Annuity Income Planning
A Clear-Eyed Look at Guaranteed Income
An annuity acts like a paycheck that never stops — so you're not forced to lean on your portfolio in a down market. Put $300,000 into an annuity paying $20,000 a year for life, and that income continues no matter how long you live or how the market performs, protecting both your lifestyle and your remaining savings.
The Four Core Types of Annuities
A Single Premium Immediate Annuity (SPIA) converts a lump sum into income starting almost immediately — as of August 2026, a 70-year-old paying $200,000 might receive roughly $1,300–$1,500 a month for life. A Multi-Year Guaranteed Annuity (MYGA) locks in a rate for a set term, much like a CD — top 5-year MYGA rates were running roughly 4.5%–6.2% versus 4.2%–5.2% for bank CDs. A Fixed Indexed Annuity (FIA) credits interest tied to a market index with a 0% floor and a cap, roughly 8%–12% on many contracts. A Variable Annuity invests in market sub-accounts with no guarantee and typically carries the highest fees, often 2%–3%+ per year.
The "Floor and Upside" Framework
A common way to think about annuities in a holistic plan: use guaranteed income — Social Security, any pension, and sometimes an annuity — to cover essential, non-negotiable expenses like housing and food, then let a diversified portfolio handle discretionary spending and growth, since that money doesn't need to be guaranteed to be useful. Under this framework, an annuity supplements Social Security just enough to cover the bills that must be paid no matter what the market does — it isn't meant to replace your investment portfolio.
What They Cost You
Most annuities restrict access to principal for 5–10 years; withdrawing more than the free allowance (typically 10% a year) during that window triggers a surrender charge, often starting around 7%–10% and declining over time. Growth inside a non-qualified annuity is taxed as ordinary income when withdrawn, not at lower capital-gains rates, and once you annuitize, the decision is generally permanent. The SECURE 2.0 Act has eased some of these trade-offs — raising the Qualified Longevity Annuity Contract (QLAC) limit to $210,000 and removing the old 25%-of-balance cap — but the fundamental trade of liquidity for guarantees still applies.
Key Considerations
- Annuities generally make the most sense after you've already maxed out 401(k) and IRA contributions, where fees are typically lower.
- Check the insurer's financial strength rating (A or better from AM Best or an equivalent agency) — guarantees are only as good as the company backing them.
- Ask for the full fee load as a single annual percentage, including mortality and expense charges, administrative fees, and rider costs.
- Variable and indexed products deserve the most scrutiny for cost and complexity; MYGAs and SPIAs are the simplest and most transparent.
- Confirm whether the person recommending an annuity is compensated by commission and whether they're required to act as a fiduciary.