What Annuities Protect

Many people turn to annuities for protection, but what specific risks do they address? The answer depends on the type of annuity you choose.

At a minimum, annuities protect against one of retirement’s biggest threats: outliving your money. With guaranteed income for a set term or for life, annuities help ensure financial security in your later years. This benefit applies to both fixed and variable annuities.

In addition, fixed annuities can protect against market losses, long-term care expenses, poor financial decision-making, and disruptions to legacy goals. Here’s a breakdown of the protections annuities can offer during retirement and beyond.

Protection Against Market Risk

As retirement approaches, many individuals aim to reduce exposure to volatile markets — or, as economist Roger Ibbotson puts it, “derisk” their portfolios.

Your exposure to market risk should align with your age, risk tolerance, and need for income stability. Alongside Social Security and possibly pensions, you’ll want secure income streams to cover your essential living costs.

Fixed annuities do more than generate income — they also protect your principal from market downturns. Traditional fixed annuities credit a guaranteed interest rate, while fixed index annuities base interest on index performance with downside protection. Even if markets decline, your account value stays intact, and interest credits continue when markets recover.

Protection Against Sequencing Risk

Sequence of returns risk — or sequencing risk — refers to the danger of market losses early in retirement. A downturn at the wrong time, especially while withdrawing income, can compound losses and jeopardize long-term financial security.

Dr. Wade Pfau has shown how sequencing risk can derail even well-planned retirements. Annuities, with their guaranteed payouts, help reduce reliance on volatile portfolio withdrawals and stabilize income regardless of market timing.

Rather than withdrawing from a shrinking portfolio after a drop, annuity owners receive predictable monthly income — reducing pressure and preserving long-term assets.

Protection Against Longevity Risk

With longer lifespans, it’s increasingly common to spend 30 years or more in retirement. This creates the risk of running out of money too soon.

Annuities offer guaranteed lifetime income by pooling funds from policyholders and using actuarial science to estimate life expectancy. Whether your retirement lasts 10 years or 40, your income is backed by the insurance company for the full duration.

Some annuities also allow joint life payouts, so a surviving spouse can continue receiving income after your death. This option provides added peace of mind but usually results in slightly lower monthly payouts.

Protection Against Bad Financial Decisions

Emotional investing can lead to costly mistakes, especially during market downturns. Studies show that when portfolios lose value, investors may panic-sell and lock in losses unnecessarily.

Annuities reduce this behavioral risk by automating your income stream. With payments on autopilot, you’re less likely to make hasty decisions that could impact your financial future.

Protection for Legacy Wishes and Care Services

Many annuities include a guaranteed minimum death benefit, ensuring your loved ones receive a payout if you pass away. Typically, this benefit equals the greater of the contract value or a pre-specified amount.

Some annuities also include features to support long-term care needs. If you require assistance in a nursing facility or at home, the annuity may offer enhanced income for a period of time to help cover these costs.

This enhanced income is often available if you’re unable to perform specific activities of daily living. After the period ends, your income reverts to the previous amount. Check your contract or speak with a licensed advisor to review these options.

Today’s contracts often offer riders à la carte, so you can select the benefits that matter most to you and pay only for what you use.

Annuities Can Protect Your Financial Well-Being

From market risk to longevity and care expenses, annuities provide a wide array of protections. They’re not right for everyone, but when structured properly, they offer powerful safeguards that few other financial tools can replicate.

Risk	How Annuities Help
Market Losses	✅ Fixed and fixed index annuities protect principal from downturns
Sequencing Risk	✅ Provide stable income regardless of market timing
Longevity Risk	✅ Guaranteed income for life, even past age 100
Emotional Investing	✅ Automatic income stream reduces behavioral mistakes
Legacy Interruptions	✅ Death benefits ensure assets pass to heirs
Long-Term Care Costs	✅ Some annuities offer enhanced income for care needs