Is this the key to unlocking guaranteed income in retirement?

Vanguard is launching a new 401(k) target-date fund that will allow older workers to roll some of their savings into a fixed annuity. The product, launched in partnership with financial services company TIAA, will be available in 2026.

“It provides retirement plan participants with a direct, cost-effective way to obtain guaranteed income for life and supports the evolving needs of Americans as they prepare for retirement,” David Stinnett, president of Vanguard Strategic Retirement Consulting, said in a written statement.

Vanguard’s announcement comes as annuities grow in popularity. Total annuity sales in the United States rose to a record $119.2 billion in the second quarter of 2025, according to LIMRA.

But this complex financial instrument, which works more like a self-funding pension plan, has its pros and cons. Learn how to decide if an annuity is right for you.

Are annuities a smart move for retirement income?

Annuities are usually sold by insurance companies. They allow users to set up a fixed income stream, usually for retirement, by making a lump sum or series of payments, which the insurance company later pays out at regular intervals for a specified period or perhaps for the rest of your life.

There are different types of pensions. Fixed annuities offer a guaranteed but modest return. Variable and indexed annuities are market-based and offer more opportunities for growth. Most of them come with tax advantages. For example, any earnings are tax deferred—that is, you pay taxes on your annuity when you start taking withdrawals.

“Annuities can work well for retirees who are concerned about outliving their savings or who are struggling emotionally with market fluctuations and want a predictable paycheck in retirement,” said Carson Odom, a wealth advisor at Adams Wealth Partners.

But it is not suitable for everyone, as annual contracts are often very complex and expensive. In addition to the lump sum or annuity payments, many charge administrative fees, maintenance fees, mortality expenses, and agent commissions. They also come with a surrender fee, which means you’ll pay well into the first few years of the contract if something happens and you need to access that money.

“Investors with large liquid assets, strong pensions, high risk tolerance, or large legacy goals often don’t need annuities,” Odom said.

Things to consider when purchasing an annuity

Take these steps if you’re trying to decide whether you should add an annuity to your retirement plan.

• Determine whether you can cover retirement expenses with other guaranteed income, Such as social security or workplace pension. “Annuities can be useful when there is a gap between expected spending and expected income,” said Yuri Nosenko, a wealth advisor at Imperial Fund Asset Management. “In practice, people usually pay only the portion necessary to cover their essential, non-discretionary expenses, while keeping the rest invested for growth and liquidity.”
• Calculate the full costs of an annuity. In addition to recurring fees and commission fees, ask if you’re paying for any special features or riders. For example, insurance companies often charge higher fees for increased death benefits, long-term health insurance, cost of living adjustments (COLA), and more.
• Understand the true tax benefits, Because it varies, depending on how the annuity is structured. Annuity gains are also taxed as ordinary income, not capital gains, so you may end up paying more on deferred funds if your income is high at the time of withdrawal. Additionally, “when an annuity is purchased within an IRA or 401(k), the tax benefits may be limited, because these accounts already provide a tax deferral,” Nosenko said.
• Take care of your health, Since most pensions penalize you if you withdraw money during the first few years of your contract, ultimately, these products are best for people worried about outliving their retirement savings. “Also make sure the insurance company is quality,” Odom said. “You are effectively lending money to an insurance company for decades; balance sheet strength is more important than marketing promises.” You can ascertain the strength of an insurance company by checking AM Best or Standard & Poor’s (S&P) ratings.
• Consult a specialist. Annuity contracts are not always clear. It’s long, full of legal jargon, and comes with built-in costs that are difficult to define, understand, and compare to other offers. A Certified Financial Planner (CFP®) or other credentialed professional can help you choose the best annuity for your retirement needs.