Most people who spend decades saving for retirement share the same worry: what happens if the market drops just as they need the money? For Steven P. McCormick, a Simi Valley financial advisor and estate planning attorney who specializes in retirement planning, Social Security optimization, and estate planning, helping clients prepare for that possibility is part of his work. One tool that often comes up is the safe-growth annuity, an insurance contract designed to protect principal from market losses while offering the potential for growth.

Safe-growth annuities aren’t right for everyone, and they carry trade-offs that deserve careful attention. Understanding how they work, what they cost, and how they affect taxes, Medicare premiums, and estate plans can help savers decide whether they fit their retirement income plan.

Why Protecting Principal Matters Near Retirement

A market decline doesn’t affect every investor equally. Someone in their thirties who sees a portfolio drop has years of contributions and potential recovery ahead. Someone who has just retired and is selling investments each month to cover living expenses faces a different problem. Every share sold at a low price is a share that can’t participate in a later rebound. This is often called sequence of returns risk, and it explains why the same loss can do more lasting damage in the years just before or after retirement than it would earlier in life.

Market losses can also affect how people make decisions. Investors who watch their savings fall may be tempted to sell at the worst possible moment, locking in losses they might otherwise have recovered. These behavioral investing tendencies have long interested Steven P. McCormick, who is also an avid student of stock market history. A plan that limits how much a person can lose may also make it easier to stay calm when markets turn volatile.

How Safe-Growth Annuities Work

Safe-growth annuities differ from income annuities in that they guarantee safety of principal rather than an income stream. However, many safe-growth annuity owners take regular income from them by withdrawing the interest or up to 10% of the value. The two kinds of safe-growth annuities available are fixed annuities and fixed indexed annuities. Fixed annuities offer a fixed interest rate, while a fixed indexed annuity credits interest based partly on the performance of a market index. The money isn’t invested directly in the index. In years when the index rises, the contract credits a portion of that gain. In years when the index falls, the credited interest is typically zero rather than negative, protecting principal from market losses. In exchange, caps, participation rates, or spreads limit the upside, and the insurer may adjust them over time under the contract.

In some cases, choosing a safe-growth annuity for income, rather than an income annuity, can be the wiser choice. Income annuities often have a rider fee of around 1% that pays for the income guarantee, and they usually have lower returns than safe-growth annuities. That means safe-growth annuities have the potential to accumulate interest that “backfills” a portion of the money being withdrawn. The lower growth of income annuities will usually result in the value being drawn down more quickly. Unless the value hits zero, the income annuity owner will not experience any benefit and is merely withdrawing their own money; beneficiaries could also receive a smaller inheritance than from a safe-growth annuity. However, for someone with strong longevity in their background and a higher chance of living longer, an income annuity will guarantee that income payments continue after the value reaches zero. The best choice might involve splitting the money between both kinds of annuities. Speaking to an informed advisor can help navigate this complex decision.

Both types of safe-growth annuities, fixed and fixed indexed, offer principal protection from losses with no fees. As interest rates increased dramatically over the past five years, the interest rates offered by safe-growth annuities also increased significantly. Since the bond market has experienced heavy losses due to higher interest rates, safe-growth annuities are increasingly being used as a bond alternative. Thanks to higher rates, many fixed indexed annuities now offer cap rates that allow double-digit annual growth, returns that can potentially match or even outperform 50/50 stock-and-bond portfolios, but without market risk or fees.

A variable annuity works differently from safe-growth annuities. The money is placed in investment subaccounts that rise and fall with the markets. Protection, when it exists, usually comes from optional riders that guarantee a minimum benefit or income stream for an added cost. The expenses of variable annuities are high and often exceed 3% to 4%. Unlike safe-growth annuities, the value of a variable annuity is subject to fluctuation and potential losses. In every case, the guarantees depend on the financial strength and claims-paying ability of the insurance company that issues the contract.

