Retirement planning can be tricky as you have to make your retirement savings last for an unknown number of years. However, one way to remove this uncertainty is to consider an income annuity.
Key takeaways
Income annuities convert savings into a regular income stream.
Payout periods can vary, such as with some annuities providing lifetime payments and others paying for a guaranteed number of years.
The two main types of income annuities include immediate annuities that start payouts within a year of opening the contract, and deferred annuities that let you wait longer to begin payouts.
Income annuities provide income security, such as in retirement, but a big trade-off is their lack of liquidity.
What is an income annuity?
An income annuity is a contract with an insurance company that exchanges a premium for a guaranteed stream of payments, either for a set period or a lifetime. It can provide additional income and help with financial market fluctuations.
Typically, income annuities are designed for people approaching or in retirement who want to turn their savings into predictable income. Rather than managing retirement withdrawals yourself, purchasing an annuity provides a contractual guarantee that the insurer will make consistent payments to you, based on agreed-upon terms.
There are two basic kinds of income annuities: Immediate and deferred
Immediate annuities | Deferred income annuities |
|---|---|
Start getting income now | Build a future stream of income |
Immediate annuities are purchased with one lump sum payment, so they're often called Single Premium Immediate Annuities (SPIAs). The insurer takes that premium and converts it into a series of regular payments, either for a set number of years or a lifetime. Immediate annuities start payouts within the first year of the contract. | Deferred income annuities (DIAs) are purchased through either a single lump sum or a series of premiums. Payments are then deferred until a future date you select, but more than one year from purchase (otherwise it would be an immediate annuity). Many people start payments at or after retirement. While the income payment start date and exact amount are typically set when first purchasing the annuity, with some contracts you may be able to change these during the deferral phase. |
How income annuities work
Simply put, an income annuity is a contract with an insurance company to turn a sum of money (the premium) into regular guaranteed income payments.
Some annuities pay over a fixed number of years, while others guarantee payments for the rest of your life. Many buyers choose this lifetime option to reduce the risk of outliving their savings in retirement, as the insurance company takes on the legally binding responsibility to indefinitely make payments, even if, say, you live past 100.
An annuity can also simplify the process of turning retirement savings, which are often invested in a variety of stocks and bonds, into a steady stream of income: You don’t have to decide what to sell when or pay commissions and transfer fees every time you need money — income payments are automatically deposited into your account according to the exact schedule outlined in your contract. However, annuities are generally not liquid: You typically can’t withdraw money — other than your scheduled payments — without paying significant charges or penalties.
When payments start
Income payouts can begin almost immediately after purchasing the annuity contract — you just need to start within the first year. With a deferred income annuity, payments can start after the first year, or many years from when you purchase it. All else being equal, deferred annuities have higher payouts — as you're delaying payments, the principal grows at a fixed interest rate.
Tax treatment
How are payments taxed? It depends if you purchase a qualified annuity, or a nonqualified annuity. Qualified annuities are purchased with pre-tax money, and both the principal and earnings are taxed as ordinary income when paid out. Nonqualified annuities are purchased with post-tax money, so only the earnings portion of each payout is taxed. Also, because annuities are typically meant to be retirement products, you may face a 10% early withdrawal penalty on the taxable portion of any annuity funds you access before age 59½.
Why do annuities typically come from life insurance companies?
Many annuity contracts also offer a death benefit that ensures your beneficiaries get back the amount you paid in if you pass away early. But more importantly, life insurance companies issue these contracts because they have the actuarial experience and investment expertise to manage premiums and make annuity payments to customers. Still, you should make sure your annuity contract comes from an insurance company with high financial strength ratings and a long history of meeting its obligations.
Payout options: Period certain, single life, joint life
Annuity contracts are flexible instruments that can be tailored to fit a wide variety of scenarios. But generally speaking, there are four kinds of payout options to cover the needs of people in different situations:
Refund certain: This guarantees income as long as you’re alive and, if you die before receiving at least your original premium back, pays the remaining unpaid amount to your beneficiary, either as a lump-sum cash refund or as continued installment payments until the full premium has been refunded.
Period certain: Pays out for a specific period, often between five and 20 years. If you pass away during this period, payments continue to your beneficiary for the remaining contract years. This can help secure ongoing income for your surviving spouse, or you could designate another beneficiary, such as your child or even a charity.
Single life: Payments last for your lifetime only, and then stop (but if there’s a death benefit, your beneficiary could receive any leftover portion of the premium if you pass away). Sometimes married couples will purchase a single life annuity for each spouse so that they each can guarantee having income for the remainder of their lives; however, a joint life payout (below) may be a better option.
Joint life: Another option for couples, or those wishing to support a beneficiary, is a joint life annuity. After the original purchaser dies, the surviving spouse (or beneficiary) continues receiving partial or full payments, depending on the terms of the contract. Joint life annuities help protect a partner's future income, without requiring two annuities. However, depending on each partner’s longevity, joint life payouts may be smaller than the combined value of similar single life annuities.
As noted, annuities can be tailored to fit different needs. Some people combine these features, for example by getting a "life with period certain" annuity that provides lifetime payments along with a guaranteed minimum payment period.
Benefits of income annuities
Perhaps the top benefit of income annuities is ensuring you'll have lifetime income — even if you live well past 100.1 But even if you choose a guaranteed period instead of lifetime payments, predictability is another big advantage. You'll know exactly how much you'll receive every month (or quarter or year, depending on the payment schedule you choose). By contrast, other types of retirement income can vary based on market factors and economic conditions.
