| ||||||||||||
As a source of passive income, rental properties have obvious appeal — particularly for retirees who are no longer collecting a paycheck.
Indeed, income-producing real estate:
- Has the capacity to generate consistent cash flow through rental fees.
- Can potentially appreciate in value over time, which may help build net worth.
- Is a tangible, physical asset that may foster a sense of security for some investors.
- Can act as an inflation hedge.
Fair points all around. But financial professionals caution that investors who rely on rental property alone to cover their expenses as they age may be more exposed to risk than they think.
In some cases, they suggest, a combination of income-producing real estate and annuities, which provide a guaranteed income stream during retirement, may help them better meet their financial goals.
“It doesn’t have to be an either/or situation,” said Albert Chang, a MassMutual financial professional in Seattle, Washington. “Some of my clients really like owning real estate, but if I know they have an income need, I look to help them balance their portfolio with guaranteed income. Even the most dedicated real estate investor can benefit from guaranteed income to help stabilize their cash flow — and annuities are one way to help them do that.”
To determine whether income-producing property, annuities, or both, might be right for you, it helps to explore the pros and cons of each — and examine how these two products can potentially work together to help retirees capitalize on growth opportunities and deliver a sense of confidence.
Connect with a MassMutual financial professional
Rental property: Pros
As noted, rental property has a lot of potential advantages.
It can generate monthly cash flow through the collection of rental fees. And it may help retirees maintain purchasing power in the face of rising inflation, because landlords can usually raise rents to counter rising costs.
Real estate, of course, may also appreciate over time, which contributes to net worth. According to Redfin, homes in the United States have appreciated an average of 4.2 percent since 1967, although U.S. home values rose about 6 percent to 7 percent on average from 2014 to 2024, and even higher during the five year period from 2019 to 2024 at 8 percent to 9 percent.1 (Related: Should I rent out my old home when I retire?)
More recently, housing price increases have moderated amid interest rate and economic pressures. And MassMutual’s Head of Investments for Wealth Management Daken Vanderburg expects prices to continue to moderate slightly for the foreseeable future — although he does not predict a significant sell-off.
Tax deductions are yet another potential perk that may enable rental property owners to lower their tax liability.
For example, residential real estate investors may be able to depreciate the value of their property over 27.5 years to capture the wear and tear of the property over time.2
They can also potentially write off operating expenses, such as:
- Mortgage interest.
- Property taxes.
- Insurance premiums and utility fees.
- Maintenance and repairs.
- Advertising fees to market the property.
But that involves careful recordkeeping.
A tax professional can offer guidance on tax breaks that may be applicable to you, which can be more complicated if you utilize the property for personal use part time.
Rental property: Cons
Now let’s consider the risks you may encounter as an investor in rental property. For example:
- Income-producing property is a hands-on investment. Maintenance is ongoing and can be costly. You may find yourself answering calls in the middle of the night about noisy neighbors and broken air conditioners. You may also have to chase down tenants for rental checks if they don’t pay on time.
- Being a landlord can be stressful. Owners may experience financial hardship during periods of prolonged vacancies. You can hire a property manager who can help find prospective tenants and perform background checks, but the cost for that can be considerable, which erodes your income.
- Real estate doesn’t always appreciate. In some cases, property values drop, making it harder to find tenants and more difficult to liquidate in a hurry if you need to sell.
“It’s fair to say that rental property can provide passive income, but it’s not necessarily guaranteed,” said Chang. “If you have good tenants, your income may be more predictable, but what if you are in an area where it’s hard to find tenants, or you have three or four months of vacancy before you find a new tenant?”
The fact that residential real estate is tied to a single sector — the housing market — is yet another potential negative, and one that may leave landlords more vulnerable to economic swings. (Related: Asset allocation: Fix your mix)
Due to the downside risks of maintaining a real estate—heavy portfolio, Daniel Drabinski, founder and chief executive of Integrated Strategies in Dallas, Texas, encourages retirees and investors to better secure their financial future through diversification.
“Holding an investment property directly can be a risky strategy,” he said. “Though the pros can be considerable, and it often ‘feels good’ to be able to hold and see the property, the economic downside can often outweigh the benefits once you factor in taxes, repairs, slippage costs, and the unforeseen. From my experience, while it can make sense to own individual properties where you can scale, or make capital improvements, the process should not be taken lightly.”
Drabinski notes that investors need not own real estate directly, but can instead gain indirect exposure to the sector through real estate investment trusts (REITs) or private equity. (Learn more: Should REITs be in your portfolio?)
Annuities: Pros
Unlike real estate investments, an annuity can be designed to be an income-protection product.
An annuity is a contract with an insurance company, which agrees to provide a guaranteed income stream to an individual either immediately or at some point in the future in exchange for an upfront payment or series of payments.3
Some annuities (lifetime annuities) offer guaranteed income for as long as you live, which helps ensure that you won’t outlive your assets. Retirees might, for example, choose a lifetime annuity to cover the gap between their monthly living expenses and their other sources of guaranteed income (Social Security and pensions), which may liberate them to spend down their savings more freely in retirement.
