Almost all retirees receive at least some form of guaranteed lifetime income, most commonly Social Security. For many households, Social Security represents the largest cash flow source in retirement, but there are other options, like annuities, that can offer additional guaranteed income.
The idea of receiving a reliable paycheck in retirement can be appealing, but there are some trade-offs to consider. This article looks at how guaranteed income from immediate annuities can affect a retiree’s first-year safe spending amount, lifetime spending, and their ending balance after 30 years.
Our Research on Retirement Income
In our recent annual study on retirement income, my colleagues Tao Guo, Amy Arnott, Christine Benz, and I explored different ways retirees can turn their savings into dependable cash flow. Along the way, we estimated a sustainable starting withdrawal rate of 3.9% and assessed flexible withdrawal strategies for those hoping to leave a legacy.
Our safe-spending methodology is deliberately conservative, targeting a 90% probability that a portfolio will last 30 years, with annual inflation adjustments to initial spending. We assume retirement at age 67, and total spending reflects both portfolio withdrawals and full Social Security benefits.
Note that this article uses updated annuity quotes and Morningstar Investment Management capital market assumptions as of mid-January and Dec. 31, 2025.
Keep it Simple: Income Annuities
Immediate annuities, often called income annuities or single-premium immediate annuities, are the simplest type of annuity. In exchange for a lump-sum payment, an insurer provides a fixed monthly income for life (or for a set period).
For example, a 67-year-old man purchasing an immediate annuity in January 2026 with $100,000 would receive about $7,800 annually for life, according to an estimate from annuity pricing research firm Cannex Financial Exchanges. (Women typically receive slightly lower payouts because they are expected to live longer.)
This “life-only” option delivers the highest possible payout because payments stop when the owner dies. However, most retirees prefer additional features, such as joint benefits for a surviving spouse, refund provisions, or guaranteed payment periods, to ensure some value remains for heirs. These protections reduce the payout rate because they shift more risk back to the insurer.
Adding Cost-of-Living Adjustments Can Pay Off Long-Term
Social Security payments adjust with inflation, and it’s possible to add inflation protection to your annuity payments. But that inflation protection changes the math.
A fixed 3.0% cost-of-living adjustment lowers the initial payout rate from 7.7% to 5.9%, or $5,900 in the first year. That amount would rise to $6,077 in Year 2, $6,259 in Year 3, and so on, based on our assumption of 2.43% annualized inflation.
It takes about 11 years for these inflation-adjusted payments to match the original unadjusted payout. After that point, the inflation-protected annuity becomes a stronger hedge against longevity risk. As with delaying Social Security, which is also adjusted annually for inflation, the longer you live, the greater the benefit, and vice versa.
The Impact of Income Annuities on Retirement Income
Immediate annuities can simplify financial planning if their payouts, combined with Social Security, cover basic living expenses. In general, allocating part of a portfolio to an immediate annuity increases lifetime spending when paired with Social Security. However, it usually results in a lower ending balance after 30 years because the annuity purchase is effectively a withdrawal; those funds no longer grow, even though they provide steady income.
The exhibit below shows how different funding levels for an income annuity affect lifetime spending and median ending balances over a 30-year retirement. Each scenario starts with the same $1 million 40% equity/60% fixed-income portfolio used throughout the broader study and includes Social Security as part of the lifetime spending.
Allocating a portion of the portfolio to an immediate income annuity increases sustainable spending over retirement. Because the annuity’s initial payout rate (5.7%) exceeds the base-case bond portfolio’s projected total return (4.9%) and includes a 3.0% annual cost-of-living adjustment, retirees can support a slightly higher first-year withdrawal. Over a 30-year horizon, that higher starting income compounds into greater lifetime spending.
In these examples, $100,000 (10%) or $300,000 (30%) is used to purchase an immediate income annuity, funded from the fixed-income allocation given the annuity’s bondlike characteristics. The equity allocation remains fixed at 40%, with the remainder invested in traditional bonds. This structure effectively increases the equity weight of the remaining investable portfolio. For example, allocating 30% of the bond sleeve to an annuity results in a remaining portfolio of 40% equity and 30% fixed income, equivalent to a 58% stock allocation, which helps support higher median ending balances.
Can You Take More Risk With an Income Annuity?
Some proponents argue that securing a portion of retirement income with an annuity can justify taking more risk with the remainder of the portfolio.
In the previous example, the annuity was funded from bonds without altering the equity target. Below, we follow the same approach but include portfolios that hold higher equity allocations of 50% and 60%.
In portfolios with higher equity allocations, the primary effect is on ending balances. The additional growth potential from a larger stock allocation leads to meaningfully higher median ending balances as equity exposure increases, which may appeal to retirees who place a higher priority on leaving a bequest.
Lifetime spending, however, either stays the same or decreases. The higher volatility associated with greater equity exposure requires more conservative withdrawal assumptions to maintain a 90% probability of portfolio longevity over a 30-year horizon, limiting the impact on sustainable spending.
Our approach is intentionally conservative. Being comfortable with a lower probability of success would allow for higher lifetime spending.
Income Annuities Look Attractive Today, But Proceed With Caution
Although income annuities may look very attractive relative to traditional fixed-income investments today, there are important caveats that call for prudence.
Purchasing an immediate annuity locks up your principal, reducing liquidity and eliminating flexibility to respond to emergencies or changing financial needs. While it guarantees income for life, the trade-off is that, if you die earlier than expected, you’re not getting your capital back, unless you added extra provisions that would reduce your income. Bonds, by contrast, allow you to retain control over liquidity and, if interest rates do rise, allow for reinvestment at higher interest rates.
For retirees seeking a measure of guaranteed income, allocating a portion of the portfolio to an annuity can make sense today, but it should be done in moderation.
