live.4 Even if you’ve lived long enough to have collected your entire premium and any earnings, the insurance company will continue to regularly pay you the same amount.4
Leave a legacy
By selecting a beneficiary, you can pass your annuity value on to a loved one. Doing so could also help avoid going through probate, something that can take time and money during a difficult period in the lives of your friends and family.5
Long term care
Most people will need long term care at some point as they get older.6 You can help address this potential expense by adding a long term care rider to your annuity contract. Annuities with long term care riders usually have more lenient medical underwriting than traditional long term care insurance policies.7 Note that an annuity isn’t considered long term care insurance. Long term care riders are typically available for an additional cost within an annuity and may not pay the entire cost of long term care. than you might think.
How to buy an annuity: A step-by-step guide
So now that we’ve reviewed why people choose annuities, let’s walk through the steps of buying one. Since annuities are insurance contracts, the purchase process is different from buying stocks and mutual funds. Following the steps laid out here could help you easily find an annuity that fits your needs.
1. Understand your financial goals
First, talk with a financial professional. They can help you consider your lifestyle, financial situation, risk tolerance, and goals to determine if an annuity is a good fit for you. If you’re looking for protection from market downturns while saving for retirement, the potential for lifetime guaranteed income, or tax-advantaged growth, chances are an annuity could be a good choice.
2. Choose an annuity based on your financial objectives and goals
With the help of your financial professional, do your research. Be sure to check out all the types of annuities and rider options — and there are a lot. Your financial professional can also help you understand how an annuity would fit into your investment portfolio.
Figure out your retirement date
It’s helpful to know when you plan to retire because annuities are often used to supplement other retirement income (like Social Security) to cover fixed expenses (like housing) in retirement. So establish when you plan to retire, calculate how much annual income you’ll need, and then use that information to determine the purchase amount of your annuity.
Select the type of annuity that fits your situation and goals
Annuities tend to come in three basic varieties:
- Fixed annuities. You’re guaranteed a minimum interest rate and a set amount of payouts.
- Variable annuities. You can apply your premiums to specific investment options. Your payout is based on how much money you contributed and how your investments performed, minus any fees and other costs. Variable annuities are subject to investment risks, including possible loss of principal.
- Indexed annuities. This is an option that pays an interest rate based on the performance of a stock market index, like the S&P 500. Typically, these offer a cap on potential earnings and a floor for any potential losses.
There’s also another annuity option called the registered index-linked annuity (RILA). This contract links returns and losses to a stock market index, but has added protection via a buffer, which provides protection from losses up to a maximum threshold that you specify. Registered index-linked annuities are subject to possible loss of principal and earnings.
3. Choose how you’ll be paid
Do you want to receive an income stream for the rest of your life, for a set number of years, or all at once? Work with your financial professional to determine what makes the most sense for you and then customize your annuity contract accordingly.
4. Choose who is getting paid
Do you want the annuity to be just for you or provide payments for both you and your spouse for life? Who will be your beneficiary? Again, your financial professional can help you make these important decisions based on your situation and goals. Withdrawals of taxable amounts are subject to ordinary income tax and may be subject to a 10% additional federal tax if withdrawn before age 59½.8
5. Select your provider
Typically, annuities are purchased through an insurance company. But you can also buy them from brokerage firms, mutual fund companies, and banks. Regardless of where you purchase an annuity, a licensed insurance agent will need to be involved in the final submission of your contract to the insurance carrier.
Because annuities are contracts backed by the claims-paying ability of the insurance carrier, you’ll want to do your research and be sure the provider you choose is reputable. Looking at financial ratings from agencies like Moody’s, AM Best, and Standard & Poor’s (S&P) can help you make this determination.
There are other factors to consider when choosing your provider. You’ll want to examine the type of death benefits offered and understand the minimum guaranteed returns you can expect. Also, be sure to ask about any surrender fees you may have to pay if you decide to withdraw funds early, as well as any administrative fees that may be assessed over the life of the contract.
6. Complete and submit an application
Annuity contract applications are similar to those you’ve probably filled out when you opened a bank or brokerage account. You may need to provide information like your Social Security number, date of birth, address, and the names of any beneficiaries.
Once you receive your quote from the insurance company, complete your application as soon and as carefully as you can to be sure you get the rate quoted to you. Any mistakes or inconsistencies in your application can delay your processing time.
7. Fund the annuity
Depending on your contract, you can pay for your annuity with cash, funds from retirement accounts [i.e., rolling over a 401(k) or transferring assets from an IRA], or a transfer from a brokerage account.9 The IRS also allows a tax-free transfer of an existing annuity contract to another annuity contract of the same kind via a Section 1035 Exchange.9 Note that the transfer terms must be similar to the terms of your previous account. Talk with your financial professional to be sure you understand the tax implications that come with your chosen method of funding the annuity.
When rolling over or exchanging funds, you’ll also want to consider all the costs, such as annual maintenance fees, surrender charges, and death benefits. Speak with your financial institutions and a financial professional to make sure you understand any costs and penalties that might be associated with the transfer.
Traditional IRA and other tax-qualified funds are already tax-deferred, so you won’t gain any additional tax advantages by transferring them into an annuity. Consider features other than tax-deferral when purchasing a qualified annuity.
When should you buy an annuity?
The answer depends on your individual situation and needs. If you’ve maxed out all you can put into retirement savings accounts — like IRAs and 401(k)s — then it may be a good time to consider purchasing an annuity.10 Speak with a financial professional to get all your annuity questions answered so you can make an informed decision on which annuity to buy based on your plans and goals for the future.
These are the basic steps involved in buying an annuity. Annuities can be an excellent addition to a retirement portfolio and long-term financial plan, especially when you consider the opportunity for protection against market downturns, guaranteed lifetime income, and tax-advantaged growth potential they can offer.
Things to consider
- Look into different annuity providers and shop around to determine which ones offer the products you want. Be sure to check into their ratings and overall financial stability.
- Research the different kinds of annuities and talk with a financial professional to see which type might be a good complement to your retirement plan.
- Once you’ve decided on an annuity to purchase, consider how you’ll fund it. If you’re funding it with another retirement account or 1035 exchange, work with a financial advisor to ensure the transaction is completed properly so you don’t incur any unnecessary tax penalties.
1“What’s Ahead for Annuities in 2025?” ThinkAdvisor, December 2024
2 ”2025 Retail Annuity Sales Power to a Record $432.4 Billion 1/2025,” LIMRA, January 2025
3 “Using Annuities to Increase Risk-Adjusted Returns,” Yahoo Finance, January 2025
4 “Guide to Annuities: What They Are, Types, and How They Work,” Investopedia, September 2024
5 “Annuity Beneficiary,” Annuity.org, January 2025
6 “Here’s Who Actually Needs Long-Term Care Insurance – And When to Buy It,” Money, August 2024
7 “Long-Term Care Rider,” Annuity.org, December 2024
8 “Topic no. 410, Pensions and annuities,” IRS, August 2024
9 “How to buy an annuity: Get passive income for life,” Bankrate, May 2024
10 “Should You Add an Annuity to Your Retirement Portfolio in 2025?” Kiplinger, January 2025
Transamerica Resources, Inc. is an Aegon company and is affiliated with various companies which include, but are not limited to, insurance companies and broker dealers. Transamerica Resources, Inc. does not offer insurance products or securities. The information provided is for educational purposes only and should not be construed as insurance, securities, ERISA, tax, investment, legal, medical or financial advice or guidance. Please consult your personal independent professionals for answers to your specific questions.
