Some annuities advertise a guaranteed 7% a year, and that number is usually what gets people interested. A financial professional once asked me whether an annuity like that would make sense for a 35-year-old client. I said probably not. My answer on annuities for a 35-year-old lays out the full reasoning, and most of it is about what that 7% actually grows.
An annuity is a contract with an insurance company that turns money into a stream of payments, now or later. A deferred annuity waits before it pays. A fixed indexed annuity credits interest based on a market index, with a floor so a market drop isn't credited as a loss, though fees can still come out. Many of them offer an income rider, which is an add-on, usually with a yearly fee, that guarantees payments for the rest of your life.
An annuity with an income rider carries two numbers. The account value is the money that's actually yours to withdraw, minus a surrender charge, which is a fee for taking money out in the early years. The income base is a separate number used only to figure your lifetime payments. A roll-up is a guaranteed increase in that income base. A few years ago, one contract offered 7% a year for ten years, with the option to extend it once for ten more. The roll-up goes to the income base. You can't take the income base out as a lump sum, and if you surrender the contract, you get the account value.
Put $100,000 in at 45, and a 7% roll-up that compounds for 20 years takes the income base to about $387,000 at 65. Some contracts add a flat 7% of the original deposit each year instead of compounding, which gets you to $240,000. Either way, the contract then pays a percentage of the income base each year for life, and the percentage depends on your age when payments start. If it pays 5% at 65, the $387,000 base becomes about $19,350 a year for as long as you live. Meanwhile the account value has grown at whatever the index credited, minus the rider fee, and the account value is the only number you could walk away with.
Age is the problem at 35. The payout percentage is based on life expectancy, so it's small when you're young, and I wouldn't want anyone turning lifetime income on before about 65. A 35-year-old gets at most 20 years of roll-ups, which run out at 55, about ten years before the payout makes sense. Annuities also tie money up. Surrender charges can last a decade, and earnings taken out before 59½ generally owe a 10% IRS penalty on top of income tax. At 35, I'd rather see that money in a retirement plan with an employer match, or in a cash value policy you can borrow against before retirement, and matching the money to the date you'll need it is a good way to sort that out.
Someone between 45 and 55 is a better fit. A roll-up that runs ten or twenty years can end right around the age they plan to retire, and the income it guarantees can cover the bills Social Security doesn't. Covering those basic bills with guaranteed income is the job I like annuities for, and I explained why I put one inside a retirement account in whether an annuity belongs inside an IRA. The guarantees depend on the financial strength of the insurance company behind them.
If someone shows you a 7% roll-up, ask for two numbers in writing. The first is the account value you could walk away with in year ten. The second is the yearly income the income base buys at the age you actually plan to start.