Others may choose a fixed-term annuity, which provides income payments for a limited period of time, say, 10 or 20 years. Early retirees might, for example, opt for a fixed-term annuity to supplement their other sources of guaranteed income until their required minimum distributions (RMDs) kick in at age 73. (Learn more: Turning 73? Required minimum distributions explained)
Annuities fall two main categories:
- Income annuities provide a guaranteed stream of income, either immediately or at a specific date in the future.
- Deferred annuities help you accumulate funds for a long-term goal, particularly retirement, upon which they can provide a guaranteed income stream.
Note that some deferred annuities, such as fixed-index annuities, variable annuities, and registered index-linked annuities (RILAs), are tied to the performance of investment options outlined by the insurance company. And in the case of fixed-index annuities and RILAs, they offer growth opportunity, but also limited or no protection from market loss. (Related: Is there potential for market growth and guaranteed income? Yes)
“Retirees may favor real estate because they feel more in control,” said Chang. “They can choose their tenants, refinance to a lower interest rate, raise rents, and enjoy growth potential. But you can potentially get guaranteed income and growth potential with a fixed or variable annuity that is linked with the stock market.”
Annuities also offer the potential for tax-deferred growth. Money invested in annuities that will pay out at a future date (deferred annuities) generally grows tax deferred.4
And some offer riders with living benefits that can be added to the annuity contract at an additional cost. For example, a spouse could potentially add a death benefit rider to provide benefits to their partner should they pass away.
“The beauty of annuities is they can be customized to serve a specific purpose,” said Drabinski. “If you require fixed income, there are a variety of fixed annuities available. If you desire market exposure with creditor protection and potential income, there are a large number of annuities to choose from. Or, if you are attempting to multiply your exposure to a certain market or index, you can achieve this result through the use of [fixed-index, variable, and registered index-linked] annuities. The challenge is to first identify your needs and challenges, then customize an annuity around them.”
Annuities: Cons
That said, annuities are not necessarily the right solution for everyone. They do have some potential drawbacks.
For starters, annuities can be costly, they may include restrictions on when and how much money can be withdrawn, and withdrawals are generally taxed as ordinary income, which may be higher than capital gains rates. (Learn more: How is annuity income taxed? It depends)
Some may prefer to invest the money they would have used to purchase an annuity in stocks or mutual funds instead, which offer greater long-term growth potential. Just remember that stocks and mutual funds do not offer income guarantees and may lose value.
Additionally, for those looking for conservative options, certificates of deposit may be attractive, especially when interest rates are relatively high. But there can be drawbacks with them as well. (Related: Conservative options for retirement: CDs vs. fixed-rate annuities)
Finally, those who select an annuity with a guaranteed level of payment may also incur inflation risk, as their buying power diminishes over time.
The perceived downsides of annuities must be carefully weighed against the potential benefit of creating a guaranteed income stream that you can’t outlive.
A financial professional can offer important guidance on whether an annuity might be right for you.
Conclusion
Retirement planning is as much about saving as it is about creating sustainable income streams to support ourselves as we age.
While rental property and annuities can both help generate income, their risks and potential rewards are very different.
In some cases, combining them can give retirees the growth opportunities they seek and the protection they need against longevity risk.
Talk with your financial professional today about building a portfolio that meets your needs.
_______________________________________
Frequently Asked Questions about annuities versus real estate
Q: What financial products can help manage risk during periods of market volatility?
A: People concerned about managing risk during market volatilty may explore products such as permanent life insurance, fixed annuities, and cash or cash equivalents, as part of their broader financial picture. These productsare not market investments but can play distinct roles alongside stocks and bonds by offering predictability, liquidity, or income features not tied to market performance, potentially providing stability when equity and bond markets struggle.
.
Q: How can whole life insurance help during a market downturn?
A: Permanent life insurance, such as whole life, is designed to provide a death benefit to help protect your loved ones. However, it can build cash value over time that is based on the policy's terms, not stock market performance. That cash value grows on a tax-deferred basis and can be accessed via policy loans, potentially giving you a source of liquidity during a downturn without forcing you to sell investments at a loss. Dividends, when paid, can also add to that growth. It's a financial tool that serves double duty: protection for your loved ones and a stabilizing asset within your broader financial strategy. However, it's crucial to understand that taking a loan from your life insurance policy can have significant negative effects, including reduced death benefits, increased lapse risk, and potential tax consequences.
Q: What role do fixed annuities play in an uncertain economy?
A: Fixed annuities offer a guaranteed rate of return over a set period, and are not linked to stock market performance. For investors approaching or already in retirement, that predictability can be especially valuable — providing a steady income stream. They won't deliver the upside of equities in a bull market, but they won't expose you to the downside either,
Discover more from MassMutual…
Financial protection tactics as you near retirement
Using real estate in the transfer of wealth
Need a financial professional? Find one here
________________________________________
1 Redfin, “Average Home Appreciation Per Year: What You Need to Know,” June 16, 2025.
2 Internal Revenue Service, “Tips on rental real estate income, deductions and recordkeeping,” April 3, 2025.
3 Guarantees are contingent upon the claims-paying ability of the issuing company.
4 Annuities do not provide any additional tax deferral if purchased in a qualified plan type, such as an IRA. An annuity purchased under a qualified plan should be done for the benefits offered under the annuity.
