How Guaranteed Income Fits Into a Financial Plan

By Chris Gavrel, Licensed Agent · 4 min read

Most retirees I talk with worry less about getting rich and more about running out. That’s why guaranteed income, meaning money that keeps coming no matter what the markets do, shows up in so many retirement plans.

What “guaranteed income” means

Guaranteed income is income you can count on for a set period or for life, based on a promise from the source paying it. It isn’t tied to how the stock market performs. The most common sources are:

Social Security, which pays monthly for life once you qualify and start benefits
Pensions from an employer, if you have one
Income annuities, such as a Single Premium Immediate Annuity (SPIA), which turn a lump sum into payments for a set period or for life
Income riders on some fixed indexed annuities, which can provide lifetime withdrawals, often for an annual fee

With insurance products, guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Annuities are not bank deposits and are not FDIC insured. Withdrawals are subject to ordinary income tax, and withdrawals before age 59½ may be subject to a 10% federal tax penalty.

Why it matters

When you were working, a paycheck showed up every two weeks whether the market was up or down. In retirement, many people have to create that paycheck themselves. Guaranteed income can help in a few ways:

It covers the basics. When essential bills are covered by dependable income, a bad year in the market is less frightening.
It helps with longevity. Lifetime income keeps coming no matter how long you live. That matters when retirement can last decades.
It makes spending easier. Many retirees feel more comfortable enjoying their savings when they know the bills are covered.
It can protect a spouse. Joint options can continue income to a surviving spouse.

A simple way to think about it

Bucket	What it pays for	Where the money often comes from
Essentials	Housing, food, utilities, insurance, taxes	Social Security, pension, income annuity
Lifestyle	Travel, gifts, hobbies, dining out	Savings and investments
Emergencies	Repairs, surprises, large one-time costs	Cash savings set aside
Legacy	Final expenses, gifts to family or church	Life insurance, remaining savings

This is just one way to organize your thinking. Your plan might look different.

The trade-offs

Guaranteed income isn’t free, and it isn’t right for every dollar. Common trade-offs include:

Less access to your money. Once an income annuity starts paying, you generally can’t get the lump sum back.
Surrender charges on many deferred annuities if you take out more than the free-withdrawal amount early.
Inflation. A fixed payment buys less over time unless it has an increasing feature, which usually means a lower starting payment.
Fees for some optional riders.
Less money left to heirs with some options, such as life-only payments.

That’s why most people use guaranteed income for part of their savings, not all of it, and keep an emergency fund separate. See Why an Emergency Fund Still Matters in Retirement.

A hypothetical example

Imagine a couple whose essential bills are about $500 a month more than their combined Social Security. They have savings, but they worry about a market downturn forcing them to sell at a bad time. One option they might explore is using part of their savings for an income annuity designed to cover that $500 gap, while keeping the rest of their savings available for other needs. This is a made-up example only; the right approach depends on each person’s full situation, and income amounts vary by age, product, and interest rates. Hypothetical example for illustration only, not a guarantee.

Timing matters too

When you start Social Security affects how much you receive each month for life. Delaying generally increases your monthly benefit, up to age 70. The Social Security Administration has calculators and information at ssa.gov. The right time to claim depends on your health, other income, marriage, and goals, so it’s worth looking at carefully.

Questions to ask yourself

How much of my essential spending is already covered by dependable income?
How would I feel if my savings dropped 20% in a bad year?
Would my spouse have enough income if I passed away first?
How much do I want to keep available for emergencies and family?
Do I want to leave money to heirs, or is lifetime income more important?

Suitability comes first

An income annuity or rider should only be considered after looking at your whole picture: age, income, savings, how soon you might need the money, taxes, and goals. Products, features, and availability vary by state and carrier. I work with fixed annuities, fixed indexed annuities, MYGAs, and SPIAs, and I’m glad to explain how they compare in plain words. You can also learn more in What Is an Annuity? and What Is a MYGA and SPIA Annuity?

This article is general education, not tax, legal, or investment advice.

This article is for general educational purposes only and is not legal, tax, or financial advice. Coverage, pricing, and availability vary by age, health, state, and carrier.