I’ll never forget a couple, the Flemings who came to my office back in 2009, right after the market crash had decimated their 401(k)’s. They were 67, retired, and terrified. Their number one question wasn’t about growth or returns; it was, “How can we make sure we never run out of money?”
For them, and for many retirees, the answer was an immediate annuity.
This guide is my near 30 years of experience distilled into a clear, honest playbook on this powerful tool.
We’ll cover what an immediate annuity is, how they work, how much income it can realistically provide, and the critical risks you must understand before you ever sign an annuity contract.
- What It Is: An immediate annuity, also known as a Single Premium Immediate Annuity (SPIA), is a contract with an insurance company where you pay a lump sum premium and, in return, receive a guaranteed stream of income that starts almost immediately (within one year).
- Primary Use: Its main purpose is to create a personal pension, providing a predictable “paycheck” to cover essential expenses in retirement and protect against longevity risk—the risk of outliving your assets.
- How It’s Taxed: If you use non-qualified (after-tax) money, a portion of each payment is a tax-free return of your principal, a rule known as the tax exclusion ratio.
- The Biggest Risk: The primary risk is a lack of liquidity and the impact of inflation. Once you fund the annuity, you typically cannot get your lump sum back, and a fixed payment will lose purchasing power over time.
Key Takeaways Ahead
How an Immediate Annuity (SPIA) Works: The 4-Step Process
The concept is straightforward and has been around for centuries. It’s the opposite of life insurance: instead of paying premiums to protect against dying too soon, you pay a premium to protect against living “too long” and running out of money.
- The Lump Sum Premium:
You give a single, lump-sum payment to a life insurance company. Yes, you read that right, an insurance company.
This could come from a 401(k) rollover, the sale of a home, or other savings. - The Contract is Signed:
You and the insurance agent/insurer sign a contract that specifies the payout terms. I cannot stress this enough, please read the contract carefully!! I was amazed what types of terrible annuity contracts I have seen people sign. And the insurance agent did not explain any of it to them. - Income Begins:
The insurance company starts sending you regular, guaranteed checks, typically within a month to a year.
It’s not exactly the same, but the analogy I would explain to clients was simple. When you maintain an investment account, that’s like a 401(k). When you trade it in and annuitize the contract, that is more like a pension with pre-defined income. - Payments Continue:
These payments continue for the duration you’ve chosen and outlined in the contract you signed. It is often for the rest of your life.
This is fundamentally different from a deferred annuity, where you contribute money over time and let it grow for years before turning on the income stream.
🔍 Explained Simply: You Are Transferring Risk, Not Making an Investment
The most critical concept to grasp is that you are not “investing” your lump sum in the traditional sense. You are performing an irreversible exchange: your capital for a guaranteed stream of payments. The insurance company pools your money with thousands of others to manage longevity risk for the entire group. This is why it’s an insurance product, not a market investment.
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How Much Income Can a Single Premium Immediate Annuity Provide? (Examples for 2026)
This is the most common question I get from clients. The payout depends on your age, gender, the amount of your premium, and the payout option you choose. As of late 2025, with a more normalized interest rate environment, the payouts are more attractive than they have been in recent years.
| Annuitant Profile | Estimated Monthly Payout (Life-Only) |
|---|---|
| 65-Year-Old Male | ~$1,650 per month |
| 65-Year-Old Female | ~$1,575 per month |
| 65-Year-Old Couple (Joint Life) | ~$1,425 per month |
Note: These are estimates for illustrative purposes only. Payouts for women are typically lower due to longer life expectancies. You must get a direct quote from an insurer for an accurate figure.
⚠️ Myth Busted: “Payouts Are Just Based on Interest Rates”
Many believe annuity payouts are solely tied to prevailing interest rates. The hidden engine is actually “mortality credits.” The insurance pool statistically benefits from annuitants who pass away earlier than expected, and this benefit is shared with the surviving members of the pool in the form of higher lifetime payments. This is the unique feature you cannot replicate on your own.
How Are Immediate Annuity Payments Taxed?
If you purchase your annuity with after-tax money (from a savings or brokerage account), the Internal Revenue Service (IRS) allows you to receive a portion of each payment tax-free. This is governed by the exclusion ratio.
🔍 Explained Simply: The Exclusion Ratio
The IRS considers part of each payment to be a non-taxable return of your original principal. For example, if your exclusion ratio is 80%, only 20% of each monthly check is considered taxable income until you have received your entire principal back. This can be a significant tax advantage. For the specific rules, refer to U.S. Code § 72.
Key Considerations and Risks Before You Buy An Immediate Annuity
An immediate annuity is an irreversible decision. Here’s what I always made sure my clients understood.
Choosing Your Payout Option
- Life Only:
Provides the highest monthly payout but payments stop when the annuitant (the person receiving payments) dies. - Life with Period Certain:
Guarantees payments for a specific period (e.g., 10 years), even if you die sooner. If you outlive the period, payments continue for life. The payout is slightly lower. - Joint and Survivor:
Payments continue as long as either you or your spouse is alive. This is crucial for married couples but provides the lowest initial monthly payout. - Life with Cash Refund: I
f you die before receiving payments equal to your original premium, your beneficiary receives the difference.
The Biggest Risk: Inflation
A fixed payment of $1,500 per month feels great today, but its purchasing power will be significantly eroded by inflation in 10 or 20 years. Some immediate annuities offer inflation adjustment options (COLAs), but they come at the cost of a much lower starting payout.
The Financial Strength of the Insurance Company
Your “guaranteed” income is only as good as the company that issues it. Before you buy, it is essential to check the insurer’s financial strength rating from an agency like A.M. Best or S&P. I never recommended a company with a rating lower than “A.”
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Final Verdict: My Golden Rule for Immediate Annuities
After nearly 30 years of advising clients, my golden rule is this:
Solve for needs, not for greed. An immediate annuity is not an “investment” to make you rich; it’s an insurance product to ensure you never become poor. Use it surgically to create a floor of guaranteed income to cover your essential, non-negotiable expenses (like housing, food, and healthcare).
Let your other, more liquid assets in your retirement plan handle growth and fight inflation. That balanced approach is the key to a truly secure and peaceful retirement.
📌 Key Takeaway: Use an Annuity as a Tool, Not a Total Solution
An immediate annuity is a surgical tool designed to create a foundational income floor to cover your essential needs (housing, food, healthcare). It is not a growth engine. The most successful retirement plans I’ve built use a SPIA to guarantee the basics, while letting the rest of the portfolio handle growth and inflation.
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Note: The content provided in this article is for informational purposes only and should not be considered as financial or legal advice. Consult with a professional advisor or accountant for personalized guidance.
- Sharing the article with your friends on social media – and like and follow us there as well.
- Sign up for the FREE personal finance newsletter, and never miss anything again.
- Take a look around the site for other articles that you may enjoy.
Note: The content provided in this article is for informational purposes only and should not be considered as financial or legal advice. Consult with a professional advisor or accountant for personalized guidance.
