Retirement Annuities: Overview, Types, Pros & Cons, Alternatives

It provides guaranteed retirement income, but there are downsides to know about.

By Lyle Daly – Updated May 13, 2025 at 2:53 PM EST | Fact-checked by Frank Bass

Key Points

Retirement annuities provide a guaranteed income, which is useful if you're unsure about the longevity of your savings.
Annuities come with fees such as administration and investment costs, affecting long-term returns.
Alternatives like Social Security or dividend stocks offer income with varying degrees of reliability.
The $23,760 Social Security bonus most retirees completely overlook ›

A retirement annuity provides guaranteed income in your senior years. That may sound like a solution you need -- particularly if you don't know how long your savings will last. But, like any financial strategy, annuities have their drawbacks. To avoid unpleasant surprises later, it's smart to evaluate the pros and cons before you lock up your cash in an annuity.

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An infographic outlining five common types of retirement annuities. — Image source: The Motley Fool.

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Pros

Cons

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Dividends: Dividend stocks could also generate lifelong income. Unfortunately, this is not guaranteed. A company always has the option to lower, suspend, or cancel its dividend.

The good news is that some dividend stocks are more reliable than others. Dividend Aristocrats® (the term Dividend Aristocrats® is a registered trademark of Standard & Poor’s Financial Services LLC), for example, are companies that have paid and increased their dividends for 25 or more consecutive years. There's also a group of 50-year dividend increasers called Dividend Kings.

Dividend Aristocrats and Dividend Kings don't guarantee dividends, but they won't be quick to cancel a dividend, either. If you can handle some risk, these stocks are suitable options for retirement income.

Relative to annuities, dividend stocks have more uncertainty but greater income potential. You'll earn the dividend income, plus your stocks should also appreciate over time.

The premium for guaranteed income

A retirement annuity guarantees income for a specific duration or for the rest of your life. That guarantee can be comforting, especially if you're worried about outliving your savings. A big downside is that annuities charge a premium for the peace of mind they provide.

Fortunately, you don't necessarily have to choose between an annuity and other income strategies.

Your retirement plan can incorporate multiple income sources -- an annuity, a strategically timed Social Security benefit, plus dividend income, for example. Diversifying in that way can soften the drawbacks of each income source, including your annuity's fees and the uncertainty of a dividend portfolio.

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About the Author

Lyle Daly is a contributing Motley Fool stock market analyst covering information technology and cryptocurrency. Lyle has been a contributor at the financial services company since 2018. His work has been featured on USA Today, Yahoo Finance, MSN, Fox Business, and Nasdaq. Before joining The Motley Fool, he wrote for financial brands including Intuit.

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