When does buying an annuity make sense for retirement income?
Last reviewed: July 2026
Buying an annuity makes sense when you need guaranteed income to cover essential expenses that Social Security and a pension don't, and when outliving your money is a real worry. You hand an insurance company a lump sum, and it pays you income for life. The tradeoff is access: most of that money is no longer yours to touch. For the right retiree, that tradeoff buys a floor under the bills. For the wrong one, it locks up cash that should stay flexible.
On This Page
- Key Takeaways
- What does an annuity actually do for your retirement income?
- When does buying an annuity make sense?
- When does an annuity not make sense?
- Which type of annuity fits when you're deciding when to buy an annuity?
- How much of your savings should go into an annuity?
- Related Topics Worth Reading
- Frequently Asked Questions
- Deciding whether an annuity belongs in your plan
- Disclosures
Key Takeaways
- An annuity converts a lump sum into lifetime income, which makes sense mainly when guaranteed income must cover essential expenses.
- The average Social Security retirement benefit is about $2,071 per month in 2026, rarely enough to cover everything on its own.
- Annuities trade liquidity for certainty; if you may need the principal, that tradeoff usually works against you.
- Cover essential expenses first, then keep the rest invested for growth, flexibility, and what you leave behind.
About the Author: Jeff Judge, CFP®, AEP®, ChFC®, CLU® is Managing Partner of Chesapeake Financial Planners in Forest Hill, Maryland. He has been helping families and business owners in Harford County and the Baltimore metro area navigate retirement income decisions since earning his CFP® certification in 2013, by using Chesapeake Financial Planners’ signature process, the R.U.D.D.E.R. method™. Jeff's take: an annuity should solve a specific income problem, not serve as a default just because the word "guaranteed" feels safe.
What does an annuity actually do for your retirement income?
An annuity is a contract with an insurance company: you pay a premium, and in return the insurer pays you a stream of income, often for the rest of your life. The version most retirees should understand first is the single premium immediate annuity (SPIA). You hand over a lump sum, and income starts within about a year. That is the cleanest form of the trade, and the easiest to price-compare.
The income exists to do one job well: cover spending you cannot afford to have swing with the market. Social Security already gives you one inflation-adjusted, lifetime income stream. The average retirement benefit runs about $2,071 per month in 2026, after the 2.8% cost-of-living adjustment. For most households that covers part of the essentials, not all of them. An annuity can fill the gap between guaranteed income and the bills that arrive whether the market is up or down.
What it does not do is grow your wealth or stay liquid. The insurer keeps the upside in exchange for taking the longevity risk off your plate. That is the whole bargain. Understanding that one sentence settles most annuity debates before they start.
When does buying an annuity make sense?
Buying an annuity makes sense in four situations, and they share a theme: a specific income gap that guaranteed money solves better than a portfolio can.
First, when guaranteed income doesn't cover your essentials. If Social Security and any pension fall short of housing, food, healthcare, and utilities, a SPIA can build an income floor so those bills never depend on a good market year. Picture a household that needs more each month than its guaranteed sources provide; an annuity sized to that shortfall covers it for life.
Second, when outliving your money is your real fear. Longevity risk is the chance you live well past your savings, and the odds are longer than most people plan for. A 65-year-old man today can expect to live about 17 more years and a 65-year-old woman about 20 more, and those are just averages, meaning half live longer. If you are healthy with longevity in the family and facing a 30-plus year retirement, lifetime income is insurance against your own success at staying alive.
Third, when you face a pension lump-sum decision. Choosing a monthly pension over a lump sum is really choosing to keep an annuity you already own. Sometimes the pension is generous; sometimes buying your own annuity on the open market beats it. Run both.
Fourth, when you want later retirement to be simpler. Managing a portfolio at 82 is harder than at 62. A deferred income annuity that switches on at 80 or 85, sometimes called longevity insurance, hands future-you a paycheck without the spreadsheet.
