How to Buy Your First Annuity: Step-by-Step Guide

If you’re thinking about buying your first annuity, here’s what you need to know. An annuity is a contract with an insurance company that provides a steady income stream in exchange for a lump sum or periodic payments. It’s a popular tool for retirement planning, offering predictable income, tax-deferred growth, and protection from market volatility.

Key Steps to Buy Your First Annuity:

Understand Your Retirement Needs: Calculate your future expenses and compare them to your expected income. Identify any gaps an annuity could fill.
Learn About Annuity Types:
- Fixed: Steady payouts with low risk.
- Variable: Potential for higher returns but tied to market performance.
- Indexed: Combines guaranteed returns with some market exposure.
Compare Providers: Check financial strength ratings, fees, and contract terms. Look for reputable companies with strong ratings.
Customize Your Annuity: Choose payout options (e.g., lifetime income or period certain) and consider optional riders like inflation protection or death benefits.
Work with an Advisor: Consult a licensed professional to ensure the annuity fits your goals and finalize your purchase.

Quick Tips:

Annuities have no IRS contribution limits, unlike 401(k)s or IRAs.
Fees can range from 2% to 5% annually, so review the costs carefully.
Use online calculators to model different scenarios and retirement goals.

By following these steps, you can confidently choose an annuity that aligns with your retirement plans and provides long-term financial security.

How To Buy An Annuity in 2025 (Step by Step Guide)

Step 1: Figure Out Your Retirement Income Needs

Before deciding if an annuity is a good fit for your retirement plan, you need a clear understanding of your financial situation. This involves knowing both your future expenses and the income sources you’ll rely on. By mapping this out, you can identify any shortfalls that an annuity could help fill. Start by breaking down your expected retirement costs to see where additional income may be necessary.

Add Up Your Retirement Expenses

Retirement doesn’t mean your expenses disappear – they just shift. Begin by estimating what you’ll spend based on the lifestyle you plan to maintain. Housing costs often remain a major expense, whether that’s paying off a mortgage, covering property taxes, or downsizing to a smaller home. Healthcare costs, however, tend to increase with age.

For example, retired couples may need anywhere from $188,000 to $366,000 in savings just for medical expenses, depending on their Medicare coverage. Everyday costs like groceries, utilities, and transportation will continue, though you might save on commuting. On the flip side, you may spend more on travel, hobbies, or other activities you’ve been waiting to enjoy.

Find Income Gaps

Once you’ve outlined your expected expenses, compare them to the income you anticipate from all sources. Social Security will likely form a base, but it usually won’t cover everything. Include other income streams like pensions, 401(k) or IRA withdrawals, and any additional savings.

Some experts suggest aiming to save 10 to 12 times your annual income by the time you retire. Another common guideline is the 4% rule, which recommends withdrawing about 4% of your retirement savings each year to make your funds last approximately 25 years.

The reality check comes when you compare your numbers. For instance, while many workers plan to retire at 65, the median retirement age is actually 62. A 40-year-old retiring at 62 with steady contributions might have enough savings to last, but a 30-year-old with lower contributions could risk running out of funds by age 87. Identifying these gaps is essential before considering different types of annuities.

Plan for Longevity and Family Needs

With people living longer than ever – well into their 80s and 90s – your retirement plan needs to stretch further than it might have for previous generations. This means planning for a longer retirement period and ensuring your money lasts.

You’ll also want to think about any financial support you might provide to family members or the legacy you hope to leave behind. These factors can influence both how much income you’ll need and how you structure your retirement savings.

"You can use any of the common suggestions of income multipliers or percentages to guide you, but you’ll likely feel you have more certainty if you ask yourself key questions about what you envision for retirement and then set clear goals. With a defined target, you’ll know better what you’ll need to get you there." – Tina Hurley, Head of Planning & Ultra-High-Net-Worth Solutions, EVP | Citizens Wealth Management

Online retirement calculators can be a helpful tool for creating scenarios and setting realistic goals. These tools let you model different retirement ages, spending habits, and savings rates to see how various choices impact your financial outlook.

