Many Americans Buy Annuities To Avoid Market Risk. Here Are The 4 Risks They Take On Instead

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Retirees usually buy an annuity for one reason: they want income that keeps coming whether stocks rise or fall, and passing market risk to an insurance company can make sense. It also creates four other exposures, and each one affects a retiree differently after the contract is signed.

Annuities come in many forms. As Suze Orman described them on her podcast, “They might guarantee you an interest rate for a specific period of time. They might guarantee you income for life.” Every type rests on the same foundation, and the guarantee is only as good as the issuing insurer’s claims-paying ability. Here is what retirees take on in exchange.

1. Inflation Risk: Fixed Checks Buy Less Every Year

A standard fixed annuity pays the same dollar amount for life, but prices keep rising. The Consumer Price Index stood at 336.298 in September 2026. That was up 0.6% from a month earlier and up from 325.063 in November 2025, a rise of 3.46%. Social Security adjusts for rising prices: the 2026 COLA was 2.8%, and the 2027 COLA is 3.6%. Most annuities don’t rise automatically unless the contract includes an inflation-linked or cost-of-living feature.

Hypothetical example: Suppose a retired teacher locks in $1,000 a month. If prices rise 3% a year for 20 years, that check would eventually buy what about $554 buys on day one.

How people manage it: Some buyers add an annual-increase feature and accept a lower starting payment, while others annuitize only enough to cover fixed necessities alongside Social Security and keep the rest invested for growth. Clark Howard has said retirees must “deal with the long trend of inflation” through the years of retirement.

2. Insurer Risk: Your Guarantee Depends on One Company

When an annuity is sold as “guaranteed,” the guarantee comes from the insurer’s claims-paying ability. Bank CDs carry FDIC deposit insurance, but annuities rely on a different backstop. If an insurer fails, state life and health insurance guaranty associations step in, and limits on benefits and coverage are established by state law. Your protection depends on where you live, what type of contract you own and how much you hold with a single company.

How people manage it: Look up your own state guaranty association’s limits before buying. Review the insurer’s financial strength ratings from independent rating agencies. Retirees putting in large amounts often split purchases across several insurers so each contract stays within their state’s coverage.

3. Liquidity Risk: Annuitized Money Is Hard to Get Back

Annuitizing turns a lump sum into a payment schedule, and the lump sum leaves your balance sheet. You can’t draw on that principal to pay for a new roof, a large medical bill or long-term care. Under a life-only payout, payments also stop at death. Orman has noted that with a single premium immediate annuity, “the highest payout life only” option is the one that pays the most each month. It is also the version that leaves nothing behind.

How people manage it: Keep a separate cash reserve. The national average 12-month CD rate was 1.76% as of October 2026, and top online banks routinely pay well above that average. A CD or Treasury ladder releases money on a set schedule. Some buyers annuitize only part of their savings, or add a cash-refund or period-certain feature in exchange for smaller payments.

4. Surrender Charge Risk: Leaving a Deferred Contract Early Costs Money

Deferred annuities, including MYGAs, fixed indexed annuities and variable annuities, build value before income starts. Most charge surrender fees if you withdraw more than a set free amount during the early years. Schedules differ from contract to contract, so the only figures that apply to you are the ones in your own contract.

Taxes can add to the cost. For a nonqualified contract, IRS Publication 575 is clear. It says withdrawals made before the annuity starting date are allocated first to earnings (the taxable part) and then to your cost (the tax-free part). Under 26 U.S.C. § 72(q)(1), the taxable portion of an early withdrawal also owes an additional 10% tax. Exceptions include distributions made on or after age 59½ (§ 72(q)(2)(A)) and payments under an immediate annuity contract (§ 72(q)(2)(I)).

How people manage it: Choose a surrender period that ends before you expect to need the money, and read the free-withdrawal provision closely. Before a 1035 exchange into a new contract, ask whether the switch starts a new surrender schedule.

Who Comes Out Ahead on These Tradeoffs, and Who Doesn’t

These risks are more likely to be worth carrying for retirees who:

• Have essential expenses that Social Security and any pension leave uncovered, and want that gap filled for life.
• Expect a long retirement and worry more about outlasting their savings than about leaving an estate.
• Already hold a separate emergency fund and won’t need the annuitized money for surprises.
• Can spread purchases across insurers to stay within their state’s guaranty limits.

They weigh more heavily on retirees who:

• Have modest total savings, where tying up a large share leaves no buffer.
• Face health conditions that shorten life expectancy and reduce the value of lifetime payments.
• Already cover most expenses with inflation-adjusted Social Security and pension income.
• May need a large sum during the surrender period, such as for a home purchase or to help family.

Before signing, get written answers to five questions. Ask what supports the guarantee, what your state’s guaranty association covers, how payments respond to inflation, what it costs to get out and how withdrawals will be taxed. Orman has said she has no problem with income annuities for people who want “guaranteed income”. She has also said variable annuities, in her view, “make absolutely no sense” most of the time. Compare any offer against a CD or Treasury ladder and against delaying Social Security, then decide where, if anywhere, an annuity fits.

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