Fidelity Finds A Ticking Time Bomb In Retirement Plans

Most retirement plans look solid on paper until the day you stop working, and the paychecks stop for good. Fidelity Investments is sounding an alarm that most retirees never see coming until the financial damage has already been done. 

The firm says the gap between your guaranteed income and your essential monthly expenses is far wider than you think. A lifetime income annuity, a product most people avoid on instinct, may be the best tool for closing that gap, according to Fidelity.

The retirement income gap most people never calculate

Social Security replaces roughly 40% of pre-retirement income for the average American worker, according to the Social Security Administration. That leaves a massive shortfall between what you receive each month and what your basic bills demand you pay.

Pensions have nearly vanished from the private sector, with only about 14% of Generation X workers holding a pension plan, according to the National Institute on Retirement Security.

Your essential monthly costs for housing, utilities, groceries, insurance, and health care require a fixed dollar amount every single month. The shortfall between those costs and your guaranteed income has to come from drawing down a portfolio that carries real risk.

What Fidelity says a lifetime income annuity can do for you

A lifetime income annuity works like a personal pension you purchase directly from an insurance company, Fidelity explains in its research. You pay a lump sum up front, and in return, the insurer sends you fixed monthly payments for the rest of your life.

Income that outlasts your lifespan

Among workers who have positive retirement savings, the median balance is $40,000; however, looking at all workers ages 21-64, including those with nothing saved, the median falls to just $955, according to the NIRS in February 2026.

A lifetime annuity eliminates the guesswork about longevity by paying you every month, regardless of how long you live. A 65-year-old woman has a 25% chance of living past 94, which means your plan may need to fund 30 years of expenses.

A predictable paycheck without portfolio management

Managing a retirement portfolio requires ongoing decisions about which positions to sell, when to rebalance, and how to generate income. Fidelity warns that those decisions become increasingly difficult by your 80s and 90s as cognitive decline becomes a real factor.

"One of the strongest reasons to buy a DIA is the foundation it provides for your retirement income plan. You establish a guaranteed level of income no matter what happens over the next several years, and are one step removed from the anxiety of watching the market," said Fidelity Investments Life Insurance Company Vice President Tom Ewanich.

An annuity deposits a set amount into your bank account each month with zero effort or decision-making required.

Protection from market downturns

Retirees who depend on portfolio withdrawals during a bear market face sequence-of-returns risk, which can permanently deplete their savings. Retirees experiencing poor returns in the first five years who did not adjust spending were far more likely to go broke, Morningstar's 2025 research found. 

A fixed income annuity locks in your payout regardless of market performance, creating a financial floor beneath your essential expenses.

A shield against elder fraud and financial abuse

Financial exploitation of older Americans costs victims an estimated $28.3 billion every year, according to a December 2024 interagency statement co-issued by the Federal Reserve, CFPB, FDIC, FinCEN, NCUA, OCC, and state financial regulators.

An irrevocable income annuity removes a portion of your assets from vulnerability because the insurer pays you directly for life.

No one can redirect, drain, or mismanage that income stream once the contract is officially in place with the insurance company.

The spending guilt problem that retirees rarely talk about

Research from the Journal of Financial Planning found that many retiree households spend far less than they can afford. Fear of outliving their money drives them to cut vacations, reduce gifts to grandchildren, and postpone simple purchases. 

This phenomenon costs retirees the quality of life they spent decades saving for and enjoying in their later years. Fidelity argues that locking in a guaranteed income stream through an annuity gives you real permission to spend more freely. 

When your essential bills are covered by predictable payments that never expire, every discretionary dollar in your portfolio becomes truly discretionary. The psychological shift from fear-based budgeting to confidence-based spending can transform the way you experience your retirement years.

More Personal Finance:

• Retirees following 4% rule are leaving thousands on the table
• Fidelity says a $500 policy could protect your entire net worth
• Fidelity’s 4 Roth strategies could save your family a fortune in taxes

Roughly 64% of Americans now say they worry more about running out of savings than about dying, the 2025 Allianz Annual Retirement Study found. That number captures the emotional weight of the exact problem Fidelity is trying to solve with its annuity recommendation. 

You simply cannot enjoy a retirement that you spend every single day worrying about losing to inflation or market downturns. An annuity does not solve every financial problem in retirement, but it does address the psychological toll of constant uncertainty. 

The confidence to book a trip, help a grandchild with college tuition, or stop checking your portfolio balance each morning matters. That peace of mind is worth more than most people realize until they finally experience the freedom that comes with a guaranteed monthly income.

The tradeoffs you need to understand before buying

No financial product is without cost, and Fidelity is transparent about the downsides you should weigh carefully before committing any money. Understanding these tradeoffs is essential before you sign any contract with an insurance company, because this decision is irreversible.

• You permanently surrender liquidity when you purchase a traditional income annuity, and that lump sum is no longer available in an emergency.
• Fixed annuity payments do not adjust for inflation, unless you add a cost-of-living rider, which will reduce your initial payout.
• The guarantee depends on the insurance company's financial strength, so checking A.M. Best credit ratings is essential.
• If you pass away earlier than expected, total payments received may be less than the lump sum you originally invested in the contract.
• By converting savings into an annuity, you forfeit the potential for market growth on that specific portion of your overall portfolio.

The annuity market is booming for a reason

Total U.S. annuity sales reached a record $464.1 billion in 2025, marking the fourth consecutive year of record-breaking consumer demand, LIMRA reported.

Roughly 4.1 million Americans are turning 65 each year during the current Peak 65 demographic wave sweeping across the country. Many of these new retirees lack pensions or guaranteed income sources beyond Social Security, LIMRA noted in its analysis.

Social Security's uncertain future adds urgency

The combined OASDI trust fund reserves will be depleted by late 2034, at which point beneficiaries would receive only 81% of benefits, the Social Security Trustees projected. A typical couple retiring shortly after insolvency could face an $18,400 annual benefit cut if Congress takes no corrective action, the Committee for a Responsible Federal Budget estimated.

How to decide if an annuity belongs in your retirement plan

Financial planner Dana Anspach of Sensible Money recommends calculating your coverage ratio as the first step in this decision process. If less than 50% of your essential expenses are covered by guaranteed income, an annuity is worth serious consideration, Anspach told The Street's Retirement Daily.

• List every non-negotiable monthly expense, including housing, food, insurance premiums, utilities, health care costs, and basic transportation needs.
• Add up your guaranteed monthly income from Social Security and any pension payments you currently receive from former employers.
• Calculate the gap between your essential expenses and your guaranteed income to determine exactly how much additional coverage you need.
• Consult a fee-only financial advisor who can model how adding an annuity would specifically affect your overall retirement income plan.

The bottom line for your retirement security

Fidelity's message is backed by data that is difficult to dismiss for anyone approaching retirement or currently living in retirement. If your guaranteed income does not cover your essential expenses, your plan has a structural weakness that market returns alone may never fix. 

A lifetime income annuity is not right for every retiree, but for those facing a meaningful income gap, it offers certainty that basic bills will be paid.

Talk to a qualified advisor, run the numbers yourself, and make the choice that lets you stop worrying about money every day. The retirement you worked decades to build deserves a plan that holds up no matter how long you live or what markets do.

Related: Fidelity warns health care could derail retirement