How to use an Annuity in Retirement
How to use an Annuity in Retirement
Jason Stolz CLTC, CRPC, DIA, CAA
Understanding how to use an annuity in retirement is not just about selecting a product — it is about understanding the shift that retirement creates in what your money needs to do. During the accumulation years, the goal is growth: contribute to 401(k)s, IRAs, and other savings vehicles, let compound interest do its work, and build the largest balance possible before the working years end. When retirement begins, that goal reverses. The account balance is no longer the primary metric. The monthly income it can sustain, dependably and for however long retirement lasts, is what matters. That shift — from accumulation to distribution — is the exact problem annuities are built to solve, and why they have become a core component of retirement income planning for the generation of workers who no longer have employer pensions to provide that guaranteed income automatically.
A pension functioned as a contractual income promise: work for a defined period, and the employer commits to a monthly payment for the rest of your life regardless of markets, interest rates, or how long you live. The private sector has largely eliminated that arrangement. What replaced it — the 401(k) and IRA ecosystem — is excellent for accumulating assets but provides no contractual income guarantee. Withdrawing from a portfolio is not the same as receiving a pension. A portfolio-based withdrawal depends on market performance, requires ongoing management decisions, and exposes the retiree to sequence-of-returns damage during downturns. An annuity addresses those vulnerabilities by converting a portion of accumulated savings into a contractual income stream backed by the financial strength of the issuing insurance company — replicating the function of the pension that most private-sector retirees never had. Turning savings into guaranteed lifetime income is the foundational strategy, and why annuities are the best pension replacement for today’s retirees covers the structural case for this approach in depth. At Diversified Insurance Brokers, Jason Stolz, CLTC, CRPC, DIA, CAA, helps retirees design income strategies across 100+ carriers so the annuity income is sized, timed, and structured for the actual retirement plan — not just picked based on a headline rate.
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The Six Ways Retirees Actually Use Annuities — With the Right Tool for Each Job
Annuities are not a single product category with a single use case. They are a family of insurance contracts that can be deployed in six distinct ways within a retirement income plan, depending on timing, income needs, risk tolerance, and the role the specific asset needs to play. Understanding which use case applies to your situation is the prerequisite to selecting the right product type — because the annuity that serves one purpose well may serve another purpose poorly.
The first and most foundational use is closing the income floor gap. Social Security provides a guaranteed, inflation-adjusted income stream that covers a portion of essential expenses for most retirees. But guaranteed income from annuities addresses the portion of essential monthly expenses — housing, utilities, food, insurance, healthcare — that Social Security does not cover. The goal is to ensure that essential expenses are covered by contractual, guaranteed sources rather than by portfolio withdrawals that depend on market performance. What that income floor looks like at 65, at 70, or at 60 depends on premium size, income start date, and the annuity structure selected. When the income floor covers essential expenses, the investment portfolio is freed from the pressure of generating monthly income and can be managed with genuine patience through market cycles.
The second use is eliminating sequence-of-returns risk for the income-dependent portion of the plan. Sequence-of-returns risk is one of the most underestimated threats to retirement sustainability — the possibility that a market decline in the early years of retirement, coinciding with mandatory withdrawals, permanently reduces the portfolio’s ability to recover. A retiree who loses 30% of their portfolio in year two of retirement and needs to withdraw 5% annually to cover expenses is selling deeply depreciated assets and removing them from the eventual recovery. A guaranteed annuity income floor prevents this by eliminating the need to sell portfolio assets during downturns to cover essential bills. The guaranteed income runs regardless of market conditions, and the portfolio can be held rather than liquidated at the worst possible moment.
The third use is protecting against longevity risk — the statistical probability that a healthy 65-year-old will live well beyond what their withdrawal assumptions anticipated. Not running out of money in retirement is the core objective of retirement income planning, and it is the one outcome that portfolio withdrawals cannot contractually guarantee regardless of how well the portfolio performs on average. A lifetime income rider on a fixed indexed annuity, or a life-contingent immediate annuity payout, contractually guarantees income regardless of how long the annuitant lives. Even if the portfolio is depleted, the annuity income continues. For retirees with family histories of longevity, the best annuity for lifetime income is the product that solves this problem most efficiently for their specific age and premium.
The fourth use is tax-deferred accumulation — using the annuity’s growth phase to compound retirement savings before income begins, without the annual tax drag that applies to taxable investment accounts. Tax-deferred annuity strategies provide a framework for understanding when deferred accumulation inside an annuity produces meaningfully better after-tax results than equivalent accumulation in a taxable brokerage account, particularly for retirees who have already maximized their qualified account contributions and are looking for additional tax-efficient growth vehicles.
