Guaranteed Income in Retirement: Do You Need an Annuity? 

If the market fell tomorrow, how much of your monthly spending would still be covered without selling investments? 

While you’re working, your paycheck covers the bills. In retirement, income may come from several places, including Social Security, pensions, investment withdrawals, and rental income. 

Before deciding whether you need an annuity, start with your own numbers. How much predictable retirement income will you have each month, how much will you need to spend, and is there a gap between the two? 

Answering those questions can help you determine whether an annuity may have a role in your retirement income plan. 

What Counts as Guaranteed Income in Retirement? 

Retirement income can come from several places, but not every source works the same way. 

• Social Security: Provides monthly retirement benefits for life. 

• Pensions: May provide monthly income throughout retirement, depending on the plan. 

• Annuities: Certain annuities can provide contractual income for a set period or for life, depending on the contract. Guarantees are subject to the claims-paying ability of the issuing insurance company. 

• Investment and retirement accounts: IRAs, 401(k)s, and taxable investments can provide income through withdrawals, but the amount available over time depends in part on portfolio performance and withdrawal decisions. 

You don’t necessarily need all of your retirement income to be guaranteed. Instead, consider how much of your essential retirement spending you want covered by predictable income and how much you’re comfortable drawing from your investments. 

Start With Your Retirement Income Gap 

Before deciding whether you need more predictable income, start with what your retirement income needs to cover. 

Essential Expenses – Predictable Income = Retirement Income Gap 

For example, if your essential expenses are $10,000 per month and Social Security and pension income provide $7,000, you have a $3,000 monthly gap. 

That doesn’t automatically mean you need an annuity. The retirement income gap could be covered by portfolio withdrawals, an annuity, or other income sources. Knowing the amount simply gives you a clearer starting point for deciding how to fund it. 

Considering an annuity? Download The Annuity Reality Check to learn how different annuities work, what they may be used for, and the tradeoffs to consider. 

How Much Guaranteed Income Do You Really Need? 

More guaranteed income isn’t always necessary. How much you need depends on your expenses, existing retirement income sources, and how much flexibility you want to maintain. 

Consider: 

• Essential vs. discretionary spending: Which expenses need to be covered every month, and which could be adjusted if needed? 

• Market downturns: Which expenses would continue even if the market declined for an extended period? 

• Portfolio withdrawals: How comfortable are you relying on investments to fund regular expenses? 

• Available cash: Do you have enough liquid assets to cover unexpected expenses without disrupting your income plan? 

For some retirees, it may make sense to cover more of their essential expenses with predictable retirement income while keeping other assets available for growth or future needs. Others may already receive enough from Social Security, pensions, or other sources. 

Start with what your retirement needs to fund, then decide how much guaranteed income makes sense. 

Four Factors That Can Influence Whether an Annuity Has a Role 

Your income gap is one consideration. How you expect to use your money throughout retirement matters, too. 

1. Longevity 

Retirement could last 20, 30, or even more years. If you’re concerned about your savings lasting throughout your lifetime, an annuity with lifetime income may be worth considering. But that decision should account for the income and assets you already have. 

2. Liquidity 

Think about how much of your money you may need to access. Healthcare costs, a home purchase or renovation, or helping children or grandchildren can all require significant cash. Some annuities have surrender periods or limits on withdrawals, so it’s important to understand those withdrawal restrictions before committing your money. 

3. Market Risk 

Market declines can be harder to manage when you’re also withdrawing money from your portfolio. If part of your monthly income comes from a predictable income source that doesn’t require selling investments, you may have more flexibility in deciding when to take portfolio withdrawals. 

4. Legacy Goals 

If leaving money to your family is important, consider how an annuity would affect those plans. Beneficiary provisions and death benefits vary by contract, and some structures may be better suited to lifetime income than passing assets to heirs. 

Before considering an annuity, look at what you need from your money during your lifetime and what you hope will remain for the people and causes you care about. 

Case Study: Closing a Retirement Income Gap Without Putting Every Dollar in an Annuity 

This example reflects a client experience. The client was not compensated for sharing it. The experience is not representative of all clients, and results are not guaranteed and will vary based on individual circumstances. 

Susan is 66 and preparing to retire with about $2.4 million in retirement and investment assets. She expects $4,500 per month from Social Security and a small pension, while her baseline expenses are about $7,500. 

That leaves a $3,000 monthly retirement income gap. 

At first, Susan considers moving a large portion of her portfolio into an annuity. But does she actually need another $3,000 in predictable income every month? 

She may be comfortable covering part of the gap with portfolio withdrawals. She may also want to keep money invested for future growth and maintain access to funds for larger expenses that come up later in retirement. 