The Trade-Offs Every Saver Should Weigh

Protection comes with trade-offs. Most safe-growth annuities have a surrender period, often lasting several years, during which withdrawals above a specified charge-free amount trigger surrender charges. Money placed in an annuity should be money the owner doesn’t expect to need on short notice.

Caps and participation rates mean that in a strong market year, a fixed indexed annuity will usually trail the index itself. Variable annuities and their riders can carry multiple fees that reduce returns over time. Withdrawals of earnings before age 59½ may also face an additional federal tax penalty on top of ordinary income tax.

The contracts themselves can be long and complex, with crediting methods that differ from one product to the next. Savers need to understand those terms before committing their money. McCormick’s earlier career in commercial litigation, representing clients in business and investment disputes, showed him that many of his clients’ legal problems traced back to poor financial planning. His experience shows why you should take your time with an annuity contract: understanding the commitment before signing is much easier than trying to undo it later.

Why Steven P. McCormick Looks Beyond Returns to Taxes and Medicare

Retirement planning involves more than maximizing returns. Annuities are a good example: growth inside an annuity is tax-deferred, but that deferral doesn’t eliminate the tax. When you withdraw earnings from an annuity bought with after-tax money, they’re generally taxed as ordinary income, and earnings usually come out before the original principal.

That income can affect other parts of a retirement plan. It counts toward the modified adjusted gross income used to determine IRMAA, the income-related monthly adjustment amount that raises Medicare Part B and Part D premiums for higher earners. A single large withdrawal in one year can push someone over an IRMAA threshold and increase their premiums. The same income can also raise the portion of Social Security benefits that’s subject to tax.

Planning for those effects means that coordinating withdrawals with Medicare costs and Social Security timing deserves as much attention as choosing the contract itself. McCormick holds certifications with the National Social Security Advisors (NSSA) in both Social Security and IRMAA/Medicare planning, areas he came to see as essential during his years advising credit union members on retirement.

Estate Planning Considerations

An annuity also needs to fit the owner’s plans for passing on wealth. A named beneficiary can generally receive the contract’s value without going through probate, which can save time and expense. Even so, beneficiary designations should be reviewed alongside a will or trust so that the documents don’t conflict.

Heirs should also understand how the money will be taxed. Unlike many inherited investments, annuity gains don’t receive a step-up in cost basis at the owner’s death, so beneficiaries generally owe income tax on the earnings they receive. For families caring for a loved one with a disability, naming that person directly as a beneficiary could affect eligibility for means-tested benefits. In those cases, coordinating the annuity with a special needs trust may be worth discussing with an estate planning attorney. McCormick’s background in wealth transfer trusts, special needs trusts, and probate law informs his approach to these overlapping legal and financial concerns.

Questions to Ask Before Buying a Safe-Growth Annuity

Before signing any contract, savers can work through a few practical questions:

• How long is the surrender period, and what are the charges for early withdrawals?
• What caps, participation rates, or spreads apply, and can the insurer change them?
• What fees apply to the contract and to any optional riders?
• How will future withdrawals affect income taxes, Medicare premiums, and Social Security taxation?
• Do the beneficiary designations match the rest of the estate plan?

Preparation Is the Real Protection

A safe-growth annuity can be one way to shield part of a retirement portfolio from market losses, but it works best as one piece of a coordinated plan rather than a standalone solution. Steven P. McCormick’s approach has long been to understand the person before building the plan. Choosing an annuity requires the same attention to someone’s needs and circumstances.

Before committing, savers should understand how the contract will affect their access to cash, future income, taxes, and plans for their heirs. Taking time to work through those questions can help them decide whether the protection offered is worth the costs and restrictions. This article is for general educational purposes, and anyone considering an annuity should review their own situation with a qualified professional.

Steven P McCormick is a financial advisor and estate planning attorney who launched his own advisory firm, McCormick Capital, in Simi Valley, California, in January 2025. A member of the California State Bar, he is certified by the National Social Security Advisors (NSSA) in Social Security and IRMAA/Medicare planning. Since 2025, he has offered free public seminars on Social Security, income planning, and retirement strategies through the Foundation for Financial Independence.