The 100 Best Annuities for You

Annuity payouts and guaranteed income are the highest they have been in more than a dozen years. Investors, aiming to take some risk off the table as they either build their nest eggs or prepare to live off their savings in retirement, are locking in annuities at an unprecedented rate. Sales of the products surged 23% last year to a record $312.8 billion, and the buying spree continued this year, according to the Limra Secure Retirement Institute.  

The biggest draw has been fixed annuities, which guarantee principal along with a fixed rate for a specified period, much like bank certificates of deposit. Annuities from highly rated insurers currently pay five-year guaranteed rates as high as 5.20%, compared with about 4.3% on CDs and 3.93% for Treasuries.  

Higher interest rates have also boosted guaranteed pension-like income offered by fixed-indexed annuities, which protect principal while tying returns to a stock market index. 

For example, assume a 60-year-old invested $200,000 and planned to begin drawing income at age 70. Last year, the top-paying fixed-indexed annuity contract guaranteed an annual $23,400 for life. Now, Eagle Life guarantees a lifelong annual $29,480 on its Select Income Focus annuity with the Lifetime Income Benefit 2 rider, according to Cannex, an independent research firm.

Should you be considering annuities, too? If so, how do they best fit into your portfolio?

If you are part of the tidal wave of Americans approaching or already in retirement—17% of Americans are age 65 or older, and almost four million will hit that milestone this year alone—there are annuities designed to ease whatever concern you have about building and sustaining assets. 

Just as regular insurance policies protect against particular risks, such as a flood or an auto accident, insurers design annuities to remove or minimize risks associated with your investments and retirement security. They address not only market-related risks such as losing money in stocks, but behavioral risks, as well.

“The behavioral aspects of investing are just as important to address as the financial aspects,” says Kimberlee Orth, an advisor at Ameriprise Financial in Wilmington, Del., who is both a fee-based financial planner and licensed to sell insurance. “Pulling money out of stocks when the market tumbles or being too conservative is a real risk to retirement security. Annuities can help build a portfolio with a high chance of success and let you sleep at night.” 

Depending on the type you choose, an annuity can protect investments against losses while delivering either a fixed or variable return, provide tax-deferred savings opportunities beyond individual-retirement-account and 401(k) contribution caps, or create a guaranteed pension-like income in retirement.

Annuities can be mind-numbingly complicated and expensive. Investors should do a detailed analysis of benefits and costs, or they could end up with a product that doesn’t address their needs while giving them a “false sense of security,” says Gal Wettstein, senior research economist at the Boston College Center for Retirement Research. For example, certain variable annuities tout guaranteed income, but the level is guaranteed only as long as assets in the account haven’t been depleted.

While many advisors have avoided annuities due to their complexity and costs, more are finding that when selected and used wisely, annuities can improve outcomes. It helps that in recent years fees have trended down and insurers have created a new crop of no-commission annuities designed to be used by fee-based advisors.

Traditionally, annuities were sold primarily through an insurance agent who would collect a commission for a sale. Commissioned products often have higher fees and a surrender period, usually about seven years, during which you must pay a fee to withdraw assets.

A commission structure isn’t necessarily more expensive than a fee structure, when factoring in the fees that advisors charge. But commissions can invite unscrupulous agents to sell pricey products to people who don’t need them. 

Investors should ask advisors how they are getting compensated and what their all-in costs will be, says Mark Cortazzo, a financial advisor at Wealth Enhancement Group in Parsippany, N.J., who uses both fee-based and commissioned products.

“Also, ask how many companies they looked at,” Cortazzo says. “If an advisor only looks at one or two, they might say a 3.4% rate is good, when the range is 4.9% to 3.4%.” 

Most annuities fall into one of two buckets: those used to accumulate assets for retirement, and those used for creating a lifelong income stream.

Barron’s assembled 100 annuity contracts by category and objective in the neighboring tables. Each section highlights competitive offerings and was compiled with the help of Cannex’s database. 

Best Annuities: Guaranteed Income. No Frills.

