What an annuity actually is
An annuity is a contract with an insurance company: you hand them a lump sum, they hand you a stream of guaranteed income. The income can start immediately (Single Premium Immediate Annuity, SPIA), at a future date (deferred or longevity annuity), or be tied to a market index (variable or indexed annuity).
Annuities aren't inherently good or bad, they're a tool. The right question is whether the specific contract solves a specific problem better than alternatives. For longevity protection (the risk of outliving savings), the answer is often yes. For 'growth with downside protection' marketing pitches, the answer is almost always no.
The two annuities worth considering
- SPIA (Single Premium Immediate Annuity): hand over $200k, get a fixed monthly check for life starting now. The cleanest, lowest-fee annuity. Pays roughly $1,250/month for a 65-year-old male at 2026 rates.
- QLAC (Qualified Longevity Annuity Contract): IRS-blessed deferred annuity inside a Traditional IRA. Up to $200,000 (2026 limit) can be moved into a QLAC, with payments starting as late as age 85. Reduces RMDs in your 70s.
- Both produce predictable, inflation-vulnerable income that complements a portfolio. Neither involves complex 'income rider' fees or surrender charges.
The four annuities to walk away from
- Variable annuities with living benefit riders, fees often 3–4%/year, vastly underperforms a low-cost index portfolio over time.
- Indexed annuities ('upside without downside'), participation caps and spreads typically cap returns at 3–5%/year over rolling periods.
- Fixed-deferred annuities with surrender charges of 7+ years, locks money up with no upside vs a high-yield savings account or Treasury ladder.
- Any annuity sold via a 'free dinner seminar', these are almost universally commission-driven products structured for the agent, not the buyer.
When a SPIA makes sense
A SPIA is most valuable for retirees who need to convert a fixed dollar amount into a guaranteed lifetime income stream, typically because Social Security and any pensions don't cover essential expenses. A 70-year-old with $300,000 in guaranteed-income gap can buy a SPIA for roughly $200,000 and receive $1,200–$1,400/month for life. The remaining $100,000 stays invested for growth and bequests.
The trade-off is irreversibility. Once you hand over the lump sum, you can't change your mind, your heirs don't inherit the principal (unless you bought a refund option, which reduces the payout), and you have no upside if markets soar. SPIAs solve a longevity problem; they do not generate wealth.
Buying an annuity, the right way
- Decide what problem you're solving, longevity insurance, predictable income, or RMD reduction. If 'growth,' walk away.
- Shop at least three providers via a fee-only broker (Stan The Annuity Man, Blueprint Income, Income Solutions). Avoid commissioned agents.
- Compare quotes apples-to-apples, same payout option (single life vs joint), same payment frequency, same start date.
- Verify the insurer's claims-paying rating (AM Best, Moody's, S&P). A-rated or better is the floor.
- Confirm state guaranty association coverage limits, typically $250,000 of contract value per insurer per state.
- Never put more than 25–30% of total retirement assets into annuities. Diversify across providers if exceeding state guaranty limits.
The two annuities worth considering
Single Premium Immediate Annuity (SPIA): you hand the insurer a lump sum, they pay you a fixed monthly amount for life starting now. In 2026, a 65-year-old man trading $100,000 for a SPIA gets roughly $620/month for life, a 7.4% payout rate (return + return-of-principal). The trade is simplicity and longevity insurance: you cannot outlive it.
Deferred Income Annuity (DIA), also called longevity insurance: you buy at 60–65 and payments start at 80–85. A 65-year-old paying $100,000 for an 85-start DIA gets roughly $4,200/month, over 50% payout rate because the insurer is betting on mortality. Pair a 20-year DIA with a 20-year self-managed bucket strategy and you've solved the longevity-risk question without buying a SPIA on day one.
The four annuities to walk away from
- Variable annuities with riders, fees often 2.5–3.5% per year, dragging long-run returns into bond-fund territory while keeping equity-level downside.
- Indexed annuities, capped upside, complicated participation rates, surrender charges of 7–12 years. Marketing-led product, almost never the right tool.
- Whole-life insurance pitched as 'retirement income', it's life insurance, not retirement; combine term life and 401(k) for far better outcomes.
- Period-certain annuities sold as 'lifetime' income, these pay only for a fixed period (e.g., 15 years), not for life, and miss the point of an annuity.
Allocation rules of thumb
Most planners cap total annuity allocation at 25–30% of retirement assets. The rest stays liquid and invested. Diversify across at least two A-rated insurers to limit insolvency risk; state guarantee associations cover annuities only up to $250,000 per insurer in most states.
Buy at 65–70 if at all, younger annuitization locks in low payouts because life expectancy is longer. Buying ladder-style (a small annuity each year from 65 to 75) averages interest-rate risk and spreads insurer risk.
Annuity buying checklist
- Insurer financial strength: A.M. Best rating A or higher; check ambest.com.
- Confirm your state's guarantee association coverage limit, typically $250,000 per insurer per claimant.
- Buy from a low-load broker (Fidelity, Vanguard, Schwab, Income Solutions) to avoid 5–8% commission markups from agents.
- Cap annuity allocation at 25–30% of total retirement assets and diversify across at least two A-rated insurers.
- Wait until 65–70 to lock in highest payouts; younger annuitization captures lower mortality credits.
Annuity concepts to know
- SPIA, Single Premium Immediate Annuity; lump sum in, lifetime income starts immediately.
- DIA, Deferred Income Annuity; lump sum now, payments begin 15–25 years later for longevity insurance.
- Mortality credit, the extra return generated by pooling risk; longer life expectancies subsidise shorter ones.
- Surrender period, the years during which exiting an annuity costs 5–12% of value; avoid products with periods over 5 years.
- State guarantee association, backstop covering annuities up to ~$250,000 per insurer if the issuer fails.
Final notes and what changes year to year
Topic note: income annuities in retirement. The trade-offs above will keep evolving as IRS limits, FDIC coverage rules and Federal Reserve policy shift each year. Re-check the headline numbers in this article every January when the IRS and Social Security Administration publish their annual updates, and re-vet your bank's FDIC status whenever your institution merges or rebrands. The structural advice, separate accounts for separate goals, automate the boring parts, refill what you draw, does not change.
Single-source dependency is the most common failure mode in personal finance. If your emergency cash, your sinking funds, your bill pay and your retirement contributions all run through one bank or one app, an outage or compromised credential can freeze every part of your financial life at once. Spread across at least two unrelated institutions and document login recovery paths somewhere your future self can find them in a panic.
