Retirement income planning is really about matching guaranteed and flexible sources of money to guaranteed and flexible expenses. Annuities are one tool among several, and understanding where they typically fit can make the bigger picture easier to see.

Covering essential expenses first

A common approach (sometimes called the “floor” strategy) is to make sure guaranteed income sources — Social Security, any pension, and potentially an annuity — cover your essential, non-negotiable monthly expenses: housing, utilities, groceries, insurance. Once that floor is covered, remaining savings and investments can be used more flexibly for discretionary spending, travel, or growth, without the fear of a market downturn threatening basic needs.

Reducing sequence-of-returns risk

One of the biggest risks in early retirement is a market downturn happening right when you start withdrawing from investments — forcing you to sell at depressed prices. Because annuity income generally isn’t tied to withdrawing shares at a loss, allocating a portion of savings to an annuity can reduce how much of your spending depends on market timing.

How much to allocate

There’s no universal percentage that fits everyone. Some retirees use an annuity for a small slice specifically covering a gap (like the years before Social Security or a pension begins); others use it more heavily if guaranteed income and peace of mind matter more to them than maximum growth potential. The right allocation depends on your other assets, health, spending needs, and how you personally feel about market risk.

Annuities as one piece, not the whole plan

Most well-built retirement income plans use annuities alongside — not instead of — other assets like investment accounts, cash reserves, and Social Security timing strategy. Thinking of an annuity as a tool for a specific job (guaranteed lifetime income) rather than a single all-purpose retirement product tends to lead to better decisions.

This article is educational and general in nature. It isn’t personalized financial advice. All guarantees are subject to the claims-paying ability of the issuing insurance company.