Fixed-income annuities are tools that turn a lump sum into a lifelong income stream, either immediately or sometime later. Single-life contracts pay for one person’s lifetime. Payments are generally lower for women and couples because their life expectancies are longer. Joint-life contracts are for couples and continue to pay during a surviving spouse’s lifetime.

• Immediate-Income Annuities

Called SPIAs, these contracts turn guaranteed income on right away. Assumes a $200,000 investment at age 70. Payments for “joint life” assume a man is 70 and his spouse is 65.

• Deferred Income Annuities

Called DIAs, these contracts pay out future income. The longer income is deferred, the higher the annual payouts.

Best Annuities: Guaranteed Income With Some Flexibility, Liquidity, and Growth Potential

Annuity contracts with income riders are designed to pay monthly income for life, covering either a single person’s or couple’s joint lifetime. Payouts can be higher than guarantees based on growth of assets in the contract, and assets are more liquid and accessible to investors than in SPIAs and DIAs.

• Fixed-Indexed Annuity Income Guarantees

These riders are purchased on S&P 500 index-linked fixed-indexed annuity contracts with seven-year surrender charge periods. Assumes a $200,000 investment by a 60-year-old. Payout begins at age 70. Joint life assumes a married man and woman are ages 60 and 55.

• Variable Annuity Income Guarantees

These riders are sold as add-ons to variable annuities. Assumes a $200,000 investment by a 60-year-old. Payout begins at age 70. Joint life assumes a married man and woman are ages 60 and 55.

Principal Protection With Upside 

Higher rates make plain fixed annuities an attractive component of a fixed-income portfolio, says David Faskas, a fee-only advisor at KMH Wealth Management in Victoria, Texas. Called multiyear guaranteed annuities, or MYGAs, these simple contracts pay a fixed rate for one to 10 years. If you pull money out within the fixed period, you will be subject to a surrender charge.

“We use them as one of three legs in fixed income,” Faskas says. “Another leg is individual bonds, and the third is a series of bond mutual funds for liquidity and flexibility.”

Annuities are tax-deferred vehicles, making them ideal for fixed income, which would be taxed as ordinary income each year in a taxable account. Assets in annuities can’t be withdrawn without a 10% tax penalty until after age 59½. 

Best Annuities for Accumulation: Downside Protection With Upside

These annuities are designed to tie returns to stock indexes while providing varying degrees of cushion on the downside.

• Registered Indexed-Linked Annuities, or RILAs

These contracts, also referred to as variable indexed annuities, combine some loss protection and upside tied to an index with limits set by caps or participation rates. Assume a $200,000 investment tied to the S&P 500.

• Variable Annuity Variations

• Fixed-Indexed Annuities

To figure out how much to allocate to fixed annuities, Faskas recommends first determining how much liquidity and flexibility you want and ensuring that the mutual fund leg will cover that. “You back into the numbers for how much you can put into the longer-duration investments. Most annuities we use are in the three- to six-year range,” he says.

Consider fixed-indexed annuities alongside plain fixed annuities. Fixed-index annuities guarantee principal, but the annual payout is tied to an index’s performance, usually with a cap that is reset annually.

Current cap rates are higher than in recent years because of rising interest rates, but be sure to look under the hood of the account for all details. For example, sometimes there is both a cap and limit on how much of an index’s return you can participate in. If you have an 80% participation rate and a 10% cap, and the S&P 500 returns 11%, the participation rate limits your maximum return to 8.8%.

Opportunity for Tax-Deferred Savings

If you want to sock more away on a tax-deferred basis, an ultralow-cost variable annuity can be a solution.

Variable annuities, like 401(k)s, have a menu of investments and allow assets to grow tax-deferred. 

While variable annuities can be expensive, with total account fees nearing 2% annually or more, there is a subset called investment-only variable annuities, or IOVAs, which are cheaper to own than most 401(k)s and have no investment limits.

“You can put $1 million in. There are no caps,” says David Lau, founder and CEO of DPL Financial Partners, a marketplace for commission-free, fee-based annuities for advisors. “The additional alpha you can generate through tax deferral is significant.”

