Annuities Techniques: Advanced Strategies for Retirement Income

Annuities have become one of the most popular retirement income tools in the United States, with total U.S. retail annuity sales reaching $461.3 billion in 2025, marking the fourth consecutive year of record sales, according to LIMRA. This represents a 6% increase over 2024 and the ninth consecutive quarter of $100 billion-plus in sales. The surge is driven by the Peak65 demographic wave, with 4.1 million Americans turning 65 each year, many without access to traditional defined-benefit pensions. Understanding the different types of annuities, their fee structures, and strategic applications is essential for retirees seeking guaranteed lifetime income in an era of uncertain market returns and rising longevity.

What Is an Annuity and How Does It Work?

An annuity is a contract between you and an insurance company. You make a lump-sum payment or a series of payments, and in exchange, the insurer agrees to make periodic payments to you, beginning either immediately or at a future date. Annuities are designed to provide a guaranteed income stream that cannot be outlived, addressing the longevity risk that retirees face when they do not know how long they will need their savings to last.

The basic mechanics involve three phases. During the accumulation phase, your money grows tax-deferred. During the payout phase, the insurer makes regular payments. The contract may allow you to choose between payments that last for a fixed number of years, for your lifetime, or for your lifetime plus your spouse’s lifetime. The tradeoff for this guarantee is that annuities typically have higher fees than other investment vehicles, and withdrawals before age 59.5 may incur a 10% IRS penalty in addition to surrender charges.

The installed base of annuity assets in the United States exceeds $3 trillion, according to LIMRA and ICI data. This includes variable annuity separate accounts, fixed annuity general account reserves, and indexed product reserves. As defined-benefit pensions have declined from covering 40% of today’s 62- to 80-year-olds to a projected 23% for those age 30 to 45, annuities have become the primary private-sector tool for converting accumulated savings into guaranteed lifetime income.

Fixed-Rate Annuities and MYGAs

Fixed-rate annuities, including multi-year guaranteed annuities, are the simplest and most popular annuity type. They function similarly to certificates of deposit but with tax deferral and typically higher rates. The insurer guarantees a fixed interest rate for a set period, usually 3 to 10 years. In 2025, fixed-rate annuity sales reached $160.6 billion, up 5% year over year, as rising interest rates made this product highly competitive with CDs and bonds.

MYGAs offer several advantages over bank CDs. Interest is tax-deferred until withdrawal, whereas CD interest is taxed annually. MYGA rates are typically 0.5 to 1.5 percentage points higher than CD rates for comparable terms, according to LIMRA data. The tradeoff is that MYGAs have surrender charges for early withdrawal, typically 5% to 10% of the account value declining to zero over 5 to 10 years. Most contracts allow penalty-free withdrawals of 10% of the account value per year.

LIMRA forecasts that fixed-rate deferred annuity sales will decline in 2026 as interest rates moderate. Short-duration MYGAs have attracted investors looking for safe, higher-yielding alternatives to CDs and money market funds. For retirees, a MYGA ladder, purchasing multiple MYGAs with different maturity dates, can provide predictable income while maintaining access to a portion of funds each year without penalty.

Fixed Indexed Annuities

Fixed indexed annuities offer principal protection combined with interest credits linked to the performance of a stock market index, typically the S&P 500. The account value cannot decline due to index performance, even if the index falls. In exchange for this downside protection, the upside is capped. A typical FIA might credit 100% of the index return up to a cap of 8% to 10% annually, or use a participation rate of 80% to 100% of the index return.

FIA sales reached $128.2 billion in 2025, the fifth consecutive year of growth and a new record, according to LIMRA. FIAs now account for approximately 28% of total annuity sales. The appeal is easy to understand: clients want equity participation without equity risk. For retirees who cannot afford to lose principal but need growth to keep pace with inflation, FIAs offer a middle path between the safety of fixed-rate products and the growth potential of variable products.

Approximately 53.2% of indexed annuity buyers elect a guaranteed lifetime withdrawal benefit rider, according to WinkIntel data. The GLWB guarantees a minimum annual income stream for life, typically 4% to 6% of a benefit base that grows during the accumulation period. Among GLWB owners, 28.7% are currently taking income, with individual company results ranging from 1.3% to 52.3%. The wide range reflects differences in product design, client demographics, and market conditions.