The fifth use is inflation protection. A fixed annuity payment that covers essential expenses at 65 may cover significantly less at 85 if it never increases. Annuities with inflation protection — whether through a fixed annual increase percentage, a CPI-linked adjustment, or an index-linked income growth feature — address this erosion by building automatic payment growth into the income design. For seniors specifically, inflation protection structures designed for seniors cover how those designs are calibrated for later-stage retirement spending patterns where healthcare costs dominate.
The sixth use is spousal and survivor income protection. When household income depends significantly on one spouse’s Social Security, pension, or annuity, the death of that spouse can create a sudden and severe income reduction for the survivor at exactly the moment when grief and logistical complexity make financial decisions hardest. Joint lifetime income annuities continue payments at a defined percentage to the surviving spouse for life, regardless of when the primary annuitant dies. For married couples, the survivor income design is as important as the income amount — a plan that produces great income for one spouse but leaves the other in financial difficulty if the higher earner dies first is not a well-designed plan.
Annuity Types and Which Retirement Job Each Serves
| Annuity Type | How It Works | Primary Retirement Use | Key Consideration |
|---|---|---|---|
| Immediate Annuity (SPIA) | Converts a lump sum into income payments beginning within 30–12 months; no accumulation phase; income is contractual from the start | Closing the income floor gap immediately; eliminating sequence-of-returns risk for the essential income portion; best immediate annuity options cover the top market choices | Payout option selection (life-only, period-certain, joint-and-survivor) is irrevocable at issue; survivor protection should be built into the design, not added as an afterthought |
| Fixed Annuity / MYGA | Guarantees a declared interest rate for a specific term; principal protected from market loss; interest compounds tax-deferred; no annual management fees | Tax-deferred accumulation before income begins; principal protection for conservative investors; stability bucket within a broader portfolio | Surrender period alignment with liquidity needs; renewal rate at contract maturity should be compared against market alternatives before auto-renewal |
| Fixed Indexed Annuity (FIA) | Credits interest based on index performance subject to cap, participation rate, or spread; principal protected from market loss; can include income riders for lifetime distributions | Growth potential with principal protection; longevity risk elimination when paired with a guaranteed lifetime withdrawal benefit rider; how income riders work covers the rider mechanics | Principal is protected from market loss; upside is limited by crediting strategy terms; income rider has a separate benefit base from the account value |
| Deferred Income Annuity (DIA) | Premium deposited now; income begins at a defined future date (often 2–30 years out); simple structure with no accumulation management required during the deferral period | Locking in future income now at current payout factors; bridging to Social Security; creating a rising income profile in later retirement years; see best retirement income annuity options | The longer the deferral, the higher the future monthly payment; premium is generally not accessible during the deferral period; best for retirees with current income adequacy who want to lock in future income |
Coordinating Annuity Income with Social Security — The Timing That Changes Everything
The interaction between annuity income timing and Social Security claiming strategy is one of the most important planning decisions a retiree makes, and most people treat them as separate decisions when they are deeply connected. How Social Security and annuities work together covers the full coordination framework. The core insight: for retirees who delay Social Security to age 70 to maximize that guaranteed, inflation-adjusted benefit, there is typically a gap period — between retirement and age 70 — when income from other sources needs to fill the void. An annuity can be designed to provide income during that gap period specifically, bridging the years between retirement and maximum Social Security activation without depleting the investment portfolio to do so.
The tax interaction also matters. Starting annuity income and Social Security in the same year stacks two taxable income sources together and can push the household into a higher bracket than necessary. Starting annuity income during a lower-income gap period — before Social Security begins — makes use of lower marginal rates that will disappear once all income sources are running simultaneously. Maximizing Social Security benefits covers the claiming strategy that works alongside annuity income timing to produce the most efficient tax outcome over the full retirement period. An annuity payout calculator that models both income sources simultaneously — showing taxable income in each year based on when each source activates — provides the clearest picture of how timing decisions interact before any commitment is made.
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Frequently Asked Questions: How to Use an Annuity in Retirement
How much of my retirement savings should go into an annuity?
There is no universal percentage — the right allocation depends on the size of the income gap the annuity needs to fill. The most practical framework is the income floor approach: calculate your total essential monthly expenses (housing, utilities, food, insurance, healthcare), subtract your Social Security benefit and any pension income, and the remainder is the income gap the annuity needs to cover. The premium required to produce that monthly income at your age and with your chosen income start date determines how much of your savings goes into the annuity. Everything above that amount can remain in the investment portfolio for growth, discretionary spending, liquidity, and legacy goals. Most retirees who use this framework end up allocating somewhere between 25% and 50% of investable assets to annuity income, but the number is driven by the math of the income gap — not by a target percentage. The annuity payout calculator allows you to model different premium sizes and see the resulting monthly income before committing to any allocation decision.
What is the income floor strategy and why do financial planners recommend it?
