You just retired. Maybe you rolled a 401(k) into an IRA, took a pension buyout, or sold a business — and now you're staring at the single biggest number you've ever been responsible for, with no paycheck coming next month. The instinct is either to keep it all invested and hope the market behaves, or to lock the whole thing into something "safe." Both extremes usually leave you worse off than the middle.
Should you put a lump sum into an annuity?
If you've just retired with a lump sum, the question isn't "annuity or not" — it's how much of it to convert into guaranteed income so your essential expenses are covered for life, while keeping the rest invested and liquid.
That reframe matters. People who treat it as all-or-nothing tend to either annuitize too much (and lose flexibility they'll regret) or annuitize nothing (and spend their 60s anxious about every market dip). The retirees who handle a lump sum well almost always do the same thing: they carve off just enough to build an income floor, and leave the rest alone.
What is an "income floor"?
An income floor is the baseline of guaranteed, lifetime income that covers the bills you absolutely have to pay — housing, food, utilities, insurance, taxes, healthcare. The expenses that don't go away in a bad market.
Most retirees already have part of a floor: Social Security, and maybe a pension. The floor strategy is simple to state. Add up your essential monthly expenses, subtract the guaranteed income you already have, and the gap — if there is one — is the only part you might fill with an annuity.
Here's why that's powerful. Once your must-pay bills are covered by income you can't outlive, the rest of your portfolio has a completely different job. It can stay invested for growth, fund travel and gifts and the fun years, and ride out market drops — because you're never forced to sell stocks at the bottom just to buy groceries. The floor buys your other money the freedom to behave like long-term money.
How much of a lump sum should you annuitize?
There's no single right number, but a few sane guardrails:
- Fill the gap, not the goal. Annuitize only enough to close the difference between your essential expenses and your existing guaranteed income (Social Security + pension). If there's no gap, you may not need an annuity at all.
- Many planners land around 25–40% of investable assets going to guaranteed income — sometimes less, occasionally more. Treat that as a sanity check, not a rule. If filling your gap would require 70% of everything you have, that's a signal you may be trying to insure too high a lifestyle.
- Keep 1–2 years of spending in cash outside the annuity, plus an emergency reserve. Liquidity is the thing you can't get back once it's annuitized.
- Mind the surrender period. If you use a deferred product with a surrender schedule, don't put money in that you might need before the schedule ends.
The point of all three: cover the floor, then stop. You are buying certainty for the expenses that scare you, not trying to maximize a number.
A realistic walk-through
Let's make it concrete. Say Susan, 66, just retired with $600,000 in an IRA. Her situation:
| Item | Monthly |
|---|---|
| Essential expenses | $4,500 |
| Social Security | $2,600 |
| Pension | $0 |
| Income gap to cover | $1,900 |
Susan doesn't need to turn $600,000 into income. She needs about $1,900 a month more, guaranteed, to cover her must-pay bills. Everything above that is discretionary and can stay invested.
As of early 2026, an immediate annuity for a 66-year-old runs in the neighborhood of $560–$600 per month per $100,000 of premium for single life. So roughly $320,000–$340,000 would generate Susan's missing $1,900/month for life. (Live quotes move with interest rates and vary by carrier — these are early-2026 snapshots, not guarantees. You can sketch your own version with the income goal tool or the calculator.)
Round it to $330,000 into guaranteed income, leaving Susan with:
- $330,000 annuitized → $1,900/month + her $2,600 Social Security = $4,500/month, exactly covering essentials, for life.
- $270,000 still invested and liquid — her growth engine, travel fund, healthcare cushion, and legacy.
Susan's essential bills are now bulletproof. Her remaining $270,000 can sit in a diversified portfolio and do its job over 25+ years without her panicking when the market drops 20%, because none of those drops touch her grocery money.
She could also stage it — annuitize part now and revisit in a few years — since payout rates rise with age and with interest rates. A 66-year-old who waits until 72 to turn on income gets a meaningfully bigger check per dollar.
Why you shouldn't annuitize all of it
Putting the entire $600,000 into an annuity would be a mistake for most people, for reasons that have nothing to do with annuities being "bad":
- Liquidity is one-way. Once you convert a lump sum into a lifetime income stream, that principal is generally gone as a lump sum. A new roof, a medical event, or a chance to help a grandchild with a down payment all require cash you no longer have.
- You over-insure. Annuitizing far past your actual income gap means paying for certainty you don't need on money that could be growing or staying flexible.
- Inflation and growth. A plain fixed income stream doesn't grow on its own. Keeping a meaningful slice invested in stocks is how most retirees keep pace with 25 years of rising prices.
- Legacy. Money inside a basic immediate annuity usually isn't left to heirs the way an invested account is. If leaving something behind matters to you, that argues for annuitizing less.
The floor approach sidesteps all of this. You insure the bottom — the expenses that would genuinely hurt to miss — and you keep the top flexible.
What type of annuity fits a lump sum?
It depends on whether you need income now or later, and how much guarantee you want:
- Income now: a single-premium immediate annuity (SPIA) turns a lump sum into a paycheck that starts within a year. Simplest, most income per dollar, least flexible. See the income annuity reviews.
- Income later: a deferred income annuity or a fixed indexed annuity with an income rider lets the future payout grow before you switch it on.
- Just safe growth, not income yet: a MYGA (a fixed annuity with a set rate for a set term) parks part of the lump sum at a guaranteed rate — useful for the "income later" bucket before you commit to lifetime payments.
If you're not even sure you fall into the "needs an annuity" camp, work through do you actually need an annuity before sizing anything.
A few tax and sequencing notes
A lump sum from a pre-tax 401(k) or IRA is still tax-deferred money. Moving it into an annuity inside that IRA (a "qualified" annuity) doesn't trigger a tax bill — but every dollar of income it eventually pays out is ordinary income, and required minimum distributions still apply once you reach RMD age. An annuity bought with after-tax (non-qualified) money is taxed differently: part of each payment is a tax-free return of your own principal. The details get specific fast, so it's worth reading how annuities are taxed and confirming your own situation with a tax professional before you move a large balance.
On sequencing: there's rarely a reason to rush the whole thing on day one of retirement. Covering your income floor is time-sensitive only to the extent you're spending down savings to pay bills. Beyond that, staging purchases over a few years lets you average across interest-rate conditions and benefit from higher payout rates at older ages. And if you want a sense of how the payout math actually works before you commit, how much a $500,000 annuity pays per month walks through the numbers in detail.
The bottom line
A lump sum at retirement is not a single decision — it's a sizing decision. Figure out the gap between your essential expenses and the guaranteed income you already have, fill only that gap with lifetime income, and let the rest of your money stay invested, liquid, and working for the long haul. Cover the floor, then stop. That's the whole strategy, and it's the part most people get wrong by going all-in or all-out.