Americans Increasingly Turn to Annuities for Guaranteed Retirement Income

American retirement planning is undergoing a notable transformation as individuals increasingly prioritize guaranteed lifetime income through annuities over sole reliance on Social Security or traditional 401(k) plans. Industry data reveals U.S. individual annuity considerations surged by 21.5 percent in 2023, reaching approximately $347.7 billion. This trend reflects growing apprehension about market volatility, fears of outliving savings, and declining confidence in Social Security's long-term viability.

Many retirees are funding annuities by downsizing their homes and redirecting equity into retirement income solutions. This strategy addresses a critical concern, as nearly half of retirees worry about insufficient guaranteed lifetime income. By converting home equity into an annuity, retirees transform a one-time asset sale into a predictable lifelong paycheck. Annuities function by exchanging a premium—either lump-sum or periodic payments—for the insurance company's commitment to provide regular payments for life, potentially extending to a spouse's lifetime.

Gary Jensen, CFP® and Chief Analyst at Annuityverse, emphasizes that recent layoffs highlight retirement's unpredictability. "While no one can be fully prepared, advance planning is key to prevent a late-career layoff from derailing financial security," Jensen stated. He recommends deferred income annuities, ideally funded in one's 50s, to establish an income baseline alongside Social Security. This foundation, combined with diversified assets, offers both lifetime guarantees and flexibility.

Tax advantages further bolster annuities' appeal. Unlike withdrawals from distressed 401(k)s or savings drawdowns—which may trigger ordinary income tax and penalties—certain annuity structures allow tax-deferred interest accumulation until payout. Earnings grow tax-deferred during accumulation, reducing tax drag. Upon income commencement, payments are taxed at ordinary rates, but a portion may be tax-free return-of-principal, depending on contract type, as principal often comprises after-tax dollars.

Annuities mitigate longevity risk by transferring the possibility of outliving savings to the insurer, ensuring payments continue until death. Rising interest rates and increased market volatility have amplified interest in this guaranteed income "floor" for covering essential retirement expenses. Fixed-rate deferred annuities experienced exceptional growth in 2023, with fixed-indexed annuities also rising markedly. In fixed annuities, a stated interest crediting rate (e.g., 3-5 percent) compounds annually during accumulation, with payouts calculated based on accumulated principal, credited interest, payout options, and actuarial assumptions.

Fixed-indexed annuities tie credited interest to market index performance, such as the S&P 500®, with caps and floors that capture some upside while protecting against loss. Payouts begin by converting accumulated value into a payment stream, often dividing it by mortality-factor tables and interest factors. Higher interest rates and longer payout periods typically yield larger periodic payments. This structural predictability, combined with tax efficiency and longevity protection, positions annuities as a foundational component in modern retirement strategies, addressing systemic concerns about financial security in an uncertain economic landscape.