Income
A paycheck you can’t outlive is the thing retirees say they miss most. Annuities exist to manufacture exactly that — but they trade away flexibility to do it, and the trade deserves clear eyes.
The problem annuities solve
The hardest question in retirement isn’t how to grow money; it’s how fast you can safely spend it when you don’t know how long you’ll live. Guaranteed lifetime income transfers that longevity risk to an insurer: in exchange for a premium, you receive a check for life, however long life turns out to be. Social Security and pensions are the same idea — annuities are simply the version you can buy.
The main flavors, in plain English
An immediate annuity converts a lump sum into income starting now — the simplest and most transparent form. A deferred income annuity starts the checks years later, which makes it cheap insurance against a very long life. Fixed annuities pay a set rate; variable and indexed annuities tie results to markets and often layer on optional riders. As a rule of thumb, the further you move from the simple versions, the more important it is to understand exactly what you’re paying for.
What the guarantee costs
Every guarantee has a price. Money annuitized is money you generally can’t get back for emergencies or heirs. Fixed checks lose purchasing power to inflation unless you buy protection. Complex products can carry meaningful fees and surrender charges, and the guarantee is only as strong as the insurer behind it. None of this makes annuities bad — it makes them a tool with a specific job, not a whole plan.
A sensible way to size one
A common framework: add up your essential expenses, subtract Social Security and any pension, and consider guaranteeing just that gap — so the basics are covered no matter what markets do, while the rest of your portfolio stays invested and flexible. And before buying anything, remember the cheapest lifetime income raise available to most people: delaying Social Security, which increases an inflation-protected government-backed check by roughly 8% for each year you wait past full retirement age.
Key takeaways
- Annuities convert savings into income you can’t outlive — insurance, not investment.
- The costs are flexibility, inflation exposure, fees, and complexity; simpler is usually clearer.
- Consider guaranteeing essential expenses only — and price delaying Social Security first.
Sources
Concepts drawn from retirement-income research and educational presentation materials published by major insurers and asset managers, including materials from Allianz featured in our income-planning webinar. Annuity guarantees are backed by the claims-paying ability of the issuing insurer.