Income annuities, explained plainly

An income annuity is a contract with an insurance company: you pay a lump sum, and in return receive a guaranteed income, often for life. In effect it works like buying a personal pension, adding to Social Security and any pension you already have.

Immediate and deferred. An immediate annuity starts paying within a year. A deferred income annuity starts later — for example at 80 or 85 — which costs less today and protects against the risk of outliving savings.

Why households consider them. Covering essential bills with income that arrives regardless of markets lets the rest of the portfolio be invested for flexibility and growth. Many people also find that guaranteed income makes them more comfortable spending in retirement.

The trade-offs. Money used to buy an income annuity is generally no longer accessible for emergencies or heirs. Many payments are level and lose purchasing power to inflation unless an increasing payment is chosen at a lower starting amount. Guarantees depend on the insurer's financial strength, and contracts vary widely in features and cost.

Options to know about. Joint-life payments continue for a surviving spouse; cash-refund or period-certain features return unused value to heirs at a lower payment. Each option changes the monthly amount.

How much, if any. Some households annuitize just enough to cover the gap between essential spending and Social Security plus pensions, leaving the rest invested. Others prefer no annuity at all. There is no single right answer.

This article is general education, not a recommendation of any product. Whether an annuity fits depends on your health, other income, and goals — worth exploring with your planning team.