Few financial products generate as much confusion, and as much strong opinion, as annuities. Some retirees are told never to touch one; others are sold one without understanding what they actually bought. The truth sits in between: an annuity is a tool, not a strategy on its own, and whether it belongs in a South Jersey retiree's plan depends entirely on the specific situation. This guide breaks down what annuities are, the main types, and when they tend to make sense, and when they don't.
This is written for South Jersey retirees and pre-retirees in Marlton, Cherry Hill, Voorhees, Mount Laurel, Medford, and Berlin, as well as those in Washington Township, Sewell, Mullica Hill, Glassboro, Deptford, and Woodbury across Gloucester County, who are weighing whether guaranteed income has a place in their retirement plan.
What an Annuity Actually Is
At its core, an annuity is a contract with an insurance company: in exchange for a lump sum or a series of payments, the insurer agrees to pay income back, either starting immediately or at some point in the future, often structured to last for life. That's the appeal, a stream of income that doesn't run out, regardless of how long the retiree lives or how markets perform in a given year. The tradeoffs of cost, flexibility, and how the underlying money is invested vary significantly by type of annuity, which is where most of the confusion comes from.
The Main Types of Annuities
Fixed annuities pay a guaranteed, set interest rate for a specified period, similar in spirit to a CD but issued by an insurance company rather than a bank. They're the simplest and generally the most conservative option.
Fixed indexed annuities credit interest based partly on the performance of a market index (like the S&P 500), typically with a cap on the upside and a floor that prevents losses from market declines. They aim to offer some upside participation with downside protection, though the caps and participation rates vary widely between contracts and matter enormously to the actual return.
Variable annuities invest the underlying funds in subaccounts similar to mutual funds, meaning the account value can go up or down with the market. These typically carry more fees than fixed products, but can also offer optional living-benefit riders that guarantee a minimum income regardless of how the underlying investments perform.
Immediate annuities convert a lump sum into an income stream that begins right away, often used specifically to create a "pension-like" income floor at or near retirement.
Deferred income annuities work similarly, but the income stream begins at a specified future date, which can make them useful for addressing "longevity risk". The risk of outliving other savings later in retirement.
Where Annuities Can Genuinely Help
Covering essential expenses. Some retirees like knowing that a base level of guaranteed income, combined with Social Security covers non-negotiable expenses like housing and healthcare, regardless of what the stock market does in any given year.
Reducing sequence-of-returns risk. As discussed in ourretirement planning guide for Marlton, NJ, a market downturn in the years immediately before or after retirement can do outsized damage to a portfolio that's actively being withdrawn from. A guaranteed income layer can reduce how much a retiree needs to pull from market-based investments during a downturn.
Longevity protection. For someone concerned about outliving their savings, a real risk given that retirements can now last 25-30 years or more, an annuity's lifetime income guarantee directly addresses that specific fear in a way a portfolio alone cannot.
Where Annuities Tend Not To Be The Right Fit
When liquidity matters most. Annuities typically involve surrender periods of years during which withdrawing more than a set amount triggers a penalty. Anyone who anticipates needing significant access to a lump sum should weigh this carefully.
When fees aren't understood. Variable annuities in particular can carry a combination of mortality and expense charges, administrative fees, subaccount fees, and rider costs that compound over time. These aren't inherently disqualifying, but they need to be weighed against exactly what guarantee is being purchased.
As a way to "beat the market." Annuities are fundamentally an insurance product designed for guaranteed income and risk transfer, not a growth vehicle. Anyone buying one expecting market-beating returns is likely to be disappointed and has probably been sold the product for the wrong reason.
Without understanding the surrender schedule and any riders. Annuity contracts are dense, and the details of the surrender schedule, any income or death-benefit riders, and how interest crediting actually works matter far more than the marketing brochure.
Understanding Annuity Riders
Many annuities, particularly variable and fixed indexed contracts, offer optional riders add-on features purchased for an additional annual cost. The most common are guaranteed lifetime withdrawal benefit (GLWB) riders, which guarantee a minimum annual withdrawal amount for life even if the underlying account value drops to zero, and death benefit riders, which guarantee that a beneficiary receives at least a specified amount (such as the original premium) even if the account value has declined. Riders can genuinely add value, but they also add ongoing cost, and that cost compounds over the life of the contract. The right question isn't whether a rider sounds appealing in a sales presentation, but whether its guarantee is worth its specific annual cost given the rest of a household's plan, a calculation that depends heavily on the exact contract terms.