Registered Index-Linked Annuities

RILAs, also called structured annuities or buffer annuities, are the fastest-growing segment of the annuity market. Sales reached $79.6 billion in 2025, up 20% year over year and 10 times the sales recorded a decade ago. RILAs offer a choice of buffer or floor protection levels, typically 10% to 30% downside protection, in exchange for a cap on upside participation. They combine features of fixed indexed annuities and variable annuities in a single product.

The RILA structure gives investors more control over the risk-return tradeoff than FIAs. A typical RILA might offer three options: 10% buffer with no cap, 20% buffer with a cap of 12%, or 30% buffer with a cap of 8%. The investor chooses the level of protection that matches their risk tolerance. Fees on RILAs are typically lower than on traditional variable annuities, often 1% to 2% annually compared to 2% to 4% for VAs with living benefit riders.

LIMRA projects RILA sales will exceed $85 billion in 2026 and continue growing through 2028. The product appeals to pre-retirees and early retirees who want some market exposure but also want a way to limit losses during the critical years surrounding retirement. RILAs are also popular with fee-based advisors because they can be structured without commission loads, making them suitable for fiduciary accounts.

Variable Annuities and Living Benefit Riders

Traditional variable annuities allow you to invest in subaccounts similar to mutual funds, with the potential for market-linked growth. Sales were $65.2 billion in 2025, up 7% from 2024 but down roughly 35% from pre-pandemic levels. The decline reflects a structural shift in the market toward fixed and indexed products. However, VAs still represent a significant portion of the installed asset base, with over $2 trillion in separate account assets.

Living benefit riders are the primary reason investors choose variable annuities. A guaranteed lifetime withdrawal benefit rider guarantees a minimum lifetime income stream regardless of investment performance. Most contracts credit a simple roll-up rate of 5% to 7% annually to the benefit base during the deferral period, or use a ratchet mechanism that locks in market gains periodically. JP Morgan Asset Management research found that allocating 20% to 40% of a portfolio to a variable annuity with a living benefit increased the probability of sustaining a $45,000 inflation-adjusted spending goal from 72% to 86% to 98% depending on the allocation.

The critical features to evaluate in a VA with a living benefit are the benefit base growth rate, the annual income percentage (typically 4% to 6% of the benefit base), the fee for the rider (typically 0.5% to 1.5% annually), whether annuitization is required to activate the income guarantee, and whether you can turn income on and off. Contracts that allow systematic withdrawals without annuitization preserve access to the remaining account value, providing flexibility that annuitized contracts do not.

Immediate and Deferred Income Annuities

Single premium immediate annuities and deferred income annuities are the purest form of longevity insurance. With a SPIA, you give the insurer a lump sum, and payments begin within one year and continue for life. With a DIA, you make a lump-sum payment now, and income begins at a future date, typically 5 to 20 years later. SPIAs and DIAs are irrevocable: you cannot access the principal once the contract is purchased.

SPIA sales were $14 billion in 2025, up 3% year over year. DIA sales were $4.8 billion, down 3%. Despite their conceptual appeal as longevity insurance, income annuities remain the least-purchased annuity type. Americans show a strong preference for liquidity and control over their assets, which SPIAs and DIAs do not provide. Behavioral economics research suggests that the “mental accounting” required to treat an irrevocable annuity payment as spending money rather than investment returns is difficult for many retirees.

Income annuities serve a specific strategic purpose: creating a floor of guaranteed income that covers basic living expenses. A retiree who purchases a SPIA to cover housing, food, and healthcare costs can invest remaining assets more aggressively because the essential expenses are already covered. This “floor-and-upside” approach is recommended by many financial planners as a way to balance guaranteed income with growth potential, particularly for retirees with modest savings who cannot afford sequence-of-returns risk.

Annuity Fees and Costs to Watch

Annuity fees vary significantly by product type and can substantially impact long-term returns. Fixed-rate annuities and MYGAs have no explicit fees; the insurer simply credits a net interest rate after its spread. Fixed indexed annuities typically have no explicit fees either, but the cap and participation rate mechanisms effectively limit returns, which is an implicit cost. RILAs charge annual fees of 1% to 2%. Variable annuities have the highest fees, typically 2% to 4% annually, including mortality and expense risk charges, administrative fees, subaccount management fees, and living benefit rider charges.

Surrender charges are another critical cost. Most deferred annuities impose a surrender charge if you withdraw more than the penalty-free amount during the first 5 to 10 years. Typical schedules start at 7% to 10% and decline to zero. Some contracts waive surrender charges for nursing home care, terminal illness, or death. Always review the surrender schedule before purchasing an annuity, because unexpected liquidity needs during the surrender period can result in significant costs.