One more piece belongs in this decision: the income you already own. Before buying private lifetime income, look hard at Social Security, because delaying it is often the cheapest annuity on the market. Claiming at 70 instead of your full retirement age of 67 raises your monthly benefit to 124% of the full amount, and that increase is inflation-adjusted and backed by the federal government. For many retirees, spending down savings in the early 60s to delay Social Security buys more guaranteed income per dollar than any commercial annuity.
When does an annuity not make sense?
An annuity does not make sense when you already have enough, when you need access to your money, when your health is poor, or when the costs are too high.
If your portfolio is large enough that you withdraw only 2% to 3% a year, you are already positioned to last. Paying an insurer to guarantee what your assets nearly guarantee on their own adds cost without adding much safety. Keep the liquidity instead.
If you anticipate large or unpredictable expenses, a major home repair, long-term care, helping an adult child, then locking principal into an illiquid contract works against you. Most annuities are hard or impossible to unwind once purchased, and surrender charges can bite for years.
Health matters more than people expect. Annuities are priced on average life expectancy. If a serious condition is likely to shorten your life, you are paying for longevity protection you may not use, which makes the annuity a poor value. And the cost itself can sink the case: variable and indexed annuities often layer on fees, riders, and surrender charges. When total annual costs run past 2% to 3%, a low-cost portfolio or a plain immediate annuity usually serves you better.
Legacy is the last common dealbreaker. With a life-only immediate annuity, whatever principal remains when you die typically stays with the insurance company rather than passing to your children or a charity. You can add a period-certain or refund feature to protect heirs, but those riders lower your monthly payout, which weakens the very reason you bought the annuity. If leaving money behind is a priority, annuitizing a large share of your assets works against that goal, and a portfolio you control may fit your plan better.
Which type of annuity fits when you're deciding when to buy an annuity?
The annuity that fits depends on whether you need income now or later, and how much complexity and cost you are willing to accept. Most retirees building an income floor are best served by the simplest product, the single premium immediate annuity, and most regret comes from buying something more complicated than the job required. The table below compares the four structures you are most likely to encounter.
| Annuity type | When income starts | Best use | Watch for |
|---|---|---|---|
| Single premium immediate (SPIA) | Within about a year | Covering essential expenses now | No liquidity; no legacy on life-only |
| Deferred income (longevity) | A future date you pick (often 80 to 85) | Hedging a very long life cheaply | Money is locked up until payments begin |
| Fixed deferred | You choose later | Conservative tax-deferred growth | Surrender charges; lower growth |
| Variable / indexed | You choose later | Growth with optional guarantees | Higher fees, riders, and complexity |
Federal regulators publish plain-language explanations of how these products and their surrender charges work. As FINRA's investor guide to annuities puts it, "An annuity is a contract between you and an insurance company in which the company promises to make periodic payments to you, starting immediately or at some future time," and it is a good starting point before you talk to anyone selling one. The pattern I see is simple: the more moving parts an annuity has, the more it tends to cost, and the fewer retirees actually need those parts. When in doubt, start with the plainest product that solves your income gap.
How much of your savings should go into an annuity?
You should annuitize only enough to cover the essential expenses your guaranteed income doesn't already reach, and rarely more. The goal is an income floor, not an income fortress. Once the floor is set, the rest of your savings stays invested.
A workable structure looks like this in practice. Cover essentials with Social Security, any pension, and a SPIA sized to the remaining gap. Keep the balance in a diversified portfolio for growth, access, and legacy. If you want to hedge a very long life cheaply, a small deferred income annuity starting at 80 or 85 can do that without tying up much capital today.
This is the kind of decision the R.U.D.D.E.R. Method™ is built to slow down. The R.U.D.D.E.R. Method™ is Chesapeake Financial Planners' six-step planning process: Review and Recognize, Uncover and Understand, Design and Develop, Discuss and Decide, Execute and Empower, and Reassess and Refine. The "Uncover and Understand" step forces the real question, which is not "should I buy an annuity" but "what income do I actually need to guarantee, and what is the cheapest way to guarantee it." As Jeff puts it, "An annuity should be the smallest piece that does the job, not the biggest piece you can afford."
