A lifetime income annuity is often marketed as a way to “never run out of money” in retirement. While that promise can be valuable, it only tells part of the story. Understanding the disadvantages of a lifetime income annuity is critical before committing retirement assets, because many of the tradeoffs are permanent and difficult—or impossible—to reverse.

At Diversified Insurance Brokers, we help retirees evaluate lifetime income annuities alongside other retirement income strategies, including fixed annuities, fixed indexed annuities, and structured withdrawal approaches. The goal is not to promote or dismiss lifetime income annuities, but to understand when their disadvantages matter, who they affect most, and how to mitigate them through smarter planning.

This page takes a deep, practical look at the disadvantages of lifetime income annuities, explains why they exist, and shows how many retirees address them using blended strategies rather than all-or-nothing decisions.

Understanding What a Lifetime Income Annuity Actually Is

Before discussing disadvantages, it’s important to clarify what a lifetime income annuity does. In its simplest form, you exchange a lump sum of money for a guaranteed income stream designed to last as long as you live. The insurance company assumes the risk that you might live longer than expected.

This structure solves one specific problem: longevity risk. However, solving that problem introduces other tradeoffs that can significantly impact retirement flexibility, legacy planning, and long-term purchasing power.

Many retirees evaluate lifetime income annuities without fully understanding how those tradeoffs work in real life. That’s where the disadvantages become important.

Loss of Liquidity Is the Core Tradeoff

The most significant disadvantage of a lifetime income annuity is loss of liquidity. Once funds are committed and income begins, access to the original principal is usually very limited or completely gone.

This is not an accident—it is fundamental to how lifetime income works. The insurer can only guarantee income for life because it pools money and spreads payments across unknown lifespans. In exchange for that guarantee, the policyholder gives up control of the lump sum.

This lack of liquidity can be problematic if retirement expenses change. Large medical costs, helping family members, buying property, or responding to unexpected opportunities can become difficult when a significant portion of assets is locked into an irreversible income stream.

For this reason, many retirees limit lifetime income annuities to covering essential expenses rather than discretionary spending.

Irreversibility After Income Starts

Another major disadvantage is that lifetime income annuities are typically irreversible once income begins. After annuitization, you generally cannot change the income amount, stop payments, or reclaim unused principal.

This rigidity can become an issue if your life circumstances change. A spouse may pass away, expenses may decline, or health conditions may shift priorities. Unfortunately, the contract does not adjust simply because your needs change.

This is one reason many advisors caution against committing too much money to lifetime income annuities at once. Once the decision is made, flexibility is largely gone.

Inflation Risk Over Long Retirements

Most lifetime income annuities pay a level income that does not automatically increase with inflation. While the income may feel adequate at age 65, its purchasing power can decline significantly over a 20–30 year retirement.

Some annuities offer inflation-adjusted or increasing income options, but these typically start with a lower initial payout. The retiree must trade higher income today for protection later.

Inflation risk is particularly relevant for retirees who expect long retirements or who do not have other income sources that adjust upward over time.

Limited or No Death Benefit

In many lifetime income annuities, payments stop at death. If the annuitant dies early, the insurance company keeps the remaining value. This is often one of the most emotionally difficult disadvantages for retirees to accept.

Optional features such as period-certain guarantees or refund provisions can protect beneficiaries, but these options usually reduce the monthly income amount.

For retirees who strongly value leaving assets to children or heirs, this tradeoff may outweigh the benefit of guaranteed income.

Opportunity Cost Compared to Other Strategies

Committing money to a lifetime income annuity can create opportunity cost. Funds used to purchase guaranteed income are no longer available for growth-oriented strategies or flexible income planning.

While growth is never guaranteed, retirees who do not need immediate income may be able to generate income later using other tools with fewer restrictions.

This is why many retirees compare lifetime income annuities to alternatives such as fixed annuities or indexed strategies before making a decision.

Interest Rate Timing Risk

Income levels from lifetime income annuities are heavily influenced by interest rates at the time of purchase. Locking in income when rates are lower can permanently reduce lifetime payouts.

Unlike investment portfolios, which may benefit if rates rise later, a lifetime income annuity is usually fixed at purchase. Timing mistakes cannot be corrected.

This is why many retirees explore laddered or phased income strategies rather than committing all assets at once.

Complexity and Misunderstanding

Lifetime income annuities are often misunderstood. Many buyers focus only on the guaranteed income number without fully understanding liquidity limits, death benefit tradeoffs, or inflation exposure.

Small design choices—such as single vs joint income, refund options, or start dates—can dramatically change outcomes.

This complexity increases the risk of selecting a product that does not align with real retirement needs.

When a Lifetime Income Annuity Makes Less Sense

Lifetime income annuities tend to be less suitable when flexibility, liquidity, and legacy planning are top priorities. They may also be less attractive for individuals with shorter life expectancy or strong alternative income sources.

They can still play a role, but typically as part of a diversified retirement income plan rather than a standalone solution.

Using Income Planning Tools Before Deciding

Before committing assets, many retirees use income modeling tools to compare guaranteed income against withdrawal-based strategies.

Balancing Guarantees and Flexibility

The disadvantages of a lifetime income annuity do not mean it should be avoided altogether. Instead, they highlight the importance of balance.

Many retirees use guaranteed income to cover essential expenses, while keeping other assets liquid for flexibility, growth, and legacy planning.

The key is understanding the disadvantages before committing—not after income begins.