The fee differential between annuity types matters enormously over long holding periods. A $100,000 investment growing at 5% gross over 20 years with 1% annual fees grows to $213,945. The same investment with 3% annual fees grows to $147,606. The 2-percentage-point fee difference costs $66,339 over 20 years. This is why financial advisors recommend minimizing fees by choosing no-load or advisory annuities when possible, and by avoiding living benefit riders that duplicate guarantees already provided by Social Security and pension income.

Annuity Laddering Strategies

Annuity laddering involves purchasing multiple annuities with different maturity dates or starting dates to create a predictable income stream while maintaining flexibility. A MYGA ladder uses fixed-rate annuities with terms of 2, 4, 6, and 8 years. As each contract matures, you can either take the proceeds as income or reinvest in a new MYGA at then-current rates. This approach provides more income stability than a single MYGA because you are not exposed to a single interest rate environment.

A DIA ladder addresses longevity risk by purchasing multiple deferred income annuities that start at different ages, such as age 70, 75, 80, and 85. The cost is significantly lower than purchasing a SPIA at retirement age because the payout period is shorter. A $100,000 DIA starting at age 85 might pay $30,000 to $40,000 annually for life, compared to $6,000 to $8,000 for a SPIA starting at age 65. The DIA ladder provides catastrophic longevity protection at a fraction of the cost of full immediate annuitization.

The “annuity floor” strategy combines a SPIA or DIA with a diversified investment portfolio. The annuity covers essential expenses, and the portfolio covers discretionary spending. JP Morgan research demonstrates that households with 60% to 80% of retirement wealth in income-producing assets spend 35% more in retirement than similar households with only 20% to 40% in income, suggesting that annuities can increase retirement spending confidence and reduce the tendency to hoard assets.

Annuity Sales by Product Type Table

The table below shows U.S. annuity sales by product type from 2020 to 2025, based on LIMRA data.

Product Type	2020	2021	2022	2023	2024	2025
Fixed-Rate (incl. MYGA)	$55B	$52B	$113B	$143B	$151B	$161B
Fixed Indexed	$62B	$68B	$80B	$96B	$127B	$128B
Registered Index-Linked	$23B	$38B	$42B	$47B	$55B	$80B
Variable	$93B	$98B	$75B	$68B	$61B	$65B
Income (SPIA & DIA)	$9B	$10B	$14B	$17B	$17B	$19B
Total	$242B	$266B	$311B	$385B	$434B	$461B

The data reveals a dramatic shift in product composition. Fixed-rate and fixed indexed annuities have grown from 48% of total sales in 2020 to 63% in 2025, driven by rising interest rates and investor preference for guaranteed returns. Variable annuities have declined from 38% to 14% of the market. RILAs have grown from 10% to 17%, reflecting their increasing role as a middle-ground option.

When an Annuity Makes Sense vs. When It Does Not

Annuities are most appropriate for retirees who need guaranteed lifetime income to cover essential expenses, have sufficient assets to set aside for this purpose without compromising liquidity, and are concerned about outliving their savings. JP Morgan’s research identifies six specific client profiles where annuities improve outcomes: mis-timers who retire into a market downturn, good savers who are fearful spenders, conservative investors who cannot tolerate market volatility, accumulators who need inflation protection, and retirees seeking to maximize their sustainable spending rate.

Annuities are generally not appropriate for younger investors who need growth for decades before retirement, for investors with limited assets who cannot afford to lock up funds, or for investors who have sufficient guaranteed income from Social Security and pensions to cover essential expenses. The fees and complexity of many annuity products are difficult to justify when simpler alternatives like target-date funds, bond ladders, and systematic withdrawal plans can achieve similar outcomes at lower cost.

The key to using annuities effectively is to treat them as one component of a diversified retirement income strategy rather than as a complete solution. LIMRA’s data shows that 53.2% of indexed annuity buyers elect a GLWB, but only 28.7% of those are actually taking income, suggesting many annuity owners are not using the products as intended. Working with a fee-only financial planner who can model annuity outcomes alongside other withdrawal strategies helps ensure that the product serves its intended purpose without unnecessary cost or complexity.

This article is for informational purposes only and does not constitute professional advice. Always consult qualified professionals for guidance specific to your situation.