The gap between your projected expenses and guaranteed income is where an annuity could come into play, offering consistent payments to help strengthen your financial security in retirement.

Step 2: Learn About Different Types of Annuities

Once you’ve identified your income gaps, it’s time to dive into the world of annuities. These financial products come in various forms, each designed to address specific needs in retirement planning. By understanding how each type functions, you can choose the one that aligns with your financial goals and comfort with risk. Let’s break down the main types and how they structure your income.

Fixed, Variable, and Indexed Annuities Explained

Fixed annuities offer a predictable and steady payout with a guaranteed interest rate. This means your returns remain consistent regardless of market ups and downs. However, the trade-off is that these annuities typically don’t grow as much since they lack market exposure.

Variable annuities function more like investment accounts, allowing you to choose from subaccounts similar to mutual funds. The returns depend on the performance of these investments, so while there’s potential for higher earnings, there’s also the risk of losing money. On top of that, variable annuities often come with higher annual fees compared to traditional mutual funds.

Indexed annuities sit somewhere between fixed and variable options. They offer a minimum guaranteed return while also linking potential additional earnings to the performance of a market index. This setup provides moderate risk and growth potential. Many indexed annuities include a safeguard, ensuring you get back at least 87.5% of your premium, with interest rates usually ranging from 1% to 3%.

Feature	Fixed Annuities	Variable Annuities	Indexed Annuities
Principal Protection	Yes	No	Yes
Market Exposure	No	Yes	Limited
Guaranteed Returns	Yes	No	Minimum guarantee
Growth Potential	Limited	High	Moderate
Risk Level	Low	High	Medium

"If you don’t want to take risk but still want to play the stock market, a good index annuity might be right for you." – Suze Orman

Now that you’ve got a sense of how these annuities balance growth and risk, let’s explore how they pay out income.

How You Can Receive Payments

Annuities offer flexible payout options, and your choice will influence both the amount and duration of your income. Factors like your age, gender, and prevailing interest rates also play a role in determining payouts. These options can help create a steady income stream during retirement.

Lifetime income: This option guarantees payments for the rest of your life, helping to ensure you don’t outlive your savings. You can choose a single-life plan (just for you) or a joint and survivor plan, which continues payments to your spouse. Payments can last even if you live into your 100s.
Period certain: This provides income for a set number of years, such as 10, 15, or 20. If you pass away before the period ends, your beneficiaries typically receive the remaining payments.
Life with period certain: This combines lifetime payments with a guaranteed period. If you pass away during the set period, the remaining payments go to your beneficiaries.

Other options include receiving payouts as a fixed amount or over a fixed period, or opting for a lump sum payment. While a lump sum gives you immediate access to your funds, it eliminates the benefit of a consistent income stream.

Keep in mind that not all annuities offer every payout option. Be sure to confirm that your preferred choice is available with the product you’re considering.

Extra Features and Add-Ons

Many annuities come with optional riders that let you tailor the contract to meet your specific needs:

Inflation protection rider: Adjusts your payments to keep up with rising living costs.
Death benefit rider: Ensures your beneficiaries receive at least your initial investment if you pass away before earning significant income.
Guaranteed minimum withdrawal benefit (GMWB): Allows you to withdraw a set percentage of your account value annually, no matter how the market performs.
Additional riders for long-term care or return of premium can provide extra benefits for specific situations.

While these add-ons offer extra flexibility, they also increase the complexity and cost of your annuity. It’s best to select only the features that align with your financial plan and retirement goals. With these options, annuities can be customized to address specific gaps in your retirement income strategy.

Step 3: Compare Providers and Check Important Details

Now that you’ve familiarized yourself with the different types of annuities, the next step is to evaluate providers. This involves digging into their financial stability, understanding contract terms, and assessing the overall value they offer. Choosing the right provider is key to securing a steady retirement income for decades.