The income floor strategy divides retirement income into two layers. The floor layer covers essential monthly expenses — housing, food, utilities, insurance, healthcare — using guaranteed, contractual income sources that arrive regardless of market conditions. These sources typically include Social Security, any pension, and annuity income. The investment portfolio above the floor covers discretionary spending, unexpected expenses, inflation cushion, healthcare reserve, and legacy goals. The strategy’s power comes from the behavioral protection it provides: when essential expenses are covered by guaranteed sources, the investment portfolio never needs to be liquidated during market downturns to pay monthly bills. The retiree can hold through a 30% equity decline without selling at the bottom because nothing about that decline threatens their ability to pay rent or buy groceries. Most retirement income research supports some version of this approach — not because annuities are “better” than portfolios in the abstract, but because the combination of guaranteed income plus market participation produces better outcomes than either source alone for most retirees’ actual spending and risk profiles.
Should I buy the annuity at retirement or wait until I need the income?
The answer depends on what the annuity needs to do. If you need income to begin immediately at retirement to cover an existing income gap, an immediate income annuity purchased at retirement is the right tool. If you have adequate income for the next several years from other sources but want to lock in future income, a deferred income annuity purchased at retirement can produce a significantly higher future monthly payment than waiting to purchase later — because the premium grows during the deferral period and the payout factors improve with age. If you are primarily concerned with principal protection and tax-deferred growth while you figure out the income timing, a fixed or fixed indexed annuity during the early retirement years can hold assets safely before converting to income later. The timing of purchase and the timing of income activation are separate decisions — and separating them allows retirees to optimize both rather than defaulting to whatever is simplest at a single decision point.
Can an annuity help protect against inflation in retirement?
Yes — though how it does so depends on the annuity structure. A level-payment annuity produces the highest starting income but does not increase over time, meaning inflation erodes its real value by 30% to 50% or more over a 20-to-30-year retirement. An inflation-protected annuity builds in automatic payment increases — typically a fixed percentage (2%, 3%, or 4%) per year — that maintain more purchasing power over time at the cost of a lower starting payment. Social Security’s automatic cost-of-living adjustment provides inflation protection for that portion of guaranteed income, but it does not protect the annuity income portion unless the annuity itself is structured for rising payments. For retirees whose Social Security covers a large portion of essential expenses, a level annuity may be acceptable. For those with significant essential expenses not covered by Social Security, an inflation-protected structure for the annuity income layer provides meaningful long-term protection. The tradeoff between starting income and long-term purchasing power is one of the most important design decisions in annuity income planning.
What happens to annuity income if my spouse dies or if I die first?
The answer depends entirely on how the annuity is structured at the time of purchase, which is why survivor income planning must be built into the design from the start rather than added afterward. For an immediate annuity, the payout option selected at issue controls what happens when either spouse dies: a life-only option stops payments at the first death; a joint-and-survivor option continues payments at a defined percentage (50%, 75%, or 100%) to the surviving spouse for life; period-certain options guarantee a minimum payment period to beneficiaries if both spouses die early. For income riders on deferred annuities, joint-life income options extend the guaranteed lifetime withdrawal benefit to both spouses, with income continuing after the first death. The income amount typically differs between single-life and joint-life options because the carrier is pricing additional expected payment years. For most married couples, designing the annuity around the survivor income need — not just the current-year income maximization — produces a more resilient household plan. How an annuity works after death covers the beneficiary and survivor mechanics across different contract types.
About the Author:
Jason Stolz, CLTC, CRPC, DIA, CAA and Chief Underwriter at Diversified Insurance Brokers (NPN 20471358), is a senior insurance and retirement professional with more than 25 years of real-world experience helping individuals, families, and business owners protect their income, assets, and long-term financial stability. As a long-time partner of the nationally licensed independent agency Diversified Insurance Brokers, Jason provides trusted guidance across multiple specialties—including fixed and indexed annuities, long-term care planning, personal and business disability insurance, life insurance solutions, Group Health, and short-term health coverage. Diversified Insurance Brokers maintains active contracts with over 100 highly rated insurance carriers, ensuring clients have access to a broad and competitive marketplace.
His practical, education-first approach has earned recognition in publications such as VoyageATL, as well as his agency's featured coverage in Kiplinger— highlighting his commitment to financial clarity and client-focused planning. Drawing on deep product knowledge and years of hands-on field experience, Jason helps clients evaluate carriers, compare strategies, and build retirement and protection plans that are both secure and cost-efficient. Visitors who want to explore current annuity rates and compare options across multiple insurers can also use this annuity quote and comparison tool.
Explore More Annuity Options: Browse our complete guide to Annuities 101 — covering annuity education, planning guides, pros & cons, how to choose & buy from 100+ carriers.
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