One of the biggest fears among people approaching retirement isn't dying too soon — it's living too long.

Specifically, it's the fear of outliving your money. Running out of savings at 85 or 90, when you're no longer able to work and your options are limited, is a genuinely frightening prospect.

Income annuities are one of the most effective tools for addressing this risk. They're also one of the most misunderstood.

What Is an Income Annuity?

An income annuity is a contract between you and an insurance company. You give the insurer a lump sum of money, and in exchange, they promise to pay you a fixed income — monthly, quarterly, or annually — for a specified period or for the rest of your life.

The key word is "guaranteed." Unlike investment accounts that fluctuate with the market, an income annuity pays the same amount regardless of what the stock market does, what interest rates do, or how long you live.

The Two Main Types

Immediate Income Annuity (SPIA)

A Single Premium Immediate Annuity (SPIA) starts paying income almost immediately — typically within 30 days of purchase. You make a single lump-sum payment, and income begins right away.

This is ideal for someone who is already retired and wants to convert a portion of their savings into a guaranteed income stream now.

Deferred Income Annuity (DIA)

A Deferred Income Annuity (also called a longevity annuity) starts paying income at a future date — often 10, 15, or 20 years from purchase. You pay now, but income doesn't begin until later.

DIAs are particularly useful as insurance against living to a very old age. You might purchase one at 65 that begins paying at 85, ensuring you have income no matter how long you live.

How Income Annuities Differ from Other Annuities

The annuity market is large and varied, and not all annuities are the same. Variable annuities and indexed annuities are investment products with insurance wrappers — their value fluctuates based on market performance.

Income annuities are different. They are pure insurance products designed to do one thing: provide guaranteed income. They don't have investment accounts, sub-accounts, or market exposure. What you see is what you get.

The Payout: What Determines Your Income?

Several factors determine how much monthly income your annuity will pay:

• Your age: Older buyers receive higher monthly payments because the insurance company expects to pay for fewer years
• Your gender: Women typically receive slightly lower payments because they live longer on average
• Interest rates: Higher interest rates generally mean higher annuity payouts
• The premium amount: More money in means more income out
• The payout option you choose: Lifetime only, joint life, period certain, etc.

Payout Options: Choosing the Right Structure

Life only: Pays income for as long as you live, then stops. Provides the highest monthly payment but leaves nothing for heirs if you die early.

Life with period certain: Pays for your lifetime, but guarantees a minimum number of payments (e.g., 10 or 20 years). If you die before the period ends, payments continue to your beneficiary.

Joint and survivor: Covers two people — typically spouses. Payments continue as long as either person is alive. Monthly payments are lower than a single-life annuity.

Cash refund: If you die before receiving back your full premium, the remaining balance is paid to your beneficiary.

For most married couples, a joint and survivor annuity or a life with period certain option provides the best balance of income and protection.

Is an Income Annuity Right for You?

Income annuities are not right for everyone. They work best for people who:

• Are concerned about outliving their savings — the longevity insurance aspect is the primary value
• Want predictable, guaranteed income to cover essential expenses in retirement
• Have other assets for liquidity and emergencies (annuities are not liquid)
• Are in reasonably good health — if you have a serious health condition that significantly shortens your life expectancy, an annuity may not be the best use of your money

They are generally not ideal for people who need flexibility, have significant health issues, or want to leave a large inheritance.

Annuities and California Taxes

Income from annuities is generally taxable as ordinary income in the year it's received. However, if you purchase an annuity with after-tax dollars, a portion of each payment is considered a return of principal and is not taxable.

California taxes annuity income at the state level as well. Working with a financial representative and a tax advisor ensures you understand the full picture.

A Tool, Not a Total Solution

Income annuities work best as one component of a broader retirement income strategy — not as the only source of income. A common approach is to use an annuity to cover essential expenses (housing, food, healthcare) and rely on investment accounts for discretionary spending and growth.

As a licensed Financial Representative with Northwestern Mutual (CA License #4464945), I help California retirees and pre-retirees understand how income annuities fit into a comprehensive retirement plan. A free consultation is always available.