What is the Best Way to Use an Annuity

Understanding the best way to use an annuity is one of the most important decisions a person approaching retirement will make. Annuities are among the most versatile financial tools available — capable of generating guaranteed lifetime income, protecting principal from market losses, deferring taxes on growth, funding long-term care expenses, and creating a financial legacy for heirs. But versatility cuts both ways. Using an annuity incorrectly — buying the wrong type, at the wrong time, for the wrong purpose — can result in unnecessary fees, reduced flexibility, and disappointing outcomes.

The best way to use an annuity depends entirely on what you are trying to accomplish. A retiree who needs guaranteed income to cover fixed monthly expenses has different needs than a pre-retiree looking to grow savings with principal protection. A person planning for long-term care has different objectives than someone focused on minimizing required minimum distributions. Matching the right annuity to the right purpose is the foundation of an effective annuity strategy — and it is exactly what Diversified Insurance Brokers helps clients accomplish every day.

At Diversified Insurance Brokers, we work with individuals and families across all stages of retirement planning to identify the best way to use an annuity within their specific financial picture. We have access to top-rated carriers across the full annuity spectrum — fixed, fixed indexed, multi-year guaranteed, and lifetime income — and we compare options across the entire marketplace to ensure every client gets the structure that actually fits their goals. This guide covers the most powerful and practical ways to use an annuity so you can approach that conversation with clarity and confidence.

The Best Way to Use an Annuity for Guaranteed Lifetime Income

For most retirees, the single most compelling reason to use an annuity is the one thing no other financial product can replicate: guaranteed income that cannot be outlived. This is the best way to use an annuity for the majority of people entering retirement, and it addresses the most fundamental financial risk of the modern retirement — longevity.

Social Security replaces roughly 40% of pre-retirement income for the average worker. Pensions have largely disappeared from the private sector. That leaves a significant income gap between what guaranteed sources provide and what most retirees actually need to cover fixed monthly expenses — housing, utilities, food, healthcare, and transportation. An annuity with a guaranteed lifetime withdrawal benefit bridges that gap with income that is contractually guaranteed by the issuing insurance company, regardless of how long you live or what the financial markets do.

Fixed indexed annuities with income riders are among the most popular vehicles for this purpose. They allow your accumulation value to grow during a deferral period — often five to ten years — while simultaneously crediting a separate income base at a guaranteed rate. When income begins, the payout is calculated from the larger income base, often producing significantly more guaranteed monthly income than would be available from a portfolio withdrawal strategy. For a deeper look at how these products work in practice, our guide on how indexed annuities work and who should consider them is an excellent starting point.

The best way to use an annuity for lifetime income is to size the coverage to match your fixed expense gap — the difference between guaranteed income sources like Social Security and the amount you need each month to cover non-discretionary costs. Covering that gap with guaranteed annuity income creates a financial floor that makes the rest of your retirement portfolio far more resilient, because you are no longer forced to liquidate investments to cover basic living costs during market downturns.

Using an Annuity as a Social Security Bridge Strategy

One of the most financially impactful ways to use an annuity is as a bridge to delay Social Security claiming. For every year you delay Social Security past full retirement age — up to age 70 — your monthly benefit increases by approximately 8%. That is a guaranteed, inflation-adjusted return that no investment can replicate with certainty. The challenge is that most retirees who leave the workforce at 62 or 63 cannot afford to wait until 70 to claim without an income source to fill the gap.

A multi-year guaranteed annuity, or MYGA, is ideally suited for this purpose. By moving a portion of retirement savings into a MYGA that produces predictable income during the bridge years, a retiree can cover living expenses from 62 to 70 without drawing Social Security prematurely. When the bridge period ends and Social Security begins at a dramatically higher monthly benefit, the financial advantage compounds for the rest of the retiree’s life — and the life of a surviving spouse.

The math is compelling. A retiree who claims Social Security at 62 may receive $1,500 per month. The same retiree who delays to 70 may receive $2,600 or more — a difference of over $1,100 per month, for life, with annual cost-of-living adjustments applied to the larger base. Over a 20-year retirement, that difference can represent hundreds of thousands of dollars in additional guaranteed income. The annuity bridge costs money upfront but produces a permanent income increase that far exceeds the investment. Our Social Security optimization guide for retirees explores this strategy in greater depth, and our income annuity calculator can help you model the numbers for your specific situation.

The Best Way to Use an Annuity for Tax-Deferred Growth

Annuities are one of the few financial vehicles that allow after-tax dollars to grow on a completely tax-deferred basis with no annual contribution limits. This makes them a powerful tool for individuals who have already maxed out their 401(k) and IRA contributions and are looking for additional tax-sheltered growth capacity.

