Three retired couples, three ways an annuity fits or does not

Whether an annuity makes sense for a retired couple depends less on the product than on the gap: the difference between the money they must spend every month and the guaranteed money that already arrives. If the gap is large, a source of income that cannot run out is worth pricing. If there is no gap, an annuity mostly buys something they already have.

The three households below are invented. Their incomes, savings and the payout figure are round numbers chosen so the arithmetic is easy to follow. The annuity payment used in each case is an illustration, not a quote: real payments depend on age, the insurer, the payout option and the interest rates on the day of purchase. Use the annuity payout calculator or written quotes from several insurers for real figures.

The measuring stick: essential spending against guaranteed income

Before looking at the couples, here is the test applied to each of them.

1. Essential spending. Housing, food, utilities, insurance, health costs and taxes. The things that must be paid in a bad year.
2. Guaranteed income. Social Security, any pension and any annuity that is already paying. These do not depend on markets.
3. The gap. Essential spending minus guaranteed income. Anything left over is discretionary spending, which can flex.
4. The reserve. Savings that stay liquid for emergencies, health costs and the unexpected.

A gap matters because it must be filled every month for as long as either spouse lives, which could be thirty years or more. The question for each couple is how to fill it, and an annuity is one option among several. Others are withdrawals from savings, delaying Social Security, part-time work and a bond ladder.

For the general product, see Single premium immediate annuities (SPIAs): how they work. For an even-handed look at the case for and against, see are annuities a good idea?.

Couple 1: Ray and Carol, a large gap and long lives in the family

The facts (hypothetical). Ray and Carol are both 66. They have no pension. Their combined Social Security is $2,600 a month. Essential spending is $4,200 a month. They have $450,000 in savings. Carol's mother lived past 95.

The gap. $4,200 minus $2,600 is $1,600 a month, or $19,200 a year.

What filling it from savings alone looks like. If they withdraw $19,200 a year from $450,000, that is about 4.3 percent of the portfolio in year one ($19,200 divided by $450,000), before any growth, inflation or surprise expense. A long retirement and a bad run of markets early on could strain that, a risk known as sequence of returns. The post sequence-of-returns risk and how guaranteed income changes the picture explains why.

The annuity option. Say a joint-and-survivor income annuity, which pays until the second spouse dies, were priced in this illustration at 6 percent of the premium each year. To produce $19,200 a year they would need a premium of $320,000 ($19,200 divided by 0.06). That leaves $130,000 ($450,000 minus $320,000) in savings.

What they weigh.

• For: the gap is covered for life, whatever the markets do. A long-lived spouse is protected.
• Against: $320,000 is a large share of their savings, and the money is not available for emergencies. Level payments lose purchasing power over decades. They would have $130,000 for a new roof, health costs or a care need.
• The survivor issue: when one spouse dies, one Social Security check ends. The joint-and-survivor payout option continues for the survivor, often at a reduced share if they choose it. A lower payment now buys that protection. The guide Social Security survivor benefits and the $255 death payment explains what the survivor keeps.

What a sensible compromise might be. They might cover most but not all of the gap with an annuity, for example $240,000 for $14,400 a year (at the illustrative 6 percent), and draw the remaining $4,800 a year from the $210,000 left. That puts the withdrawal at about 2.3 percent ($4,800 divided by $210,000). They would be using the annuity for the portion that must never fail and keeping a larger reserve for the rest. They should also check what a fee-only planner says about delaying Social Security, which could shrink the gap without any purchase.

Decision. A guaranteed-income purchase deserves serious consideration for this household because the gap is large and the family history points to a long retirement. How much to commit is the open question.

Couple 2: Walt and Joan, no gap to fill

The facts (hypothetical). Walt and Joan are both 67. They have pensions of $3,800 a month combined, with survivor benefits, and Social Security of $3,400 a month combined. Essential spending is $5,000 a month. They have $900,000 in savings.

The gap. Guaranteed income is $3,800 plus $3,400, or $7,200 a month. Essential spending is $5,000. There is no gap. In fact there is a $2,200 monthly surplus ($7,200 minus $5,000) before they touch their savings at all.

The annuity option. An income annuity would add to an income that already covers the essentials. The extra guaranteed money might be welcome, but nothing in the plan is currently at risk of failing.

What they weigh.

• For: more guaranteed income could allow them to spend more freely, and a few people simply like the certainty.
• Against: any purchase makes part of their savings less accessible and less available to leave to heirs. A level payment loses value to inflation, and their other income already covers the necessities.
• What would change the answer: if the pensions were not inflation-adjusted and they worry about rising costs, a different tool might fit better than a level annuity. If one pension lacked a survivor benefit, the gap after a death could open up, and they would revisit the question.

Decision. An annuity adds little here. Their main tasks are different: keep the pension survivor elections in order, plan for health and long-term care costs and decide how to invest the savings. The post pension lump sum or monthly annuity at retirement: a decision framework and the guide pension risk transfer: when your pension becomes an annuity cover the pension side of the picture.

Couple 3: Mina and Paul, a partial approach with one health concern

The facts (hypothetical). Mina is 68 and Paul is 70. Paul has a serious heart condition that his doctors say may shorten his life, though no one can say by how much. Mina is healthy. They have Social Security of $3,000 a month combined and a small pension for Mina of $400 a month, so guaranteed income is $3,400. Essential spending is $4,400. Savings are $300,000.

The gap. $4,400 minus $3,400 is $1,000 a month, or $12,000 a year.

Why a full annuity is a harder call. A life-only payout on Paul's life could look attractive, because the cost of an annuity is based largely on age and not on health. But if his health is poor, a payout guaranteed for his life alone may pay for fewer years than expected, and Mina is the one more likely to live long. A joint-and-survivor option for both lives protects Mina but costs more per dollar of payment.

