Income Annuities: Turning Savings Into a Retirement Paycheck

Most retirement conversations focus on growing a balance. An income annuity flips the question: instead of "how much do I have," it answers "how much can I count on every month, for the rest of my life, no matter how long that is." That is the core trade an income annuity makes, you give the insurance company a lump sum (or a stream of payments), and in exchange they guarantee you income for a set period or for life.

The two main types: SPIA and DIA

A Single Premium Immediate Annuity (SPIA) starts paying you income almost immediately, typically within a month of purchase, often used right at or after retirement. A Deferred Income Annuity (DIA) is purchased now but starts paying income at a future date you choose, often several years out, which usually produces a larger monthly payment than a SPIA because the insurance company has longer to hold the money before paying it out. Some retirees use a DIA specifically to cover a known future gap, for example, income starting at age 75 to backstop a long retirement.

Why retirees use income annuities to fill the gap

Social Security replaces a meaningful share of pre-retirement income for most people, but rarely all of it, and fewer retirees today have a traditional pension to lean on. An income annuity is designed to recreate that missing pension-like paycheck: a fixed amount, arriving on schedule, that does not depend on how the stock market performed that month. Retirees often use one to cover essential, non-negotiable expenses, housing, utilities, insurance, so that other savings can stay invested for growth or discretionary spending without the pressure of covering the basics.

The trade-off: guaranteed income vs. liquidity

The honest downside of most income annuities is liquidity. Once you annuitize a lump sum for lifetime income, that money is generally no longer available as a lump sum, you have converted it into a stream of payments instead. Some contracts offer optional features like a cash refund or period-certain guarantee that return unused funds to a beneficiary if you pass away early, but those features typically reduce the monthly payment amount. This is exactly the kind of trade-off that should be sized to a comfortable portion of your total savings, not all of it.

How much should go into an income annuity?

There is no universal percentage, and we are not going to pretend there is one on a web page. A common approach some advisors use is to size the income annuity to cover the gap between guaranteed income (Social Security plus any pension) and essential monthly expenses, leaving the rest of your savings invested or liquid. The right number depends on your other assets, your health and family longevity, your spouse's income needs if you are married, and how much flexibility you want to keep. That calculation is exactly what a conversation with a licensed advisor is for.

How this interacts with Social Security timing

When you claim Social Security changes how large that guaranteed income floor already is, which in turn changes how much (if any) additional income annuity makes sense. We cover how those two decisions interact in more detail in our Social Security timing article.