In a non-qualified annuity — funded with after-tax money — interest, dividends, and gains accumulate without generating a taxable event each year. Unlike a brokerage account where capital gains, dividends, and interest are taxed annually, the annuity allows the full value of those earnings to compound uninterrupted. Taxes are paid only when distributions are taken, and for many retirees, the tax rate at withdrawal is lower than the rate during peak earning years — making the deferral doubly advantageous.

For investors who have built substantial non-qualified annuity values over many years of deferral, the accumulated gain can be significant. Managing the timing and method of distributions — including spreading withdrawals strategically to manage taxable income thresholds — is an important planning consideration that Diversified Insurance Brokers helps clients navigate. Understanding how annuity cost basis is calculated and how annuity account value works are foundational concepts for anyone using an annuity as a tax-deferral vehicle.

For retirees concerned about required minimum distributions pushing them into higher tax brackets, a Qualified Longevity Annuity Contract — or QLAC — offers a specialized solution. A QLAC, funded with pre-tax IRA or 401(k) assets, allows up to $210,000 to be set aside in a deferred income annuity that begins paying at a future date chosen by the owner, up to age 85. Funds allocated to a QLAC are excluded from RMD calculations, effectively reducing taxable income for years while ensuring a guaranteed income stream begins later in retirement when other assets may be depleted.

Using an Annuity to Protect Principal in Volatile Markets

The best way to use an annuity for investors with a low or moderate risk tolerance is as a principal protection tool — a financial foundation that grows without exposure to market loss. For retirees who cannot afford to absorb a major market correction in the years immediately before or after they stop working, the sequence-of-returns risk is real and potentially devastating. Selling investments at depressed values to fund living expenses in a down market permanently impairs the portfolio’s ability to recover.

Fixed annuities and fixed indexed annuities eliminate this risk entirely within the portion of assets allocated to them. A fixed annuity grows at a guaranteed rate — no market exposure, no loss of principal, no sleepless nights during equity selloffs. A fixed indexed annuity links interest crediting to a market index like the S&P 500, capturing a portion of market gains during up years while crediting zero — not negative — in down years. The floor is always zero, meaning the annuity value never declines due to market performance.

This structure makes the best way to use an annuity for risk management straightforward: allocate a portion of retirement assets to a fixed or fixed indexed annuity to create a protected base, and allow remaining assets in equities or other growth vehicles to ride market cycles without the pressure of funding immediate income needs. The annuity handles the stability; the portfolio handles the growth. For context on why fixed annuities outperform in volatile markets and what makes fixed indexed annuities different from fixed products, we have dedicated resources that go deeper on both product types.

The Best Way to Use an Annuity for Long-Term Care Planning

One of the most underutilized and financially intelligent ways to use an annuity is as a funding vehicle for long-term care expenses. The Pension Protection Act of 2006 created a tax structure that makes annuities with long-term care riders uniquely efficient — allowing withdrawals used to pay qualifying long-term care expenses to be received completely free of income tax.

For individuals who own non-qualified annuities with significant accumulated gains, this is a particularly powerful planning opportunity. Without a long-term care rider or a 1035 exchange into a PPA-compliant annuity, withdrawals from a non-qualified annuity used to pay care expenses are taxed as ordinary income on the gain — reducing the effective purchasing power of those dollars precisely when they are most needed. With a properly structured hybrid annuity, those same dollars flow out tax-free for qualifying care, effectively multiplying their value.

Beyond the tax efficiency, annuities with long-term care riders can dramatically increase the benefit pool available for care. A $200,000 annuity with a long-term care rider may provide $3,600 or more per month in care benefits — two to three times what the base annuity income alone would generate — once a qualifying care event occurs. And if care is never needed, the annuity continues to provide income and passes to heirs as a death benefit, unlike traditional long-term care insurance which provides no return of premium if unused. Our dedicated resource on fixed annuities that include long-term care benefits covers this strategy in full, and it pairs naturally with broader planning resources on how much long-term care coverage is appropriate.

Annuity Laddering — A Sophisticated Best Use Strategy

For retirees with larger asset pools, annuity laddering is one of the most effective ways to use an annuity to optimize both income and flexibility over a long retirement. The concept mirrors bond laddering: rather than allocating all funds to a single annuity at a single point in time, a laddering strategy spreads purchases across multiple annuities with staggered start dates, maturity dates, or income activation points.

A practical ladder might involve purchasing a MYGA today to generate income for the next five years, a fixed indexed annuity with an income rider to begin distributions in ten years, and a deferred income annuity designed to begin payments at age 80 — providing coverage deep into retirement when longevity risk is greatest. This structure captures different interest rate environments across purchase dates, avoids locking the full asset base into a single rate, and creates sequential income streams that replace one another as each contract matures or activates.

Annuity laddering also enhances liquidity. Rather than tying up an entire retirement asset in a single long-surrender-period contract, the ladder structure ensures that a portion of assets is always approaching maturity or accessibility, giving the retiree flexibility to respond to changing needs or opportunities. For more on this approach, our annuity strategies for early retirees page provides a practical framework, and our guide on using a fixed indexed annuity for both growth and income goes deeper on the product most commonly used in ladder structures.