Check Provider Reputation and Financial Strength

When selecting an annuity provider, their financial strength should be at the top of your checklist. Why? Because you’re relying on them to make payments for 20, 30 years, or even longer. With 673 life insurance and annuity providers in the U.S. as of 2023, there’s no shortage of options to consider.

Start by reviewing ratings from multiple credit agencies. AM Best is widely regarded as a reliable source for financial strength ratings, but don’t stop there. Check ratings from S&P Global, Moody’s, Fitch, and Kroll Bond Rating Agency (KBRA) as well. Keep in mind that each agency uses a unique scale, so an A+ from one agency might not mean the same as an A+ from another. Be wary of marketing materials that highlight only the best ratings while ignoring less favorable ones.

Here’s a quick look at how some major annuity providers are rated:

Annuity Company	AM Best Rating	S&P Rating	Moody’s Rating
New York Life	A++	AA+	Aaa
Pacific Life	A+	AA-	Aa3
Prudential	A+	AA-	Aa3
Nationwide	A+	A+	A1
Lincoln National	A	A+	A2
Athene	A	A+	A1

As John Stevenson, CFFOwner and Advisor at Stevenson Retirement Solutions, explains:

"High annuity company ratings are important, but it is important to note that there are some very good annuities sold that are B++. I have had many clients come to me looking for a higher rate of return offered by a B++ rated company versus an A rated company, and in some instances the lower rating is not a problem because they are investing less than the state insured amount."

Additionally, check with your state’s guaranty association to see how much coverage is available if your provider fails. These associations often provide a safety net for annuity contracts, up to a certain limit.

Read Contract Terms and Fees

Annuity contracts are packed with details that can significantly impact your returns and flexibility. Fees alone can eat into your investment over time. For instance, administrative fees average 0.3%, while mortality and expense charges can climb as high as 1.25% annually.

Surrender charges are another important consideration. These fees can start as high as 7% in the first year and typically decrease by 1% each year. If you’re looking at variable annuities, expect additional investment expense ratios ranging from 0.6% to 3% annually, plus optional rider fees that can add another 0.25% to 1.5% each year.

Understanding how agents are compensated is also crucial. Fixed index annuity commissions generally range from 6% to 8%, while immediate annuities might pay agents 1% to 3% in commissions. Rob Williams from the Schwab Center for Financial Research suggests:

"It’s worth asking any time you’re working with someone – whether it’s a firm like Schwab who offers access to annuities, or an individual annuity company or a person – ask ‘how are you being paid? Are you being paid a commission?’"

Finally, review the withdrawal rules in your contract. Some annuities allow penalty-free partial withdrawals after the first year, while others are less flexible. Knowing whether you can make withdrawals without penalties can make a big difference during retirement.

Create a Comparison Chart

A side-by-side comparison can help you identify differences between providers that might not be immediately obvious. Focus on the factors that align with your financial goals and needs, such as fees, guarantees, and withdrawal flexibility.

Here are some key categories to include in your comparison:

Financial Strength: Use ratings from at least two credit agencies, like AM Best and S&P, to assess the provider’s ability to meet long-term commitments.
Fee Structure: Break down all annual fees, including administrative costs, mortality and expense charges, and any rider fees. Calculate the total annual cost as a percentage of your investment.
Guarantees and Returns: For fixed annuities, note the guaranteed interest rate and any bonus rates. For indexed annuities, review participation rates, caps, and floors to understand potential returns.
Contract Terms: Compare surrender periods, withdrawal rules, and minimum investment requirements.
Payout Options: Make sure the provider offers the income options you prefer, such as lifetime payments, joint and survivor benefits, or period certain arrangements.

John Stevenson adds:

"Many agents will sell annuities that are paying higher commissions to themselves, but also providing lower guarantees to you as the consumer. You should be aware of this possible conflict of interest and ask to see ALL annuities available."

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Step 4: Customize and Complete Your Annuity Purchase

Once you’ve compared providers and grasped the key details, it’s time to shape your annuity to fit your personal needs. This step involves selecting your payout method, adding any extra features you might need, and finalizing the purchase with professional guidance.

