401(k) vs. annuity: Which option is better for retirement?

Planning for retirement has perhaps never been more complicated — or more important. With Americans living longer and navigating volatile markets, the question isn’t just if you’ve saved enough to retire. It’s how you’re structuring your savings to last for decades. And, while you have numerous options for retirement planning, many of the popular tools for building retirement security offer very different approaches to achieving that goal.

Take 401(k) plans and annuities, for example. A 401(k), which is a staple of employer-sponsored retirement savings, lets you invest pre-tax or Roth contributions in stocks, bonds and mutual funds that grow over time. Annuities, on the other hand, are insurance contracts that promise a guaranteed income stream later in life and are often pitched as a way to “pensionize” your savings at a time when traditional pensions are rare.

Given their differences, choosing between the two options isn’t always straightforward. While 401(k) plans and annuities can complement each other in some retirement strategies, each comes with its own advantages, tradeoffs and ideal use cases. Understanding these differences could help you avoid missteps that may cost you peace of mind and money in retirement.

Compare your annuity options now to find the right one for your retirement plan.

401(k) vs. annuity: Which option is better for retirement?

At first glance, 401(k)s and annuities seem to serve the same purpose: helping you prepare financially for life after work. But they work in fundamentally different ways.

A 401(k) gives you control and flexibility. You contribute regularly during your working years and can choose from a range of investments to match your risk tolerance. Over time, those investments can grow tax-deferred. Many employers even offer matching contributions, giving your savings an automatic boost. 

When you retire, you can withdraw funds as needed, though withdrawals are subject to required minimum distributions (RMDs) starting at age 73. The main downside? Your income in retirement is tied to how your investments perform, so market downturns can directly impact your nest egg.

An annuity, on the other hand, shifts risk from you to an insurance company. With a deferred annuity, for example, you invest money during your working years, and later it converts into a series of guaranteed payments for either a set period or for life. This can reduce the fear of outliving your savings. But annuities often come with higher fees and less flexibility compared to 401(k)s, and some types of annuities are notoriously complex.

So, which option is better? It depends.

• A 401(k): This type of retirement account is often best suited for those who are comfortable managing investments and want flexibility in how and when they use their funds. It’s also ideal for people who expect their tax rate to be lower in retirement, making pre-tax contributions more valuable.
• An annuity: This type of retirement product can make sense for risk-averse retirees who crave stability and want to lock in guaranteed income to cover essential expenses like housing and healthcare. It’s particularly appealing to people without access to a pension or those worried about longevity risk.

Rather than thinking of it as a binary choice, though, some retirees use both: a 401(k) for growth and an annuity for guaranteed income later in life.

Find out how to add an annuity to your retirement portfolio today.

When does combining a 401(k) and an annuity make sense?

For many retirees, a hybrid approach can offer the best of both worlds. For example, you might use your 401(k) as your primary savings vehicle during your career, taking full advantage of employer matches and tax-deferred growth. Then, as you near retirement, you could take a portion of your 401(k) balance to purchase an immediate annuity or a deferred income annuity. 

This strategy essentially converts part of your savings into a steady income stream while leaving the rest invested for potential growth. And, it can help address one of the biggest fears retirees face: outliving their savings. Social Security and an annuity can form a “floor” of guaranteed income, while your 401(k) provides additional flexibility to cover discretionary spending or unexpected expenses.

However, this approach isn’t for everyone. If you’re still decades from retirement, it may be too early to consider annuities, since your money would likely grow faster in a 401(k). And if you already have a pension or other guaranteed income, you might not need an annuity at all.

The bottom line

A 401(k) and an annuity are both useful retirement tools, but they aren’t interchangeable. They’re two very different options designed to solve different retirement challenges. A 401(k) is a powerful way to grow your savings, while an annuity can provide peace of mind by guaranteeing income later in life.

For many people, the answer isn’t choosing one over the other but figuring out how to make them work together. Start by assessing your risk tolerance, income needs and overall retirement goals. And if you’re unsure which option fits your situation, consider working with a financial expert who can help you design a retirement strategy tailored to your life.