Strip away the sales language and an annuity is a simple contract. You hand an insurance company a lump of money, and in return it promises to pay you income — either starting right away or at some future date. That is the whole idea. An immediate annuity is the cleanest version: you give the insurer $200,000 today, and it sends you a fixed check every month for the rest of your life. It is less an investment than it is insurance against living a long time and running out of money.

That last point is the real reason annuities exist, and it is the one part of the pitch that holds up. For most of the 20th century, a company pension did this job automatically. Today almost nobody outside of government work retires with a traditional pension, which means the longevity risk that employers used to absorb now sits squarely on the individual. An income annuity is the most direct way to hand that risk back to an insurer. The technical engine behind it is something called mortality credits — because some buyers in the pool die earlier than expected, the survivors get paid more than a bond portfolio alone could safely support. No mutual fund can replicate that.

The current numbers are more attractive than they have been in years, and the reason is interest rates. After the rate increases of the early 2020s, payout rates have climbed. As of early 2026, a 65-year-old man putting $100,000 into a life-only single-premium immediate annuity (SPIA) can expect about $625 a month; a woman the same age gets roughly $590, because she is likely to collect for more years. That works out to an annual payout rate in the neighborhood of 7 to 7.5 percent. Be careful with that figure, though — it is not a 7 percent yield. A big chunk of each check is simply your own principal coming back to you. The genuine return only pulls ahead once you outlive the actuarial tables.

Now the part the brochures bury. The annuity that does its job well — the plain SPIA above — is almost never the one being sold to you. The products that generate the fattest commissions, often 5 to 7 percent to the agent, are variable annuities and fixed indexed annuities. These get wrapped in language about market upside with downside protection, then loaded with riders, participation caps, and surrender charges that can lock your money up for seven to ten years. The caps quietly skim most of the market's good years, the fees compound against you, and the protection you are paying for is rarely worth what it costs. As a rough rule: the more moving parts a salesperson has to explain, the more the contract tends to favor the company.

There is a middle category worth knowing about. A multi-year guaranteed annuity (MYGA) works much like a bank CD — you lock in a fixed rate for, say, three or five years — but the interest grows tax-deferred until you withdraw it. In a higher-rate environment, MYGAs have become a reasonable parking spot for conservative money, particularly for retirees who have maxed out other tax-deferred space. They are simple, which is exactly why no one pushes them very hard.

Taxes deserve a sentence of caution. Income from a non-qualified annuity (one bought with after-tax dollars) comes out as a blend of tax-free principal and ordinary-income earnings under what is called the exclusion ratio. Earnings are taxed as ordinary income, not at the lower capital-gains rate, and annuities get no step-up in basis at death — your heirs can inherit a tax bill. And buying an annuity inside an IRA to get tax deferral is usually pointless: the IRA is already tax-deferred, so you are paying for a feature you already have.

So how much should you annuitize? The cleanest framework is the income floor. Add up the expenses you consider non-negotiable — housing, food, insurance, utilities, the basics that have to be covered no matter what the market does. Then tally your guaranteed income: Social Security, plus any pension. If there is a gap between your essential expenses and your guaranteed income, that gap is the only thing an annuity needs to fill. Cover it, and you have bought yourself permission to invest the rest of the portfolio for growth without panicking every time the market drops. Annuitize everything, on the other hand, and you have traded away liquidity, inflation protection, and anything left for heirs.

If Social Security and a pension already cover your essential spending, you may not need an annuity at all — your longevity risk is largely handled, and additional guaranteed income mostly just reduces flexibility. The honest advice in that case is to skip it, regardless of how good the pitch sounds.

If you do have a gap — and most retirees without pensions do — a simple immediate annuity covering just the shortfall can be one of the most powerful moves in the plan. It converts a portion of a volatile portfolio into a check that arrives whether the market is up 20 percent or down 30, and that psychological permission to stay invested with the rest is often worth more than the income itself.

When you buy, shop it like the commodity it is. Get quotes from several highly rated insurers for the exact same payout — a difference of $30 a month on identical terms is real money over 25 years. Favor low-cost, no-commission contracts, check the insurer's credit rating, and know your state's guaranty-association coverage limit, since that is your backstop if the company ever fails.

• Annuitizing too much of the portfolio. Once the money is in an immediate annuity, it is gone as a liquid asset — no lump sums for emergencies, home repairs, or heirs. Cover the income gap, not the whole nest egg.
• Buying a variable or fixed indexed annuity for upside with protection. The caps and fees usually claw back most of the benefit; a plain income annuity plus a low-cost index fund does the same job more cheaply.
• Ignoring inflation. A level payout that feels generous at 65 can lose a third of its buying power by 85. Either build in a cost-of-living adjustment or keep enough of the portfolio in growth assets to offset it.
• Putting an annuity inside an IRA to get tax deferral you already have, then paying extra fees for the privilege.
• Taking the first quote from the agent who called you. Payouts vary meaningfully between insurers, and teaser rates on indexed products rarely survive the fine print.