The Annuity Calculators

Understanding the best way to use an annuity begins with seeing real numbers. Use the tools below to compare current annuity rates and model guaranteed lifetime income based on your specific situation.

Using an Annuity for Legacy and Wealth Transfer Goals

The best way to use an annuity for legacy-minded retirees is as a tax-deferred accumulation vehicle that passes efficiently to named beneficiaries while bypassing probate. Annuities are contracts with designated beneficiaries, which means the death benefit transfers directly to heirs without going through the probate process — providing faster, cleaner asset transfer than assets that pass through a will.

For retirees who have accumulated significant non-qualified annuity values and no longer need the funds for income, a repositioning strategy using annuity income to fund life insurance premiums can be particularly effective. The annuity generates tax-deferred income; that income funds a life insurance policy whose death benefit passes to heirs completely free of income tax. The result is a legacy-multiplication strategy that converts a taxable annuity into a tax-free inheritance — a technique that is especially relevant for those exploring wealth transfer strategies used by affluent families.

For retirees who want to leave an annuity directly to heirs rather than converting it, the beneficiary designation and spousal continuation provisions of the contract matter significantly. A surviving spouse may be able to assume ownership and continue deferral. Non-spouse beneficiaries are typically required to take distributions within a specified period. Understanding these rules before purchasing — and structuring ownership and beneficiary designations correctly from the outset — is an area where the guidance of an experienced annuity broker is invaluable.

The Best Way to Use an Annuity — Comparing Strategies by Goal

Because annuities serve so many different purposes, the best way to use an annuity varies significantly based on the individual’s primary objective. The table below provides a framework for matching annuity type to goal.

This framework is a starting point, not a prescription. The best way to use an annuity in your specific situation depends on your age, income sources, tax situation, health, risk tolerance, and the financial goals that matter most to you. Diversified Insurance Brokers works through this analysis with every client before recommending a single product.

Common Mistakes to Avoid When Using an Annuity

Understanding the best way to use an annuity also means understanding what not to do. One of the most frequent mistakes is over-allocating to annuities — placing so much of a retirement asset base into illiquid annuity contracts that there is insufficient accessible capital for emergencies, healthcare costs, or unexpected opportunities. The best annuity strategy leaves meaningful liquid reserves outside of annuity surrender periods.

Another common error is purchasing an annuity primarily for the bonus it advertises. Premium bonuses — which can range from 5% to 15% or more of the initial deposit — are attractive on paper, but they are not free money. Bonus annuities typically carry longer surrender periods, lower participation rates, or higher internal costs that reduce the net value delivered over time. Understanding how annuity bonuses actually work and when bonus annuities genuinely make sense is essential before making a purchase based on a headline number.

Buying the wrong type of annuity for the stated objective is perhaps the most costly mistake. A retiree who needs liquidity and income flexibility should not be in a long-surrender-period deferred annuity. A conservative saver who wants principal protection should not be in a variable annuity with market exposure. Matching product to purpose — precisely and deliberately — is the work that a qualified annuity broker performs before any contract is signed. Our resource on the top five annuity myths most people get wrong addresses several of the misconceptions that lead buyers toward poorly matched products.

How Diversified Insurance Brokers Helps You Find the Best Way to Use an Annuity

The annuity marketplace is vast, competitive, and filled with products that look similar on the surface but perform very differently over time and at the moment of income activation. Interest crediting methods, participation rates, cap rates, spread fees, income rider costs, surrender charge schedules, and carrier financial strength ratings all factor into which product is genuinely best for a given client’s situation.

At Diversified Insurance Brokers, we are independent annuity brokers — we work for you, not for any single carrier. We compare products across dozens of top-rated insurance companies, identify the options that best match your goals, and explain the tradeoffs clearly and honestly before any recommendation is made. We do not chase bonuses or push products with high agent commissions. We find the best way to use an annuity for your situation and help you implement it with confidence.

Whether you are just beginning to explore annuities, looking for a second opinion on an existing contract, or ready to move forward with a specific strategy, Diversified Insurance Brokers is the resource you need. For those who want to go deeper on specific annuity questions before speaking with us, our resources on why annuities are the best pension replacement available, why more retirees are choosing MYGAs, and the truth about annuities beyond the common myths provide a comprehensive foundation.

Final Thoughts on the Best Way to Use an Annuity

Annuities are not right for everyone, and not every annuity is right for every situation. But for the right person with the right objective, they represent a financial tool without equal — capable of providing guaranteed income for life, protecting principal from market loss, deferring taxes across decades of growth, funding long-term care tax-efficiently, and transferring wealth to heirs with minimal friction.

The best way to use an annuity is the way that is precisely matched to your goals, your timeline, and your financial picture. That match is what Diversified Insurance Brokers delivers — every time, for every client.