When most people think about saving for retirement, they think about their employer-sponsored 401(k). While this is one of the best ways to build a nest egg for yourself, it isn’t the only way.
Annuities are an investment option that typically appeals to workers nearing retirement age.
But depending on your personal investment strategy and risk tolerance, younger people may also benefit from annuities and the security they provide.

Erika Taught Me
- Annuities are a low-risk investment option to save for retirement.
- There are two primary types of annuities: variable and fixed.
- Annuities provide tax-deferred growth similar to a 401(k).
. . .
What Are Annuities?
An annuity is an investment that offers guaranteed income during retirement.
Insurance companies offer annuities in exchange for a premium. Premiums can be paid as a lump sum upfront or in smaller increments during the duration of the annuity contract.
Annuities provide tax-deferred growth, similar to a 401(k). You won’t pay taxes on income generated by your annuity until you begin taking distributions from it.
Other benefits also make annuities appealing. For example, some annuity contracts include a death benefit, which allows your annuity to be paid out to a beneficiary of your choice when you die.
Some contracts include a guaranteed lifetime withdrawal benefit rider you can add to provide you with a guaranteed income in retirement.
However, annuities have fees, including an annual administration fee that is a percentage of your annuity’s value. Over a long period, these fees can add up, making annuities unappealing for young adults who still have several decades of work left.
READ MORE: How To Save for Retirement
How an Annuity Works
Unlike a stock or bond you buy from a brokerage firm and add to your retirement portfolio, an annuity is a contract sold by an insurance company.
Once you retire, your annuity begins making payments. The amount you receive will depend on several factors, including age, gender, and interest rates.
Payments can be distributed at a fixed rate based on a specific number of payments or based on your life expectancy.
If you select an annuity that’s based on how long you’re expected to live, you’ll receive payments based on your current age and anticipated life expectancy.
For example, if you retire at 65 and are expected to live to 90, you’ll receive 300 months’ worth of payments.
Depending on the terms of your annuity, monthly payments may continue even if you outlive your life expectancy.
READ MORE: How Much You Need to Retire
Types of Annuities
Annuities vary based on how much you expect to receive from your annuity in retirement and how much you want to invest in it upfront.
While annuities are considered a low-risk investment option, some types come with greater risks than others.
Variable
A variable annuity is an agreement between you and an insurance company, backed by an underlying asset like a mutual fund.
The value of the annuity can change based on the performance of the underlying asset and other market conditions.
Variable annuities can be more appealing to younger investors because they come with unlimited growth potential. While there is still risk exposure, you’ll benefit from tax-deferred growth and longer time in the market.
Some variable annuities let you choose the underlying asset. This gives you the flexibility to invest in an exchange-traded fund (ETF) or a stock that can appreciate in value over time while still generating a guaranteed income in retirement.
Fixed
A fixed annuity offers a guaranteed interest rate with no exposure to the market. Even if the interest rate is periodically adjusted, it will never fall lower than the rate agreed to in the contract.
With a fixed annuity, your initial investment is guaranteed to generate tax-deferred growth — as long as you don’t make early withdrawals.
The growth rate won’t be as high as an annuity with market exposure, but it will still provide a return with substantially less risk.
READ MORE: What Is Risk Tolerance?
Indexed
An indexed annuity is a blend of a variable and a fixed annuity.
Rather than earning interest based on a fixed rate, indexed annuities are tracked to a market index like the S&P 500. If an index does well you can earn more, but if it goes down you risk earning less.
To mitigate risk, indexed annuities come with caps and floors:
- Cap is the maximum amount of interest you can earn in a year.
- Floor is the lowest your annuity will go even if the stock market goes lower.
Indexed annuities can appeal to investors of all ages because they offer growth potential while also providing security.
Flexible premium
Regardless of the type of annuity you purchase, you will have to pay a premium. It’s common to pay a lump sum at the start of the contract.
Some insurance companies offer flexible premium annuities that are similar to savings accounts. Rather than pay upfront, a flexible premium annuity allows you to make contributions over time.
A flexible premium annuity allows the value of your annuity to grow. But just like traditional investment accounts, there may be contribution limits that you’ll want to be mindful of.
FAQs
Can I buy annuities in my 20s?
Yes, you can buy annuities in your 20s.
Note that an annuity comes with administrative costs and doesn’t come with certain retirement savings benefits like a 401(k) match. This might be disadvantageous for younger investors, but annuities are also considered low-risk.
What is the minimum age to buy an annuity?
There is no minimum age to buy an annuity. Annuities are managed by insurance companies who can set their own age limits.
Who should not buy annuities?
Anyone who needs quick access to their cash should not invest it in an annuity.
While annuities provide payouts, the capital invested in an annuity is held by the insurance company where you purchased your annuity.
If you think you’ll need access to your funds, you would be better off saving with a certificate of deposit or a high-yield savings account.
TL;DR: Are Annuities a Good Investment?
An annuity is a contract offered by an insurance company, to ensure you have guaranteed income during retirement. The catch is that annuities come with fees that can easily add up over time.
While annual fees and limits to growth potential are some reasons why young people might not see the appeal of annuities, the ability to generate tax-deferred income from a low-risk investment might appeal to others.
For more advice on investing and saving for retirement, check out these episodes of the Erika Taught Me podcast:
- How To Invest for Beginners (Step by Step)
- The Missing Piece in 99% of Financial Advice
- 10 Steps Towards Financial Wholeness

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Amanda Claypool is a writer, entrepreneur, and strategy consultant. She's lived in the Middle East, Washington, DC, and a 2014 Subaru Outback but now resides in Austin, TX. Amanda writes for popular sites including, Forbes Advisor, Erika.com, and The College Investor. She also writes about the future of work and the state of the economy on Medium.