Can you lose money in an annuity?

Annuities are financial tools that can turn retirement savings into a reliable stream of income, often for life. The promise of steady payments is what makes them appealing to retirees who value stability and peace of mind.

Still, people commonly wonder if you can lose money in an annuity or if it can run out of funds while it's paying out. These are good questions to protect your investments. Neither one is common, but it depends on the type of annuity you choose, or the settlement option you select.

In this article, we'll explain how annuities work, discuss potential risks, review consumer protections and share strategies that can help you safeguard your retirement income.

An annuity is a contract between you and an insurance company that converts your money into a series of payments. It's usually designed to last throughout your retirement years. At their core, annuities are meant to provide income security, but the risks involved depend on several factors, including how the type of annuity you choose is designed to work.

One important distinction is between immediate vs. deferred annuities.

• Immediate annuities have payments that begin right after you purchase the contract, making it a way to secure income quickly.
• Deferred annuities allow your money to grow tax-deferred for years before payments start, which can offer compound interest growth without paying taxes until withdrawals are made.

Another key factor to understand is whether the annuity is fixed, variable or indexed:

• Fixed annuities pay a guaranteed fixed rate of interest for a set period of time, minimizing risk of loss. These are generally the safest type of annuity.
• Variable annuities tie growth to underlying investment options (subaccounts similar to mutual funds), meaning they offer higher growth potential but also expose you to market risk and investment losses.
• Indexed annuities work like a blend of fixed and variable, linking returns to a market index with limits on both gains and losses.

Finally, when they are annuitized (converted to income), annuities can have different types of payout structures, which are central to the question of whether an annuity can run out of money:

• Single life annuities pay income for the remainder of your life.
• Period certain annuities can pay out for a set period (depending on your specific contract), often 10, 15 or 20 years.
• Joint and survivor annuities pay out for the lives of two people. Payments continue to a surviving spouse after the first annuitant passes away.

Yes, you can lose money in an annuity. While many annuities—particularly lifetime annuities—are designed to provide guaranteed income, there are scenarios where you may receive less in payments than you expected or even less than you originally invested.

It's important to understand what "losing money" means in the context of annuities. For some contracts, the value or cash value can decrease because of fees and charges, such as management fees or riders. With variable annuities, your account value is tied to the performance of investments, which means market downturns can reduce your principal. Even indexed annuities, which limit downside exposure, can yield minimal or no growth if the underlying index performs poorly.

Loss also can occur in a more personal sense. For example, if you elect a lifetime income settlement option and die earlier than expected, you may not receive payments equal to the amount you invested, unless you elected options like a period certain or a joint and survivor benefit. In other cases, you might feel like you "lost money" if inflation erodes the purchasing power of your fixed payments over time. This is why some annuities offer cost-of-living adjustment (COLA) riders to help payments keep up with inflation.

The bottom line: Annuities are generally structured to protect against completely running out of income, but they are not immune to risks that can reduce their overall value to you. Knowing these potential outcomes is key before deciding whether an annuity fits into your retirement plan.

Yes, some annuities can run out of money, but most are designed to provide income for life. This is why it's important to understand your options and weigh the pros and cons of annuities before committing.

When it comes to "running out" of money in an annuity, it's generally tied to three separate possible issues:

If you choose a settlement option of a set number of years, say 10 or 15 years, your payments will end once the term expires, even if you are still alive. If you prefer your payments not to stop in the future, you can elect a lifetime income settlement option.

Taking withdrawals from your annuity beyond the amount allowed in your contract can deplete the annuity's principal more quickly, reducing the income available in future years. In some cases, excessive withdrawals also may trigger surrender charges or void guarantees, increasing the risk that your payments won't last as long as intended.

With annuity guarantees, you have to factor in the issuing company's ability to honor the annuity contract. While insurers are heavily regulated and required to maintain strong financial reserves, there is still a theoretical risk of a company failing. Additional layers of protection exist to prevent consumer financial losses, though. State guaranty associations, for example, provide a safety net typically up to $250,000 per person per insurance company (though limits vary by state), similar to FDIC coverage for banks but with some key differences.

However, fraternal benefit societies, like Thrivent, do not participate in state guaranty associations and are responsible for their own solvency, or the ability to meet long-term financial obligations.

While market losses or early death can affect how much value you ultimately receive, a lifetime annuity itself is purposefully designed to ensure you do not outlive your income.

While annuities are often seen as dependable sources of income, certain risks can reduce or even cut off payments, depending on how the contract is structured and who issues it. Understanding these threats is essential because the security an annuity provides is only as strong as the decisions made at purchase and the financial health of the company behind it.