Pick the Right Payout Option

Your payout option plays a huge role in determining both the amount and duration of your income. Factors like your financial goals, future needs, gender, and life expectancy should guide this decision. The timing of your purchase also affects your monthly payments.

For instance, a $100,000 annuity might pay $1,185/month if purchased at age 30, $1,116/month at age 40, and $915/month at age 50. Buying earlier often means higher eventual payments.

Gender and life expectancy also matter. Women generally live longer than men, which means their monthly payments are typically lower. For example, a 75-year-old man may receive higher payments than a 65-year-old man with a life-only payout option.

Here are the main payout options to consider:

Life Only: Offers the highest monthly payments but stops when you pass away. This might be a good fit if you’re single or your spouse has other income sources.
Joint Life: Continues payments to your spouse after your death, though the monthly amount during your lifetime will be lower.

Other formats include fixed payouts, which provide steady payments throughout retirement (with the insurer taking on the investment risk), and variable payouts, which adjust based on market performance. If you want more flexibility, systematic withdrawals let you change the amount or frequency of your payments as needed.

When reviewing payout options, ask for the exclusion ratio, which shows how much of your payment is tax-free. This can impact your after-tax income. Also, gather quotes from several reliable insurers to compare the current value of your annuity under different payout scenarios.

After deciding on your payout preferences, you can further personalize your annuity by adding riders that address your specific concerns.

Add Riders and Features You Need

Riders are optional features that let you tailor your annuity to cover risks like market downturns, inflation, premature death, or long-term care needs.

However, these add-ons come at a cost. Rider fees typically range from 0.25% to 1.50% of your annuity’s value per year, though some may cost as little as 0.1% to 1% of your annual premium. Long-term care riders, for example, tend to be on the pricier side.

Rider Type	Average Annual Cost
Guaranteed Minimum Withdrawal Benefit	0.50% – 1.00%
Guaranteed Minimum Income Benefit	0.50% – 1.50%
Guaranteed Minimum Accumulation Benefit	0.30% – 1.00%

Living benefit riders provide added income security during retirement. For instance, a Guaranteed Minimum Income Benefit (GMIB) ensures a baseline income no matter how markets perform. Similarly, a Guaranteed Lifetime Withdrawal Benefit (GLWB) allows you to withdraw a fixed percentage annually without exhausting your funds.

Death benefit riders ensure your beneficiaries receive a payout if you pass away before your investment is fully paid out. This could include the remaining account value, initial premiums minus withdrawals, or a stepped-up death benefit.

For inflation protection, a Cost-of-Living Adjustment (COLA) rider ties your income to the Consumer Price Index (CPI), helping you maintain purchasing power over time.

Long-term care riders cover the costs of personal care if you become critically ill, disabled, or unable to care for yourself. Considering that about 60% of Americans eventually need help with daily activities, this rider can serve as an alternative to standalone long-term care insurance.

"Optional riders are available on most annuity contracts to add additional security or guarantees. The most common riders offer protection for future guaranteed income, withdrawals, or a death benefit amount. Adding additional riders will usually add some costs to the annuity contract. Consider the total cost of ownership, which can include product fees, rider fees, and any investment expense ratios." – Stephen Kates, CFP® Principal Financial Analyst for Annuity.org

Keep in mind that some "no-cost" riders may have hidden expenses baked into the annuity structure, potentially lowering interest rates or capping growth. Choose riders based on your personal circumstances, such as health, marital status, and financial priorities.

After customizing your annuity, consult a professional to finalize the purchase.

Get Help from a Licensed Advisor

With your payout and rider preferences in place, a licensed advisor can ensure your annuity aligns with your overall retirement strategy. They can evaluate whether it fits your financial goals, risk tolerance, and lifestyle.

When selecting an advisor, note the difference between captive agents – who represent a single company – and independent agents, who can offer products from multiple insurers. Independent agents often provide a broader perspective by comparing options across providers.