The partial route. Say they put $100,000 into a joint-and-survivor annuity that pays, in this illustration, 5.5 percent a year. That is $5,500 a year, or about $458 a month ($5,500 divided by 12). The rest of the gap, $6,500 a year ($12,000 minus $5,500), comes from the remaining $200,000, a withdrawal rate of 3.25 percent ($6,500 divided by $200,000). They keep $200,000 reachable for medical costs.

What they weigh.

• For: part of the gap is covered for Mina's lifetime, the savings remain for an uncertain health picture and the plan does not rest on one big decision.
• Against: the remaining gap still depends on withdrawals, and Mina, who may live many years after Paul, would see lower household income after his death because one Social Security benefit ends.
• Alternatives they should price: delaying a claim on Mina's Social Security benefit, if she has not yet claimed, or a deferred income annuity that starts later, which the guide Deferred income annuities (DIAs): longevity insurance explained explains. The post partial annuitization: turning only part of a contract into income covers this middle path in depth.

Decision. The partial approach lets them cover some of the essentials with a guarantee while keeping flexibility. Because Paul's situation is medical, they should discuss the plan with a planner and, if they consider a larger purchase, with their doctors' input on realistic expectations.

A stress test: what happens after the first death

Every plan above looks fine while both spouses are alive. The harder test is the year after the first death, when one Social Security check ends and spending falls by less than income does. The figures below extend the hypothetical households; they are illustrations only.

Ray and Carol. Say Ray's benefit is $1,600 a month and Carol's is $1,000, which together make the $2,600. If Ray dies first, Carol generally keeps the larger of the two benefits and not both, so household Social Security falls from $2,600 to $1,600. Suppose essential spending for one person drops from $4,200 to $3,200. With a joint annuity paying a 100 percent survivor share ($14,400 a year, or $1,200 a month), income is $2,800 ($1,600 plus $1,200), leaving a gap of $400 a month. If they had chosen a 50 percent survivor share, the annuity would pay $600 a month, income would be $2,200 and the gap would be $1,000. The survivor share changes the widow's gap by $600 a month in this illustration, which is why the payout option deserves as much thought as the purchase amount. A higher survivor share means a smaller payment while both are alive.

Walt and Joan. Their pensions have survivor benefits, so the survivor keeps most of the income. Their exposure is different: a care need. An annuity would not have helped there, and the liquid savings they kept do.

Mina and Paul. Say Paul's Social Security is $1,800 and Mina's is $1,200. If Paul dies first, Mina keeps $1,800. Add her $400 pension and the $458 a month from the joint annuity, and income is $2,658. If her essential spending as a single person is $3,300, the gap is $642 a month, about $7,700 a year, which is roughly 3.9 percent of the $200,000 reserve in the first year. That is more than the couple's 3.25 percent, so the reserve will be working harder. Knowing this in advance lets them consider delaying Mina's own claim or buying a little more guaranteed income.

The point is not that any one number is right. It is that a plan should be tested for the survivor, not only for the couple.

What a level payment does over twenty years

Each of the annuities above pays a fixed amount. That is the feature, and it is also the limitation. Take Ray and Carol's $1,200 a month. If prices rose by an illustrative 3 percent a year, costs would multiply by about 1.8 over twenty years (1.03 raised to the 20th power is roughly 1.81). The same $1,200 would then buy what about $664 buys today ($1,200 divided by 1.81). The check would be the same size and the groceries would not.

This is not an argument against guaranteed income. It is a reason to pair it with sources that can grow, such as Social Security, which has cost-of-living adjustments, and invested savings, and to ask whether an inflation-adjusted payout is offered and what it costs in a lower starting payment. A couple who covers only their essential gap with a level annuity, and keeps the rest invested, is relying on the invested part to keep pace.

Two practical cautions

Taxes. Annuity income is taxed in a way that depends on how it was bought. Payments from an annuity bought with after-tax money are partly a return of cost and partly taxable, while payments from an annuity bought with an IRA are generally fully taxable. A tax professional can estimate the effect on each couple's bracket and on how much of their Social Security is taxed.

The insurer. The payments are only as good as the company paying them. Check the insurer's financial strength and its licensed status, and know your state's guaranty limit; most states cover at least $250,000 of annuity present value per person per insurer, according to NOLHGA as of June 1, 2025, and some are higher. A larger purchase may be split between companies. The lookup tool linked above shows each state's figures.

What the three couples show

The pattern is not about wealth. Walt and Joan have the most savings and need an annuity the least. Ray and Carol have more than Mina and Paul but a bigger gap. What decides it is the shape of the gap and what the family needs liquid.

Questions to ask about your own case

1. What is my essential monthly spending, with taxes and health costs included?
2. How much guaranteed income do I already have, and what happens to it when one spouse dies?
3. How big is the gap, and is it likely to grow with inflation?
4. How much would I need to keep liquid for emergencies and care?
5. If I buy an annuity, which payout option protects the survivor, and what does it cost in lower payments?
6. What do the alternatives cost, such as delaying Social Security, part-time work or a bond ladder?
7. If I buy from one insurer, how much of the purchase is within my state's guaranty limit? The state guaranty association coverage lookup helps with that.

A fee-only planner can run these numbers with your actual figures, and a tax professional can explain how annuity income is taxed in your situation.

Key takeaways

• The deciding number is the gap between essential spending and guaranteed income, not the size of savings.
• A large gap and a long-lived family history make guaranteed income worth pricing; no gap makes an annuity add little.
• A partial purchase can cover part of the essentials while keeping a liquid reserve, which suits households with health uncertainty.
• Choose a payout that protects the surviving spouse, and remember that one Social Security check ends at the first death.
• Every payment figure in these examples is an illustration; get written quotes and independent advice before committing money.