Depending on her financial situation, Susan could consider using a portion of her assets to address some of the income gap while leaving the rest invested and accessible. 

Susan may only need an annuity to cover part of her income gap. The rest could continue to come from her portfolio, giving her more flexibility with the assets she has saved. 

When an Annuity May Be Worth Considering 

An annuity may be worth a closer look when there’s a specific need for it in your retirement plan. 

You might consider one if: 

• Social Security and pensions don’t cover your essential expenses. An annuity could provide income to help cover part of the difference. 

• You want more lifetime income. Depending on the contract, an annuity can provide income for life. 

• You’re concerned about taking withdrawals during a market downturn. Having another source of income could reduce how much you need to withdraw from your investments when markets are down. 

• You have enough liquid assets elsewhere. Some annuities restrict withdrawals or charge surrender fees, so you’ll want to consider how much money you need to keep accessible. 

• The contract makes sense for your situation. Look closely at the costs, withdrawal rules, surrender period, income provisions, and other terms before making a decision. 

None of these factors means an annuity is automatically the right choice. But if an annuity addresses a need you’ve identified in your retirement income strategy, it may be worth evaluating further. 

When More Guaranteed Income May Not Be the Priority 

Not everyone needs more guaranteed income in retirement. 

If Social Security, a pension, rental income, or other predictable retirement income sources already cover most of your essential expenses, you may have less need for an annuity. You may prefer to keep more of your assets invested or readily available for other expenses. 

Liquidity can be especially important if you expect to make a large purchase, help children or grandchildren, or want access to your money as your needs change. Your estate plan matters as well. If leaving assets to family or charity is a priority, you’ll want to understand how an annuity could affect those plans. 

A useful question to ask is: What financial problem would this annuity solve for me? 

If you already have enough predictable income to cover your needs, adding more may not be your biggest priority. 

Annuities vary widely, so it’s important to understand what you’re considering before making a decision. Download The Annuity Reality Check to learn about different types of annuities, common misconceptions, and questions to ask when evaluating one. 

Questions to Ask Before Using an Annuity for Retirement Income 

Before you start comparing annuities, answer a few questions about your own retirement first: 

• How much of my essential spending is already covered by predictable income? 

• What is my remaining monthly or annual retirement income gap? 

• How much of that gap would I like to cover with predictable income? 

• How much money do I need to keep accessible? 

• What happens if my spouse or I live longer than expected? 

• What fees, surrender periods, withdrawal limits, or other restrictions come with the annuity? 

• What happens to the annuity when I die, and what could my beneficiaries receive? 

• How would an annuity fit with my investments and other retirement assets? 

Work through these questions before looking at a particular annuity contract. You’ll have a better sense of what you need, what you’re willing to give up, and whether the annuity you’re considering fits your retirement plan. 

Conclusion 

There’s no single formula for creating guaranteed income in retirement. How you use your savings depends on the life you want to live, the income you already have, and the expenses you expect along the way. 

Download The Annuity Reality Check to learn more about how annuities work, when they may be useful, and what to consider before choosing one. 

If you’re approaching retirement and wondering how your investments, Social Security, retirement accounts, annuities, and other assets could work together, connect with the Liberty Group team.  

We can help you review your retirement income needs, predictable income sources, liquidity, and broader financial situation and consider strategies that fit your circumstances. 

Standard Disclosure 

This blog expresses the author’s views as of the date indicated, are subject to change without notice, and may not be updated.  The information contained within is believed to be from reliable sources.  However, its accurateness, completeness, and the opinions based thereon by the author are not guaranteed – no responsibility is assumed for omissions or errors.  This blog aims to expose you to ideas and financial vehicles that may help you work towards your financial goals. No promises or guarantees are made that you will accomplish such goals.  

Past performance is no guarantee of future results, and any expected returns or hypothetical projections may not reflect actual future performance or outcomes. All investments involve risk and may lose money. Nothing in this document should be construed as investment, tax, financial, accounting, or legal advice. Each prospective investor must evaluate and investigate any investments considered or any investment strategies or recommendations described herein (including the risks and merits thereof), seek professional advice for their particular circumstances, and inform themselves about the tax or other consequences of any investments or services considered.   

Investment advisory services are offered through Liberty Wealth Management, LLC (“LWM”), DBA Liberty Group, an SEC-registered investment adviser.  For additional information on LWM or its investment professionals, please visit www.adviserinfo.sec.gov  or contact us directly at 411 30^th Street, 2^nd Floor, Oakland, CA  94609, T: 510-658-1880, F: 510-658-1886,  www.libertygroupllc.com. Registration with the U.S. Securities and Exchange Commission or any state securities authority does not imply a certain level of skill or training.