Related Topics Worth Reading
An annuity decision rarely stands on its own. These related topics shape whether guaranteed income is the right move and how it fits the rest of your plan.
- How the order of market returns in early retirement can make or break a withdrawal plan. What is sequence of returns risk, and why do the first years of retirement matter most?
- Why your stock and bond mix still matters even after you buy guaranteed income. How Should I Allocate My Investment Portfolio by Age?
- How to decide when to claim Social Security, the other lifetime income stream you already own. How do you maximize Social Security and Medicare benefits in retirement?
- How to turn a portfolio into a paycheck once you stop working. What is the best retirement income planning strategy?
- Where a guaranteed income floor fits in a full retirement income strategy. The Bucket Strategy for Retirement Income
Frequently Asked Questions
Are annuities a good investment for retirement?
Annuities are insurance, not investments, so judge them on the income they guarantee rather than the return they earn. A single premium immediate annuity makes sense when you need lifetime income to cover essential expenses that Social Security and a pension don't. For growth, flexibility, or money you may need back, a diversified portfolio usually serves you better.
How much income does a $100,000 annuity pay per month?
A $100,000 immediate annuity's monthly income depends on your age, sex, and interest rates at purchase, so the same premium buys very different payouts over time. Older buyers and higher rates produce larger checks. Because pricing varies widely between insurers, always compare quotes from several highly rated companies before committing, since the difference can be meaningful.
What is the difference between an immediate and a deferred annuity?
An immediate annuity starts paying income within about a year of your premium, while a deferred annuity delays payments until a future date you choose. Retirees use immediate annuities to cover current essential expenses and deferred income annuities as longevity insurance that switches on at 80 or 85, hedging a very long life at a lower upfront cost.
Can you lose money in an annuity?
Yes, you can lose money in an annuity, mainly through surrender charges if you withdraw early, fees on variable or indexed products, or by dying earlier than expected on a life-only contract. Income annuity guarantees also depend on the issuing insurer's claims-paying ability, which is why the financial strength of the company you choose matters as much as the payout.
Should I put all my retirement savings into an annuity?
No, you should rarely put all your retirement savings into an annuity, because doing so eliminates liquidity, growth, and money for heirs. The stronger approach annuitizes only enough to cover essential expenses your guaranteed income doesn't reach, then keeps the rest invested. An annuity works best as one piece of a retirement income plan, not the whole plan.
Deciding whether an annuity belongs in your plan
An annuity is a tool, useful for the retiree who needs a guaranteed income floor and costly for the one who doesn't. Knowing when to buy an annuity comes down to your income gap, your health, your need for access, and how much market volatility you can stomach in retirement. At Chesapeake Financial Planners, we work through this tradeoff with clients every week, and the answer is almost never all-or-nothing. If you are weighing whether guaranteed income belongs in your retirement plan, a second opinion costs you nothing. Visit chesapeakefp.com to learn more.
Asset allocation and diversification do not ensure a profit or protect against loss.
Disclosures
The information provided is for educational purposes only and should not be construed as investment advice. Investment strategies should be tailored to individual circumstances, risk tolerance, and goals. Past performance doesn't guarantee future results. Consult with qualified financial professionals regarding your specific situation.
Advisors associated with Chesapeake Financial Planners may be either (1) LPL Financial Registered Representatives offering securities through LPL Financial, Member FINRA and SIPC, and investment advisor representatives offering investment advice through Great Valley Advisor Group; or (2) solely investment advisor representatives offering investment advice through Great Valley Advisor Group and not affiliated with LPL Financial. Great Valley Advisor Group, and Chesapeake Financial Planners are separate entities from LPL Financial.