An advisor can walk you through different annuity types, rider options, and how an annuity fits into your larger investment plan. They can also guide you on funding the annuity from sources like banks, brokerages, or retirement accounts, while explaining the tax implications of each choice.

Before signing on the dotted line, review the contract details, including potential best- and worst-case scenarios. A qualified professional will help you understand these scenarios and feel confident in your decision.

Your advisor will also handle the application process, coordinate funding, and clarify ongoing management, making the final steps straightforward.

Step 5: Buy and Manage Your Annuity

Once you’ve tailored your annuity to suit your needs, the final steps involve completing the purchase and managing your income effectively.

Fill Out the Application

The application process for an annuity typically involves a detailed 10–15-page form that collects both personal and financial information. It’s important to fill this out carefully to secure the quoted rate.

Here’s what the application usually includes:

Personal Information: Your name, date of birth, Social Security number, address, contact details, marital status, and, if applicable, your spouse’s information.
Product Selection: Details about the specific annuity product, premium amounts, and any additional features or riders you’ve chosen.
Beneficiary Details: Information about your beneficiaries, including their contact details, tax identification numbers, and relationship to you.
Insurance History: Information on other life insurance policies or annuities you currently hold or have applied for.
Citizenship and Residency: Questions about your citizenship status and any recent residence outside the U.S..

Be sure to sign the application and provide any required confirmations before submission.

Review and Sign the Contract

Before signing the contract, take the time to review every detail. If anything is unclear, ask for clarification. Don’t feel rushed – this is a significant financial decision.

Carefully read through the terms and conditions. Pay close attention to any restrictions, exclusions, or limitations that could impact your income or access to funds in the future.

Key points to focus on include:

Withdrawal Limits: Understand how much you can withdraw annually and ensure it aligns with your financial needs.
Fee Structure: Double-check that all fees, such as management and rider costs, match what was discussed.
Guarantees: Look at the company’s commitments, including minimum payout rates, death benefits, and market protection features.
Financial Strength of the Company: Use rating services to verify the insurer’s financial stability.

Most annuities come with a "free look" period, typically around 10 days, during which you can return the contract for a full refund if you change your mind. If you’re replacing an existing annuity, your agent should clearly explain the pros and cons of the switch to ensure it’s in your best interest.

After signing, the next step is to set up your payout schedule and keep track of your annuity’s performance.

Set Up Payments and Track Performance

With your annuity now active, it’s time to establish your payment plan and monitor its performance regularly.

Setting Up Your Payment Schedule

Your payout option – selected in Step 4 – determines how your income will flow. Now, it’s about putting that plan into action. For example:

Life-Only Payouts: These provide higher payments but do not include a death benefit.
Joint and Survivor Options: These ensure continued payments to a surviving spouse but may result in lower monthly amounts.

If you choose systematic withdrawals, you’ll need to specify the amount and frequency of withdrawals. While this approach offers flexibility, be cautious about the risk of depleting your funds too early. Immediate annuities start payments right after purchase, while deferred annuities begin later based on your chosen timeline.

Monitoring Your Annuity Performance

Regularly review your annuity statements to stay on top of payments, deductions, and any changes. These statements provide a breakdown of the gross payment, adjustments, and the net amount.

For variable annuities, tracking the performance of underlying assets is crucial. Factors like asset performance, earnings assumptions, and mortality rates within your pool can influence your payouts.

Understanding Performance Factors

Insurance companies use several criteria to calculate payouts, including:

The value of underlying assets
Earnings assumptions, often around 4%
Adjustments for mortality experience
Recovery of overpayments

While fixed annuities offer consistent payments regardless of market changes, variable annuities are directly tied to market performance.

Making Adjustments When Needed

It’s a good idea to review your annuity annually to determine if adjustments are necessary. Some contracts allow you to modify payment frequency or amounts, though such changes may involve additional fees or restrictions.

If your financial needs shift significantly, evaluate whether your current annuity still aligns with your goals. Staying informed about your options will help you make sound decisions about your retirement income.

