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For organizations that want to support employee interest in guaranteed lifetime income, annuities naturally enter the conversation. But an annuity is not necessarily right for every retiree.
In this article, we cover the potential advantages and disadvantages of a lifetime retirement annuity, explore the underlying issue impacting retirement, and share alternative income options that organizations and individuals may be able to use to support retirement income goals.
Whether or not an annuity is appropriate depends on the unique circumstances of the retiree. If one has reached retirement age, holds a significant sum, and is seeking guaranteed lifetime income, then a lifetime annuity may be beneficial.
However, saving for retirement in the first place remains a significant challenge for many individuals, limiting the benefit of an annuity in the first place. And the contribution limits and onus to save placed on holders of a 401(k)s or other defined contribution plan do little to resolve this issue.
For organizations seeking lifetime income solutions for employees, the challenge of saving for retirement should be addressed.
There is no single income option that’s best for all retirees. One of the most significant differentiators, though, is income that comes from accumulated retirement savings versus income from a guaranteed lifetime income source. Each comes with a trade-off that can help determine which solution might be more appropriate.
Retirement savings income, often associated with 401(k)s or other Defined Contribution models, comes with greater flexibility, but also longevity risk. Concerns include running out of savings or underspending to help savings last, resulting in a diminished quality of life.
For retirees seeking guaranteed lifetime income beyond Social Security or a traditional pension, annuities are one of the most established options. Certain annuities can provide predictable payments for life, helping retirees address the risk of outliving their savings. However, these guarantees often come with trade-offs, including reduced flexibility, additional costs, and reliance on the financial strength of the insurer.
Not all annuities are designed to provide income for life. Some are intended to accumulate savings over time, while others provide payments for a fixed period, such as 10 or 20 years.
A lifetime retirement annuity broadly refers to an annuity structured to provide regular income for the remainder of a retiree's life. Several types of annuities can offer this benefit, including immediate and deferred income annuities, as well as certain fixed, indexed, and variable annuities.
Depending on the contract, lifetime income payments may begin immediately or at a future date. Retirees may also select additional features, such as survivor benefits for a spouse, though these options can reduce the initial payment amount.
For someone considering an annuity, the appropriate product and amount to commit will depend on their broader retirement strategy, other sources of income, and financial needs.
As a general example, a 65-year-old who uses $100,000 to purchase a single-life immediate annuity might receive roughly $650 per month for life, or about $7,800 annually. However, actual payments vary by insurer, market conditions, purchaser characteristics, and contract terms.
By exchanging a lump sum for a series of payments, lifetime retirement annuities can give retirees a reliable source of income. However, that reliability comes with trade-offs, including less flexibility and liquidity.
Predictable lifetime income: An annuity can provide regular payments for as long as the purchaser lives, creating a dependable source of retirement income.
Financial security: Because payments continue for life, an annuity can help address longevity risk, reducing the likelihood that they will outlive their savings.
Less exposure to market fluctuations: Depending on the type of lifetime annuity, income may be largely protected from market fluctuations, which can provide a greater sense of financial security.
Simplified retirement planning: The exact value of payments can make it easier to plan around other financial needs in retirement.
Costs and fees: Depending on the type of annuity, insurer expenses and fees may be incorporated into the contract's pricing or charged separately. These costs can affect the income or benefits the purchaser receives.
Reduced flexibility: The assets used to purchase a lifetime annuity are often less accessible than alternatives, like an investment account.
Limited investment potential: With certain lifetime income annuities, exchanging savings for guaranteed payments reduces the opportunity for investment growth compared to maintaining those assets in an investment account.
Inflation can reduce purchasing power: Inflation and the fixed payments of an annuity can reduce purchasing power over time.
The treatment of payments after death varies: How payments are treated after the retiree dies will depend on the annuity. But additional options, like survivor benefits, will often result in lower initial payments.
Reliance on the Insurer: Annuities are backed by the insurer. If the insurer has financial challenges, it can impact the security of the retiree’s annuity. Some states offer additional protections in these situations, depending on the type of annuity purchased.
For organizations seeking to help employees build retirement savings and access lifetime income, Cash Balance plans offer another approach.
As a Defined Benefit plan, Cash Balance plans deliver a guaranteed benefit in retirement. But unlike a traditional pension, that benefit is expressed as an account balance and typically earns interest based on the actual trust return, similar to a 401(K).
According to October Three’s 2026 Lifetime Income Report, Defined Benefit plans, like Cash Balance plans, can provide 20% - 30% more income in retirement compared to insurance-based products like annuities.
These plans come with additional costs, risks, and legal requirements. However, some designs, like Market-Based plans, can help reduce that risk when compared to traditional designs.
Important Update
On January 14th, 2026, the Board of the FASB took a big step towards clarifying the accounting treatment for Market-Based Cash Balance plans. Once finalized, these steps will mean that well-managed daily-valued Market-Based Cash Balance plans will be immune to the accounting risk and volatility typical of defined benefit pension plans. Click here to learn more about this update.
Cash Balance plans can be effective tools to deliver lifetime income. But they come with additional requirements and costs. October Three can help you navigate whether a Cash Balance plan might work your organization. Click below to learn more about these plans, and how they might help your employees save for retirement.