Should I Buy an Annuity in Retirement?

Retirees are pitched annuities constantly — by insurance agents, bank reps, and sometimes well-meaning friends. Most pitches lead with income guarantees and hide the tradeoffs. This guide gives you the unbiased version: what annuities actually do, when they help, when they hurt, and how to evaluate one without a commissioned salesperson in the room.

SPIA income estimator

A Single Premium Immediate Annuity (SPIA) is the simplest type: you hand over a lump sum; the insurer pays you a guaranteed monthly income for life. Use this estimator to see what a SPIA would pay vs. a 4% systematic withdrawal from the same amount.

Estimates use approximate mid-market SPIA payout rates for 2026 based on current insurer quotes.¹ Actual rates vary by insurer, state, and market conditions. Get quotes from at least three insurers before purchasing.

The four types of annuities retirees actually encounter

The word "annuity" covers a wide range of products with very different mechanics. Understanding the differences is the first step to evaluating whether any of them belong in your plan.

When an annuity actually makes sense

Annuities aren't inherently bad products — they're the wrong tool when sold for the wrong reasons. Here are the scenarios where allocating some retirement assets to a SPIA or DIA genuinely improves the plan:

• You have a longevity worry but not enough guaranteed income. If your only guaranteed income is $28,000/year from Social Security but your fixed expenses are $55,000/year, a SPIA funded with $300,000 might add $1,875/month, closing the gap and eliminating the portfolio-depletion risk that keeps you up at night.
• Sequence-of-returns risk is significant. A retiree withdrawing $60,000/year from a $1M portfolio who suffers a 30% portfolio loss in year 2 faces a much higher risk of ruin than the math suggests. Moving $200-300K to a SPIA and reducing portfolio withdrawal to $36,000/year changes the survival probability dramatically.
• You want to spend freely. Portfolio withdrawals require constant recalculation. Many retirees underspend because they're anxious about market swings. Guaranteed income from a SPIA lets you spend up to that amount without checking the market.
• You're past 75 and focused on simplicity. At 78, managing a complex multi-account portfolio is a burden. Converting a portion to guaranteed income reduces the cognitive load and the risk of a bad decision during early cognitive decline.
• QLAC to reduce RMDs. A Qualifying Longevity Annuity Contract (QLAC) can shelter up to $200,000 of IRA balance from RMD calculations until income begins (up to age 85). If your projected RMDs are pushing you into higher brackets or over IRMAA tiers, a QLAC is worth modeling.

When an annuity doesn't belong in your plan

• You already have sufficient guaranteed income. A couple with a $60,000 pension plus $50,000 in Social Security has a $110,000/year income floor before touching the portfolio. Buying more guaranteed income here sacrifices flexibility and legacy with little benefit.
• Estate transfer is a primary goal. SPIA payments cease at death (or after a period certain). If leaving assets to heirs is important, keeping the money in a portfolio preserves that option.
• You're in poor health. SPIA pricing assumes average life expectancy. Someone with a serious illness who's likely to live 7 fewer years than average will break even at age 78 instead of 78 — but collect nothing after death. The bet is unfavorable.
• Your time horizon is short. If you're 80 and need money within five years, the break-even math doesn't work in your favor.

The break-even trap and why it's the wrong question

Insurance agents often lead with "you'll break even at 82" to make the annuity seem like a long-shot bet. Reframe it: a SPIA isn't a bet you'll outlive the break-even age. It's a hedge against the financial consequences of living a long time.

Scenario: You're 65, portfolio is $1.2M, and you're spending $75,000/year with $30,000 from Social Security. Your portfolio needs to generate $45,000/year. Without an annuity, there's roughly a 25% probability your portfolio depletes before age 90 assuming a 7% nominal return (higher with sequence-of-returns risk). With a $300,000 SPIA generating $22,500/year, your portfolio only needs $22,500/year — changing the ruin probability from ~25% to ~8%.

The break-even age doesn't matter. The reduction in ruin probability does.

FIA red flags: what to ask before signing

Fixed Indexed Annuities are the most heavily sold category and the most complicated. If you're being pitched one, ask these questions before signing anything:

1. What is the participation rate, cap, and spread? These are the three ways the insurer limits your upside. "Linked to the S&P 500" does not mean you get the S&P 500 return. Many FIAs have caps of 6-8%/yr — so in a 25% index year, you earn 6-8%.
2. What is the surrender charge and schedule? Most FIAs have 7-10 year surrender periods with charges of 7-10% in year 1 declining to 0% at the end. If you need the money before the surrender period ends, you lose a significant portion.
3. If there's an income rider, what are the actual rider fees? Income riders typically cost 0.75-1.5%/yr of the contract value. Over 15 years, that's 11-22% of your money in fees before you collect any income.
4. What is the agent's commission? FIA commissions run 5-8% of the premium. On a $300,000 premium, the agent earns $15,000-24,000. This is paid by the insurer and reflected in the product's economics, not listed separately — but it explains the enthusiasm of the pitch.
5. Is this in a tax-advantaged account? Putting a VA or FIA inside an IRA is generally wrong. The IRA already provides tax deferral. Paying annuity fees for redundant tax deferral is expensive.

Annuities and taxes

Tax treatment depends on where the premium comes from:

• IRA/401(k) money: Every annuity payment is fully taxable as ordinary income (you haven't paid tax on those dollars yet). The annuity doesn't change the tax treatment — it just changes the timing and certainty of distributions.
• After-tax money (non-qualified): Each payment is partly a return of your original premium (non-taxable) and partly earnings (taxable). The exclusion ratio determines the split over your expected lifetime. Once you've received your full premium back, 100% is taxable.
• QLAC in an IRA: Defers RMDs on that portion of the balance until income starts (up to age 85). Reduces current-year RMD, potentially keeping you under IRMAA thresholds or in a lower bracket during the conversion window.