These are some of the key factors that can impact your payouts:

Annuity guarantees are backed by the claims-paying ability of the insurance company that issues them. If that company runs into financial trouble, it may struggle or fail to meet long-term obligations. This is why checking insurer ratings from AM Best, Moody's or Standard & Poor's before purchasing is crucial. While failures are rare and state guaranty associations or maintenance of solvency provisions offer some protection, the risk still exists, much like a bank that collapses during a crisis.

Selecting a payout option, such as a 10-year period certain, may seem appealing for higher short-term income. But if you live 30 years, those payments will stop long before your retirement ends, leaving a significant income gap.

Variable and indexed annuities tie growth to investment markets or market indexes. A severe downturn (like the 2008 financial crisis or 2020 market decline) could shrink your account value, reducing future payment potential or triggering lower guaranteed income amounts if you annuitize during a down market. For example, someone retiring during a market decline may see lower lifetime income than expected.

High fees or taking excess withdrawals can erode the money in your account. Similarly, cashing out early may trigger steep surrender charges, leaving you with far less than you put in.

By recognizing these risks ahead of time, you can structure your annuity in a way that better safeguards your retirement income.

Annuity owners are protected by several safeguards designed to reduce the risk of losing income if an insurer fails. Every state has a guaranty association that steps in to cover annuity holders up to certain limits, though the amount varies by state. Unlike banks, insurers are regulated at the state level, with strict requirements to maintain financial reserves.

As mentioned, fraternal benefit societies do not participate in these associations, but are nevertheless closely regulated by state authorities to help ensure financial solvency and safeguard member interests. Independent rating agencies such as AM Best, Moody's and Standard & Poor's provide financial strength ratings that help consumers gauge an insurer's stability before purchasing. Together, these protections add an important layer of security.

A timeless principle for any investment is diversification: never rely on a single product for all your retirement income. An annuity can provide valuable stability, but it should complement, not replace, other sources such as Social Security, pensions and investment accounts. With that in mind, here are some practical steps to reduce annuity risks:

1. Choose a financially strong insurer. Look for companies with solid ratings from agencies like AM Best or Moody's, as their strength directly affects your annuity's security.

2. Understand the payout structure. Know whether your income lasts for life, a set period or through a joint and survivor option, so you aren't surprised later.

3. Use withdrawals carefully. Taking out more than allowed or borrowing against your annuity can reduce principal and trigger penalties, leaving less income in the long run.

4. Review your annuity in context. Check periodically to ensure the annuity still fits within your broader retirement plan, adjusting if your goals or needs change.

5. Consider riders to protect against losses. A guaranteed lifetime withdrawal benefit (GLWB) rider allows you to withdraw a set percentage of your original investment (or a benefit base that may grow) each year for life, even if market performance reduces your account value to zero. This feature ensures you continue receiving income regardless of investment losses, helping protect against "losing money" in a deferred variable annuity. Some riders may be added at an additional cost to the contract.

6. Seek professional guidance. Working with a financial advisor with knowledge of annuities can help you compare products, understand fees and align the right kind of annuity with your overall strategy.

By following these steps, you can strengthen the role of an annuity in your retirement plan while reducing the risk of unpleasant surprises.

Yes, annuities are considered by many experts to be a relatively low-risk way to generate retirement income. When structured with lifetime guarantees, they provide predictable payments for as long as you live, offering protection against one of the greatest retirement fears: outliving your savings. This stability makes annuities a useful complement to other income sources such as Social Security, pensions and withdrawals from 401(k)s or IRAs, helping to balance both guaranteed and flexible income.

Still, it's important to remember that the level of safety depends on several factors. The type of annuity, such as fixed, variable or indexed, determines how exposed you are to market swings. The financial strength of the issuing insurance company influences how reliable the guarantee will be. And the contract terms you choose, from payout structure to fees, affect what you ultimately receive. In short, annuities can be a safe and effective option, but not all annuities are the same.

Annuities don't typically run out of money if they are structured correctly, especially when lifetime income guarantees are included. While it's true that certain choices, fees or market factors can affect what you receive, the core benefit of an annuity is protection against outliving your savings. The key is doing your due diligence and understanding the contract, the insurer and how it fits with your broader retirement plan.

Regularly reviewing your annuity ensures it continues to meet your needs. A Thrivent financial advisor can help you evaluate your annuity options and explore alternatives tailored to your long-term goals.