How Annuities Are Taxed
Tax treatment depends on whether the annuity is "qualified" (funded with pre-tax retirement dollars, such as inside an IRA rollover) or "non-qualified" (funded with after-tax dollars). In a qualified annuity, withdrawals are generally taxed as ordinary income, similar to any other traditional IRA distribution (theIRS's guidance on annuity taxation covers the general framework, though specific contracts vary). In a non-qualified annuity, only the earnings portion of each withdrawal is taxed as ordinary income, while the return of original principal is not (this is often called the exclusion ratio for annuitized payments). Both types can trigger a 10% early withdrawal penalty on the taxable portion if accessed before age 59½, similar to other retirement accounts, see the SEC'sInvestor.gov overview of annuities for a plain-language rundown of how these products are structured and regulated. Because annuities don't receive the same capital-gains tax treatment as stocks held in a taxable brokerage account, tax treatment is an important factor, not an afterthought, in deciding where an annuity fits within a broader account structure.
How Annuities Fit Into a Broader Retirement Plan
An annuity is rarely, by itself, a full retirement strategy. It's typically one layer within a broader plan that also includes a diversified investment portfolio, Social Security timing decisions, and tax-aware withdrawal sequencing, which is the same building blocks covered in ourinvestment services overview. The right question isn't "should I buy an annuity," but "does adding a guaranteed income layer improve my overall plan, and if so, which type and how much?"
For anyone who still has an old employer plan or annuity sitting in a former 401(k), it's also worth understanding how rolling that over works before making a decision, see our401(k) and IRA rollover guide.
A Realistic Example: Weighing an Annuity for a Cherry Hill Retiree
Consider a hypothetical retiree in Cherry Hill, age 66, with a paid-off home, Social Security, a modest pension, and savings split between an IRA and a taxable brokerage account. Her essential monthly expenses are mostly covered by Social Security and the pension, but she's uneasy about a market downturn forcing her to sell investments at a loss to cover expenses in a bad year. In this kind of situation, some retirees choose to allocate a portion of an IRA into an income-oriented annuity specifically to close that gap, while keeping the remainder invested in a diversified portfolio for growth and flexibility. Others in a similar position decide their existing guaranteed income sources are sufficient and prefer to keep all their savings liquid and market-invested. Neither choice is inherently right. It depends on how much guaranteed income already exists, how the retiree feels about market volatility, and what other resources are available. This is a hypothetical illustration only, not a recommendation for any specific individual's circumstances.
Working Through an Annuity Decision with a South Jersey Advisor
Because annuity contracts vary so much in structure, cost, and guarantees, this is an area where an independent perspective matters. Spectrum Wealth Partners, based in Marlton, NJ, works with South Jersey retirees, including those in Marlton, Voorhees, Cherry Hill, Mount Laurel, and Berlin, as well as Washington Township, Sewell, Mullica Hill, and Glassboro in Gloucester County to evaluate whether an annuity fits a given plan, and if so, which structure and carrier actually make sense for that household's goals, rather than starting from a specific product and working backward.
South Jersey Areas We Serve for Annuity and Income Planning, from the Philadelphia Suburbs to the Jersey Shore
Annuity and guaranteed-income planning with Spectrum Wealth Partners extends well beyond Marlton, reaching South Jersey retirees from the Philadelphia-suburb towns of Camden County all the way down to the Jersey Shore, through in-person, phone, or video meetings.
Camden County: West Berlin, Berlin, Cherry Hill, Voorhees, Gibbsboro, Atco, Sicklerville, Somerdale
Burlington County: Marlton, Evesham Township, Mount Laurel, Medford, Moorestown, Southampton
Gloucester County: Washington Township, Sewell, Mullica Hill, Glassboro, Deptford, Woodbury, Turnersville, Williamstown
Atlantic County: Egg Harbor Township, Galloway, Hammonton, Absecon, Somers Point, Atlantic City
Cape May County: Ocean City, Sea Isle City, Stone Harbor, Avalon, Cape May, Wildwood
Cumberland & Salem Counties: Vineland, Millville, Bridgeton, Salem
Guaranteed income decisions matter just as much for a retiree in a Philadelphia-suburb town like Voorhees, further out in Washington Township, as for one settling into a home down the shore in Ocean City or Cape May, the underlying South Jersey and New Jersey considerations are the same.
Frequently Asked Questions
Are annuities a good investment?
Annuities aren't designed to be an investment in the growth sense. They're an insurance contract designed to transfer longevity and market risk to an insurance company in exchange for guaranteed income. Whether one is "good" depends entirely on whether that guarantee is worth its cost for a specific household's situation.
What is the difference between a fixed annuity and a variable annuity?
A fixed annuity pays a guaranteed, set rate of return. A variable annuity's value fluctuates based on the performance of underlying investment subaccounts, meaning it can gain or lose value, though optional riders can guarantee a minimum income regardless of investment performance.
Can I lose money in an annuity?
It depends on the type. Fixed and fixed indexed annuities are structured to protect principal from market losses (though early withdrawal can trigger surrender charges). Variable annuities can lose value if the underlying subaccounts perform poorly, unless a specific guarantee rider applies.
How much of my retirement savings should go into an annuity?
There's no universal percentage. It depends on other income sources like Social Security or a pension, the size of the overall portfolio, and how much guaranteed income is needed to cover essential expenses. This is a calculation that should be run against a specific household's full financial picture.