Best Annuities: Tax-Deferred Savings

These annuities are used for accumulating assets on a tax-deferred basis. Like in a 401(k), there is a 10% penalty for withdrawing assets before age 59½. These fees and rates assume a $200,000 investment.

• Traditional Variable Annuities

• Fixed Annuities With a Multiyear Guarantee

Consider the half-dozen IOVAs listed in the accompanying table. All have annual account fees of 0.25% or less. Equitable Life’s Investment Edge Advisory has no annual fee for the basic contract. Nationwide’s Monument Advisor stands out not only for its low $20 monthly flat fee—the equivalent of a 0.12% annual fee on $200,000—but also for its 63 alternative investment options alongside 340 traditional ones. 

These contracts are sold by fee-based advisors.

Stock Market Returns With a Cushion

One of the more popular annuity types—a registered indexed-linked annuity, or RILA—is designed for conservative investors as part of a stock portfolio. 

RILAs provide a buffer or floor under a stock index’s performance. In exchange, you forgo dividends and your index return is capped. Some charge an annual fee, but most insurers embed the cost of the downside protection in their caps. 

For example, two of the most competitive RILAs with no fees—offered by Athene Annuity and Life and Pruco Life Insurance—will absorb the first 10% of any losses in the S&P 500 and cap returns at 19.50%.

Another option is to set a floor under your investments. In this case, you eat losses up to 10% or 20%, and the insurer absorbs any excess losses. 

For someone who needs portfolio growth but sits out of stocks fearing losses, RILAs can remove some anxiety and potentially provide the needed growth as part of a stock portfolio. 

Guaranteed Income for Life

With traditional company pensions nearly extinct, creating a guaranteed income stream to supplement Social Security payments can be a salve to investors’ fears of living longer than expected and depleting their assets. “It diversifies the income stream, so when savings are impacted by the markets you can have peace of mind,” says Barbara Selig, a wealth management advisor at TIAA. 

Selig recommends that two-thirds of one’s retirement income come from a combination of Social Security and an annuity stream. Another approach is to arrange for all fixed nondiscretionary expenses—mortgage payments or rent, utilities, car payments, basic living costs—to be covered by Social Security and guaranteed annuity income.  

Peace of mind can have both lifestyle and financial payoffs. “We’ve found that when people have protected income, they have the confidence to spend more in retirement,” says Michael Conrath, head of the retirement insights strategy team at J.P. Morgan Asset Management. “They also have confidence to invest more aggressively in the nonannuity part of the portfolio, which can give more growth and income.” 

Usually, the simplest options—a single premium immediate annuity, or SPIA, and deferred income annuity, or DIA—pay the highest income. SPIAs take a lump sum and turn it into guaranteed income immediately; DIAs turn income on later. The trade-off for high payouts is that they are irrevocable and illiquid. 

But today, fixed-indexed annuities with income riders are offering more-competitive deals than SPIAs and DIAs, and also variable annuities, thanks primarily to high interest rates.

“This is a big advantage to investors, because these products are highly liquid and flexible,” Cortazzo says. Unlike the irrevocable SPIAs and DIAs, once a fixed-indexed annuity’s surrender period expires, you can pull your money back or roll it into a more competitive annuity. 

Variable annuities with lifetime riders are also liquid and flexible, and you can potentially increase payouts based on the performance of investments. But their guaranteed minimum payouts are lower because their benefit levels don’t depend as heavily on interest rates as fixed annuities’ guarantees.

For a 60-year-old investing $200,000 and taking income at age 70, the top four variable annuity income riders guarantee a minimum annual income ranging from $18,468 to $20,160. In contrast, the top fixed-indexed annuity contracts guarantee $27,450 to $29,480. 

Be wary if an advisor is presenting only variable annuity options, without comparing them with different types of fixed annuities. While variable annuities have a higher income potential if the markets have a stellar run, it isn’t a sure thing, says DPL’s Lau. “If you’re looking for guaranteed income, you may not want to try to hit home runs.” 

Corrections & amplifications: Delaware Life’s Accelerator Prime Variable Annuity with the Income Control rider should have been included in the Cannex data provided to Barron’s. A previous version of this article didn’t include it in our ranking. 

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