How Much of Your Savings Should You Put in an Annuity?

There is no universal answer to how much retirement savings should go into annuities. The right size depends on essential expense levels, Social Security and pension coverage, liquidity needs, and the consumer’s tolerance for carrier-specific concentration risk.

This article walks through a sizing framework.

Step 1: Calculate the essential expense floor

Add up all expenses that must be paid regardless of market conditions:

• Housing (mortgage, taxes, insurance, HOA)
• Healthcare (Medicare premiums, supplemental, OOP estimate)
• Food and household
• Utilities
• Basic transportation
• Insurance premiums

This is the “floor” the consumer cannot let drop below. For most retirees, this is between $3,500 and $6,500 per month.

Step 2: Subtract guaranteed income from non-annuity sources

Subtract Social Security and pension income. The remainder is the essential expense gap that the portfolio (or annuity) must cover.

Example: $5,000/month essential, $2,800 Social Security, no pension → $2,200/month gap.

Step 3: Size the annuity to close the gap

To convert the gap into an annuity premium, divide by the SPIA payout rate. At industry-average rates, a 65-year-old male collects approximately $600/month per $100,000 of premium (life-only).

$2,200/month ÷ $600/month per $100K = approximately $367,000 in SPIA premium to close the gap.

This is the maximum annuity allocation a typical retiree should consider for the income-floor purpose. Larger allocations don’t add income (the gap is already closed); they expose more capital to carrier concentration risk and surrender constraints.

Step 4: Layer in liquidity and legacy

After the income-floor annuity is sized, three additional buckets:

Cash reserve. 6-12 months of essential expenses in cash or short-term bonds. Not in any annuity. This handles unexpected expenses and short-term spending shocks.

Discretionary portfolio. Funds discretionary spending (travel, hobbies, gifts). Held in a diversified portfolio (stocks + bonds). Typically funded with a 3-4% withdrawal rate.

Legacy / longevity reserve. Held in a portfolio (or another annuity, like a QLAC) for late-life needs and inheritance goals.

A typical retiree allocation for a $1M portfolio with $5K essential / $2.8K Social Security:

• $60,000 cash reserve (6-12 months)
• $370,000 SPIA for income floor
• $400,000 diversified portfolio for discretionary spending and growth
• $170,000 reserved for legacy or QLAC

The SPIA represents 37% of the portfolio. This is in line with most retirement income literature recommendations (20% to 50% annuity allocation depending on situation).

Carrier concentration limits

The state guaranty association covers annuities up to limits that vary by state, typically $100,000 to $500,000 per contract per carrier. Above the limit, the consumer carries direct exposure to the carrier’s financial strength.

For consumers placing $500,000+ in annuities, splitting across two or three highly rated carriers below each state’s coverage limit is standard practice. A $500,000 SPIA allocation might be:

• $200,000 to Carrier A (A++ rated)
• $200,000 to Carrier B (A+ rated)
• $100,000 to Carrier C (A+ rated)

The split adds administrative complexity but eliminates single-carrier concentration.

What never goes into an annuity

Money that should not be in any annuity:

• Emergency reserve (needs to be immediately liquid)
• Money intended for purchases within the surrender period (cars, home repairs, large gifts)
• Money the consumer is uncomfortable seeing locked up
• Anything that would push total annuity allocation above 50-60% of liquid net worth (concentration risk)

The “50-60% maximum” is a common heuristic. It reflects that annuities, while structurally appropriate for the income-floor function, become a problem when over-allocated. The consumer who later regrets the lock-up doesn’t have an easy exit.

Special cases

No pension, modest Social Security. Annuity allocation may need to be higher (40-50% of portfolio) to close the essential expense gap. Acceptable if the math works.

Strong pension covering most essentials. Annuity allocation may be unnecessary or minimal. The pension already provides the income floor.

Single retiree with no heirs. Larger SPIA allocation makes more sense (no need to preserve principal for heirs). Mortality credits favor the consumer.

Married couple with significant assets. Joint-and-survivor SPIA for the income-floor portion, plus separate growth portfolio. Often allocated 25-35% to the SPIA.

Health concerns / below-average life expectancy. Lower SPIA allocation; consider period-certain features. Mortality credits work against the consumer.

Working through the suitability questionnaire

The carrier’s suitability questionnaire collects information designed to verify the annuity is appropriate:

• Age, income, tax bracket
• Total liquid assets and net worth
• Existing retirement income
• Risk tolerance
• Liquidity needs over the next 5-10 years
• Source of premium funds

If the suitability questionnaire shows the proposed annuity premium is more than 50% of liquid assets, the carrier may decline the application or require additional disclosures. This is regulatory protection working as intended.

Bottom line

Most retirees should size the annuity to close the essential expense gap and stop there. Larger allocations don’t add income and create unnecessary liquidity constraints. Smaller allocations leave the consumer exposed to market dependency for essential expenses.

For the broader framework, see the retirement income planning guide.