The retirement planning landscape has never been more complex. With traditional pensions almost entirely extinct and Social Security's long-term viability questioned, millions of Americans are scrambling to find reliable income sources for their golden years. And, as investors watch their 401(k)s fluctuate and inflation erodes purchasing power, the allure of "guaranteed" returns grows stronger. So, it's no wonder that annuities, with their promise of guaranteed payments, have surged in popularity recently.

Case in point? Walk into any financial advisor's office and you're likely to hear about annuities as a cornerstone of retirement security, as these products are marketed as bulletproof retirement income solutions to avoid outliving your money. All you have to do is pay a lump sum for the annuity and receive monthly payments in return, which typically last for the rest of your life. And, aside from that steady income, the other benefits, like tax advantages and protection from market volatility, are pretty compelling, too. 

But while an annuity may sound like a foolproof way to prepare for retirement, it's still important to question the safety of any financial or retirement product you sink money into. So, is it possible to lose money in an annuity? And if so, how do you protect yourself? 

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Can you lose money in an annuity? Here's what to know before you buy

In short, yes — you can lose money in an annuity under certain circumstances. While annuities are marketed as safe and reliable, and while they generally are, the type of annuity you choose and how you use it will determine how much risk you're taking on.

Here are a few ways your annuity investment could shrink:

• Surrender charges and fees: Many annuities impose hefty fees if you withdraw your money early. often start high (around 7% to 10%) and decrease over time, but they can eat into your returns if you need access to your funds sooner than expected.
• Market risk with variable annuities: Unlike fixed annuities, which offer a guaranteed interest rate, tie your returns to the stock market. That means your account value can drop if the market underperforms, and if that happens, you could end up with less than you invested.
• Inflation erosion: Fixed annuities lock in a set payout, but over time, inflation can reduce your purchasing power. If your annuity doesn't include a cost-of-living adjustment, your monthly income may not keep pace with rising expenses over time.
• Insurer insolvency: While rare, insurance companies can fail. Annuities are only as secure as the company backing them, so it's critical to check their financial strength ratings before signing a contract.

The good news is that there are ways to limit these risks. Fixed indexed annuities, for instance, offer some market upside potential with built-in protection against losses. Riders, like inflation adjustments or death benefits, can also provide an extra layer of security but often at an added cost.

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How to decide if an annuity is right for you

Deciding whether an annuity fits your financial plan starts with understanding your goals. If you're looking for guaranteed lifetime income and are willing to trade some liquidity for security, an annuity may be a good fit. But if growth and flexibility are higher priorities, other options, like investment portfolios or bonds, might serve you better.

To help determine whether an annuity makes sense for you, it may help to consider these factors before buying:

• Your time horizon: Can you leave the money untouched for years without needing to tap it in an emergency?
• Your risk tolerance: Are you comfortable with market fluctuations, or do you prefer steady, predictable returns?
• Your income needs: Are you trying to cover essential expenses in retirement, or will this be supplemental income?
• The provider's reputation: If you do plan to buy an annuity, be sure to stick with highly rated insurers to reduce the risk of company failure.

The bottom line

Annuities can provide peace of mind and a reliable income stream in retirement, but they aren't risk-free. Between surrender charges, market fluctuations and inflation, there are scenarios where you could lose money or see your purchasing power erode over time.

If you want to avoid that risk, the key is to go in with your eyes wide open. Understand the fine print, weigh the pros and cons carefully and consider how an annuity fits within your overall financial picture. When done right, an annuity can be a valuable tool to help you enjoy a worry-free retirement, but only if you choose wisely.