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This Annuity Could Be Smart for Retirees Seeking Strong Returns

This type of annuity offers the potential to enjoy stock market gains while also limiting your downside risk.

By Chris Kissell

Edited by Lisa Dammeyer

Updated Jan. 8, 2026

Retirees looking for sources of steady income might consider purchasing a registered index-linked annuity (RILA).

This type of deferred annuity allows you to make payments now in return for income later that will continue throughout your retirement, bolstering your financial fitness. It gives you the potential to tap into gains in the stock market while limiting your downside risk.

Find out more about the potential pros and cons of an RILA and whether this product is right for your retirement.

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What is a RILA?

A registered index-linked annuity is a deferred annuity that provides returns closely tied to the performance of an underlying index tied to the stock market, such as the Standard & Poor's 500 index.

Because this annuity is deferred, you gradually make payments to an insurance company over time before the insurer begins providing you with a stream of income.

The amount of income you receive will largely depend on the performance of the stock market. The gains in your account typically grow tax-deferred until you begin receiving income from the annuity.

Typically, the terms of an RILA give you downside protection in the event of a stock market decline. For example, there will likely be a floor on how much you can lose in a downturn.

Those who purchase RILAs typically hope to strike a balance between enjoying gains tied to the stock market while also limiting their losses should the market go south.

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How do RILAs work?

To purchase an RILA, you make a series of payments to an insurance company. The money you pay to the insurer is not actually invested in stocks, but the insurer does track a stock market index and pays interest to your account based on how the index performs.

Eventually, the money in the annuity is paid out to you. In many cases, income payments do not begin until five to seven years after you begin making payments to the insurer. For most people, payouts occur during retirement.

How RILAs differ from other annuities

Unlike fixed-income annuities, RILAs do not offer the same payout consistently.

With a fixed-income annuity, you receive a consistent payout that is tied to a single interest rate. The rate may reset periodically, but never at a rate that is lower than the minimum guaranteed by the contract.

By contrast, RILA returns tend to fluctuate along with the performance of the stock market.

Each RILA comes with its own terms and conditions. These should spell out exactly how much of the index return will be paid out to you and what type of downside protection you have in case of a stock market swoon.

The upside cap

The terms of your RILA contract will spell out how much you can gain based on how the stock market performs. As the underlying market index rises, you will receive a portion of the gains up to either a cap rate or a participation rate as spelled out in the agreement.

With a cap rate, your gain is limited to a pre-established cap, such as 10%. That means you will not participate in any gains in the index above that amount. Caps typically reset after a specified amount of time, such as one year, six years, or another period.

In other cases, an RILA may credit your account based on a participation rate. For example, if your participation rate is 60%, you would get 6% on a 10% rise in the underlying stock market index.

Floor versus buffer protection

One of the key advantages of an RILA is that it offers the potential to limit your losses in a market downturn. When you purchase a RILA, you typically can choose either "floor" or "buffer" protection.

If you choose a floor, you will establish an amount you are willing to lose. For example, if you select a floor of 15%, you will never lose more than that amount of money in your account.

If you choose a buffer, the insurer will absorb losses up to an amount of your choosing before your account will take the rest of the hit. Selecting a floor of 10% means the insurer will absorb the first 10% of stock market losses, and you will be on the hook for the rest.

How the level of protection you choose impacts the upside

In most cases, the higher the level of downside protection you request, the lower your potential gains will be.

This is a tradeoff that you need to consider carefully. Are you willing to accept a lower cap rate — and potentially sacrifice some gains — in exchange for being better protected against downturns?

There is no right or wrong answer here. Everyone must decide how much risk they are willing to take on based on their financial wants and needs.

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Is an RILA right for you?

A registered index-linked annuity is less straightforward than other types of annuities that pay out a steady, consistent stream of income based on an interest rate that does not change. The amount of money you get from a RILA is more closely linked with the performance of the stock market.

In addition, you will have to make crucial decisions that will impact both the upside potential and the level of downside protection you receive.

Getting help with your RILA decision

Annuities can be a great product for retirees who want a little peace of mind. But many people find them to be complex, and the options that are available can feel overwhelming.

For this reason, you may want to consult with a professional financial advisor before deciding whether an RILA is the right product for your retirement needs.

Bottom line

There are other potential drawbacks to RILAs. For example, some insurers reserve the right to modify contract terms at any point.

In addition, although RILA fees are often lower than those associated with other types of annuities, RILAs often come with penalties if you access cash too early.

So, before you purchase a RILA, it might pay to discuss the pros and cons with a financial advisor. This type of professional can help you decide if a RILA makes sense, or if you should start investing your money elsewhere instead.

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