Annuities 101: What You Need to Know

When planning for retirement, the biggest priority for many people — both military service members and civilians — is creating a predictable stream of income to fund the lifestyle they envision. The question is: how do you convert the assets you’ve spent years accumulating into income you can live on for the rest of your life?

Let’s take a closer look at a financial tool that could play a useful role in providing retirement income: the annuity.

What is an Annuity and How Does it Work?

An annuity is a contract between you and an insurance company in which you make a lump-sum payment (or series of payments) and, in return, receive regular payments for life, joint life (until the death of the surviving spouse, should you select and pay for this option) or for a specified number of years known as a period certain. The payments can begin immediately or at some point in the future, and can be made on a monthly, quarterly, semiannual, or annual basis.

What Are the Different Types of Annuities?

Insurance companies offer a broad array of annuities, but all of them fit into a few general categories: immediate or deferred and fixed or variable.

• Immediate annuities are typically purchased with a lump-sum payment and start distributing guaranteed income right away.
• Deferred annuities can be purchased with a lump sum or a series of payments over time. They provide a stream of income that begins at a future date.
• Fixed annuities can be compared to CDs since both can provide predictable interest.  Fixed annuities, however, are issued by insurance companies and have different protections and withdrawal rules than bank CDs.
• Variable annuities are insurance contracts that let you invest your premiums in market-based investment options, often called sub-accounts, during an accumulation phase. If you later choose to receive income, those payments can go up or down depending on how the investments perform.

As with most financial products, selecting the right annuity depends on your situation and objectives. If you are retired, or plan to retire soon, and your objective is to generate supplementary income now, a fixed immediate annuity may be the right option.

However, if you’re 40 years old and don’t plan to retire for 20 more years, a deferred variable annuity that has more risk, but gives you the opportunity for tax-deferred growth, might make more sense. A knowledgeable financial advisor will take the time to understand your specific needs, help you determine if an annuity is appropriate for you and, if so, what type is the best fit.

Are Annuities a Good Investment for Military Retirees?

If you retired from the military and are seeking an additional source of guaranteed income, an annuity might be worthy of consideration. But it’s important to understand that your military retirement income is, effectively, a lifetime annuity because your payments are guaranteed to continue for as long as you live — and possibly beyond if you opted for the Survivor Benefit Plan. You may also be eligible for Social Security, which is also effectively a lifetime annuity.

Many military retirees also have savings in the Thrift Savings Plan (TSP). Unlike your pension or Social Security, the TSP is not a guaranteed‑income source — it’s an investment account that offers long‑term growth potential and flexibility in how you withdraw or invest your funds.

If you already have at least two significant streams of guaranteed income, developing a diversified investment strategy may be a more appropriate course of action than adding a third guaranteed stream of income in the form of an annuity. Because, as detailed below, there are some restrictions and limitations associated with annuities.

Disadvantages of Annuities

Fees

Due to their simple structure, fixed annuities are relatively inexpensive, but you should be aware that they typically have what are called “surrender fees” that apply if you choose to terminate your contract before a certain amount of time — ranging anywhere from two to 10 years — has passed. Variable annuities, on the other hand, typically have several layers of fees, including surrender fees, insurance charges, and investment management fees. It’s not uncommon for the total of these fees to amount to two or three percent of your total investment every year.

Liquidity

Another disadvantage of annuities is that they are somewhat illiquid. First, assets in a variable annuity have the same tax advantages as a traditional Individual Retirement Account (IRA), but like an IRA, withdrawals prior to age 59 ½ are subject to a 10 percent tax penalty. Second, deposits into annuity contracts are typically locked up for an extended period of time, known as the surrender period. The annuitant, which is the person receiving payments, incurs a penalty if all or part of that money is withdrawn.

Leaving an Inheritance

If it’s a priority for you to leave an inheritance to your children or grandchildren, an annuity might not be the best choice. Depending on the type of annuity you choose, your heirs may receive nothing after you die, even if you collected far less than you contributed. In the case of a variable annuity, your heirs would not receive the same step-up in basis at death that they would with stocks or mutual funds because they are considered insurance contracts, not investments. That means they would need to pay ordinary income taxes on any gains. This can be especially problematic if the annuity has been growing for a long time and the cost basis is low.    

Inflation

Many annuities provide fixed payments that do not adjust for rising prices, which means the real value of your income can shrink over a long retirement. Some annuities offer optional riders that increase payments to help offset inflation, but not all contracts include this feature — and those that do typically charge an additional fee or reduce the initial payout. As a result, relying on fixed annuity income can leave you vulnerable to a gradual loss of purchasing power over time.

Should I Buy an Annuity in 2026?

A First Command Financial Advisor can help you determine whether an annuity is right for you. Our knowledge of military benefits makes us uniquely qualified to help service members and veterans make this decision. In many cases, it is best addressed within the framework of a comprehensive financial plan.

Learn more about the different types of annuities that may be appropriate for your situation. Then, schedule a meeting with your First Command Financial Advisor to determine how to navigate your retirement journey with confidence.

Frequently Asked Questions

Are annuities safe?

Annuities are generally designed to help manage risk and are backed by the financial strength of the insurance company that issues them. They are not bank products or FDIC-insured, but state guaranty associations may offer limited protection if an insurance company fails, depending on state law.

How do annuities grow in value?

It depends on the type. Fixed annuities earn a fixed interest rate; indexed annuities track a market index with limits, and variable annuities invest in market-based subaccounts that can rise or fall in value.

Who is an annuity best suited for?

Annuities can be a good fit for people who want predictable income in retirement, prefer tax deferred growth, or want protection from outliving their savings.

TSP funds have very low administrative and investment expenses and, low expenses can have a positive effect on the rate of return of your investment.

Guarantee depends on the claims-paying ability of the issuing insurance company and does not apply to the investment return or principal value of the separate account. Before buying an annuity, you should find out about the particular annuity you are considering. Request a prospectus from your Financial Advisor and read it carefully. The prospectus contains important information about the annuity contract, including fees and charges, investment options, death benefits and annuity payment options.

Diversification, asset allocation and portfolio rebalancing do not guarantee a profit or protect against a loss in a declining market. They are methods used to help manage risk. Investment returns and principal value will fluctuate and your investment, when redeemed, may be worth more or less than its original cost. Sales charges and taxes may apply.

First Command and its affiliates do not provide legal or tax advice. This material is for informational purposes only and should not be relied on for legal or tax advice. You should consult your own legal or tax advisors before engaging in any transaction.