A qualified annuity (purchased with pre-tax dollars) can also help lower taxable income during your working years, and while the annuity payments you eventually receive in retirement will be considered taxable income, you may get another tax break if you are in a lower tax bracket at that point. Alternately, if you use post-tax dollars to buy an income annuity, a portion of each payment is typically considered a non-taxable return of premium, giving you a retirement income stream that’s subject to fewer tax burdens. Note that this is general information; before making any decisions regarding an annuity and how to fund it, you should seek specific advice from an independent tax, legal, or financial advisor.
In addition to providing a variety of payout options, annuities can also be further customized with optional riders, to better fit your risk tolerance and financial needs. For example, many annuities offer a cost-of-living adjustment (COLA) option, which helps protect you from inflation.
Potential drawbacks to consider
Lack of liquidity is a significant trade-off with all annuities. Once you purchase an income annuity, you generally no longer have access to that money, aside from the regular payments you receive. While some annuities offer exceptions to let you access the principal if needed, that often comes with substantial penalties or other limitations, such as potential tax penalties. So, if you need more cash than your regular income payments provide, that could be challenging.
You could also run the risk of paying more for the annuity than you ever receive, such as if you pass away soon after purchasing one. However, there are ways to minimize these risks. For example, for Guardian's SPIAs, you can choose to receive payments for a guaranteed period of five years or more, or lifetime payments. There's also a cash refund feature, where your beneficiary can receive any shortfall between what you paid for the annuity and what you received before passing.
While income annuities generally don’t have explicit fees, they can still be somewhat complex compared to other retirement investment vehicles. The total returns may also be lower than market-based investments, as a trade-off for guaranteed income. But it’s important to remember that annuities aren’t a pure investment product — they’re an insurance product that can protect you from the risk of outliving all your income.
How much does an income annuity pay?
Several factors can affect monthly income annuity payments, such as your age, gender (which affects life expectancy), the type of contract, and the general interest rate environment at time of purchase. However, in April 2026, a man purchasing a Guardian $100,000 immediate single life annuity without a guarantee period could get the following payments per month:
Age 55: $571
Age 65: $662
Age 70: $738
Rates for women are slightly less, due to longer life expectancies. Actual payouts may differ based on individual factors, like the contract provider you choose, the type of annuity, any riders you choose, and current rates at the time of purchase. Consider speaking with a financial advisor for a personalized estimate.
Is an income annuity right for you?
Every person's situation is different, but one way to decide is to first add up all known regular expenses you'll have during retirement. Then, subtract other guaranteed income types, like pensions or Social Security. If there's a gap, consider an income annuity.
In particular, consider an income annuity if you don't have a pension, you're concerned about outliving savings, or you want a baseline of predictable payments alongside other investments. Income annuities can be part of your broader retirement planning strategy, along with 401(k) plans, pensions, life insurance cash value, and other assets.
On the other hand, if you already have substantial guaranteed income, like from a pension, an income annuity might be redundant. Also, if you prefer more liquidity or want more control over your retirement savings, an income annuity may not be the best fit.
Why people choose Guardian for income annuities
The strength of an annuity contract depends on the insurer’s ability to meet its obligations, so you want to find one you can trust. Guardian has been meeting payment obligations for over 165 years, and our A++ Superior A.M. Best rating (the highest possible rating) provides independent validation that we'll meet our financial commitments.2
People also choose Guardian for income annuities based on our range of offerings to meet your financial needs. We offer SPIAs for those who want income to start right away, DIAs for those planning for the future, and a variety of payout options, including joint-life coverage for protecting a partner with continued income in the event you pass away first. We also offer some unique features, like a no-cost option to increase your income for immediate annuities each contract year by a simple interest amount of up to 5%. Like a more standard COLA rider, this feature helps protect your income against inflation.
Get help deciding if an annuity fits your retirement plan
Connect with a local financial advisor who can explain the different options, including fixed annuities, fixed index annuities, and registered index-linked annuities (RILAs), and can then help you decide what makes sense for your situation.
Frequently asked questions about income annuities
An insurance company guarantees annuity income payments. It's important to buy from an insurer with high financial strength ratings (FSRs) from the leading independent rating agencies, like A.M. Best, Standard & Poor's, and Moody's.
Annuities purchased with pre-tax dollars can lower taxable income during your working years, but income payments in retirement are typically subject to ordinary income tax. Annuities purchased with post-tax dollars can provide a portion of your payouts as tax-free retirement income. The exact tax advantages depend on your situation.
The answer varies by individual, but a popular guideline is to put enough savings into an annuity that then yields enough income to cover your fixed costs in retirement after factoring in other sources of guaranteed income, like social security. Knowing your fixed monthly income needs are covered can help you spend your other retirement savings with greater confidence.
The answer depends on your specific annuity contract. If you have a joint life annuity, for example, your beneficiary, such as your spouse, will continue to receive part or all of your regular income payments for their lifetime.
Annuity payments depend on several factors, including your age and the type of annuity. According to Annuity.org, a male purchasing an immediate life annuity for only himself, without a guarantee period, at age 60 would get $530 per month, or $750 per month if purchased at age 70.5
While annuities have many advantages, such as offering income security, they're not always the best fit. One challenge is illiquidity, along with potentially high fees and lower returns vs. other investment options. However, guaranteed income annuities provide a form of insurance protection that most pure investments lack, because they can protect you from the risk of outliving your savings.
Typically, you can’t withdraw money, besides the regularly scheduled payouts, in particular after income payments start. However, there may be exceptions, such as terms that allow you to withdraw from your principal if you agree to pay a penalty.