Finally, keep detailed records of all payments, statements, and communications with your insurance company. These documents are essential for tax purposes and for tracking how your annuity is performing over time.

Conclusion: What First-Time Annuity Buyers Should Remember

This guide has walked you through the steps to confidently purchase your first annuity. Let’s recap the essentials.

Before diving in, clarify your retirement goals and consider how an annuity fits into your overall plan. Think about your income needs, risk tolerance, and long-term objectives. As Stephen Kates, CFP® and Principal Financial Analyst for Annuity.org, puts it:

"Annuities offer retirees the opportunity to transfer the risk of their retirement income to an insurance company. Rather than depending on volatile market returns for all of their income, retirees can leverage annuities to add reliability to their regular income stream now or in the future."

Research providers and products thoroughly. With annuity sales hitting $182.7 billion in the first half of 2023 – a 28% jump from the previous year – you’ll find plenty of options out there. Compare different types of annuities, check company ratings, and request written rate quotes. Keep in mind that fees can range from 2% to 5% annually, so understanding the costs is essential.

Take your time before committing. Annuities are long-term investments with limited liquidity. Surrender charges, which often start at 7% in the first year, can make early withdrawals costly. Carefully review your contract to avoid surprises.

Seek advice from a licensed financial advisor. Brandon Renfro, Ph.D., CFP®, RICP®, and Co-Owner of Belonging Wealth Management, emphasizes:

"Annuities can be a great tool to help you generate retirement income or reach other financial goals, but there are many kinds of annuities. It’s important that you understand how they work to know if one is right for you."

A knowledgeable advisor can help you navigate the complexities and ensure you’re considering all your options. Their guidance, combined with your financial goals, can form the foundation for a well-thought-out annuity strategy.

Finally, verify all the details. Work exclusively with licensed agents, read every disclosure, and don’t hesitate to ask questions until you fully understand the terms. Know how much you can withdraw annually and confirm it aligns with your retirement needs.

FAQs

What are the differences between fixed, variable, and indexed annuities, and how do I choose the right one for my retirement goals?

Fixed annuities offer guaranteed payments at a fixed interest rate, making them ideal for those who prioritize stability and predictability. In contrast, variable annuities are tied to market performance, providing the chance for higher returns but with greater risk, making them better suited for individuals comfortable navigating market ups and downs. Indexed annuities sit somewhere in between, linking growth to market performance while offering some protection against potential losses.

When deciding which option is best, consider your risk tolerance, need for steady income, and overall retirement goals. If you value safety and consistent payments, a fixed annuity might be the way to go. For those looking for growth opportunities and willing to accept market volatility, a variable annuity could be more appealing. If you’d prefer a mix of growth potential with some level of protection, an indexed annuity may strike the right balance. Be sure to align your choice with your financial priorities for the future.

How can I choose an annuity provider that is financially stable and trustworthy for long-term income?

When choosing a dependable annuity provider in the U.S., start by examining their credit ratings from respected agencies such as AM Best, Moody’s, Fitch, or S&P Global. Aim for providers with an ‘A’ rating or higher, as this reflects solid financial stability and trustworthiness.

It’s also a good idea to assess the provider’s financial strength and asset reserves. This ensures they have the capability to meet their long-term commitments, giving you peace of mind that they can uphold their income guarantees well into the future.

What fees and charges should I know about when buying an annuity, and how can they affect my retirement income?

When buying an annuity, it’s crucial to be aware of the fees involved and how they might affect your retirement income. Some of the most common charges include:

Mortality and expense risk fees: These typically range from 0.5% to 1.5% annually.
Administrative fees: Usually around 0.3%.
Sales charges or commissions: These can vary widely, from 1% to as high as 8%.

Such costs can chip away at your investment’s growth and reduce the income you’ll receive over time.

High fees, whether they’re upfront or ongoing, can take a noticeable toll on your retirement savings. To make an informed choice, take the time to compare fee structures from different providers and understand how these charges might impact your long-term financial plans. Opting for an annuity with lower fees can help stretch your retirement income further and offer added peace of mind.

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