A Guide to Creating a Balanced Income Stream in Retirement
When it comes to retirement income, peace of mind often tops the list of priorities. That’s why more and more retirees are exploring annuities—financial products that can turn part of your savings into a predictable paycheck for life. But that leads to an important question:
How much of your retirement nest egg should go into an annuity?
Should you annuitize everything? Just a portion? None at all?
The answer isn’t one-size-fits-all. In this post, we’ll explore the pros and cons of different annuity allocation strategies and how blending annuities with traditional investments can create a retirement plan that works for you.
🧩 Why Consider an Annuity at All?
Annuities offer something few other financial tools can: guaranteed income for life.
Once you buy an immediate or deferred income annuity, the insurance company promises to send you a regular check—no matter how long you live. That steady income can:
- Cover essential expenses like housing, food, and insurance
- Provide peace of mind during market downturns
- Act as a personal pension, especially for those without one
But annuities also come with trade-offs, like reduced liquidity and limited growth potential. That’s why many retirees consider using only part of their savings to purchase an annuity.
💡 General Guidelines for How Much to Annuitize
Most retirement experts agree that annuitizing 25% to 50% of your retirement savings is a reasonable starting point—especially if your goal is to cover basic monthly needs.
Let’s break it down by strategy.
✅ Strategy #1: Cover the Essentials
This approach uses an annuity to guarantee income for your core expenses: housing, utilities, food, healthcare, insurance, and transportation.
First, total up your expected monthly necessities. Subtract any reliable income you already have, such as:
- Social Security
- A pension
- Rental income
Then, use an annuity to fill the gap. For example:
If your monthly essentials are $3,500, and Social Security covers $2,200, you’d need $1,300/month in additional guaranteed income. That could be provided by a lifetime income annuity purchased with around $250,000 (depending on age, rates, and type).
This “cover the basics” strategy allows the rest of your portfolio to be invested for growth and flexibility.
✅ Strategy #2: The Partial Annuitization Approach
This method allocates a portion of your total nest egg—often 25% to 40%—into an annuity, and keeps the rest in diversified investments like:
- Dividend-paying stocks
- Bond ladders
- ETFs
- REITs
- CDs or cash
This approach gives you:
- Stability from the annuity
- Growth potential and liquidity from your remaining investments
- Flexibility to adjust as your needs change
It’s the best of both worlds for many retirees: reliable income and financial freedom.
✅ Strategy #3: The “Deferred Income” Annuity for Later Life
What if you’re healthy, active, and want full control over your portfolio—but worry about running out of money in your 80s or 90s?
That’s where a deferred income annuity (or QLAC—Qualified Longevity Annuity Contract) can help. You buy it today, but income doesn’t start for 10 to 20 years.
- It’s inexpensive compared to immediate annuities
- It guarantees you a “paycheck for life” starting at a future age (usually 75–85)
- It’s a hedge against longevity risk—the risk of outliving your money
This strategy means you can spend your portfolio more confidently knowing a future income stream is guaranteed.
🔁 A Balanced Example: Blending Investments and Annuities
Let’s meet Carol, a 68-year-old retiree with $600,000 in savings and $2,200/month in Social Security.
- Her basic expenses total $3,500/month
- She’s healthy and expects to live a long life
- She’s worried about inflation and market crashes
Here’s her strategy:
- She puts $200,000 into a lifetime annuity that pays $1,200/month
- She keeps $300,000 invested in a mix of dividend ETFs, bonds, and REITs
- She holds $100,000 in cash and CDs for emergencies and short-term needs
With this mix, Carol has:
- $2,200 from Social Security
- $1,200 from the annuity
- Flexible income and growth from her investments
- A cushion for unexpected costs
Total fixed income: $3,400/month, nearly covering her essentials. The rest comes from portfolio withdrawals, dividends, or interest.
🧮 Factors That Can Affect How Much You Should Annuitize
There’s no universal formula, but here are some key things to consider:
🏠 Do you have fixed expenses you must cover each month?
Annuitizing enough to cover these can reduce anxiety and eliminate the need to sell investments in a down market.
💼 Do you have other sources of guaranteed income?
The more guaranteed income you already have (e.g., pension, rental income), the less need you may have to annuitize.
⏳ How long do you expect to live?
Annuities favor those who live longer. If you’re in good health and have longevity in your family, you’ll likely benefit more.
💵 How comfortable are you giving up control over your money?
Annuities trade liquidity for stability. Some people find the idea comforting. Others prefer flexibility. There’s no wrong answer—just your personal preference.
📉 Are you concerned about market volatility?
If market downturns keep you up at night, shifting some of your portfolio into a guaranteed annuity may provide peace of mind.
❌ When You Might Not Want to Annuitize (or Only Annuitize a Little)
- You already have ample guaranteed income from Social Security and pensions.
- You prefer full liquidity and control over your money.
- You have a shortened life expectancy and may not benefit from long-term income.
- You plan to leave a legacy and don’t want to reduce your estate.
That said, some annuities offer joint payouts for spouses or refund features for beneficiaries. So if legacy is a concern, be sure to shop around.
🔍 Final Thought: There’s No “Perfect Percentage”
How much of your nest egg to annuitize depends on:
- Your spending needs
- Your risk tolerance
- Your health and family history
- Your existing income sources
- Your financial goals
You don’t have to annuitize everything to benefit. In fact, a partial annuitization strategy—25% to 40%—often works best, giving you guaranteed income and flexibility.
📘 Want More?
This blog post is adapted from my book:
“Lifetime Income: The Senior’s Guide to Annuities”, available at Amazon.com in paperback and eBook formats.
Inside, you’ll learn everything you need to confidently evaluate annuity options, avoid common mistakes, and build a retirement paycheck you can count on.
Disclaimer: This content is for educational purposes only and is not intended as financial advice. Please consult a licensed financial advisor or retirement income planner before making decisions regarding annuities or investment strategies.