How Much of Your Savings Should Actually Go Into an Annuity?
There are two ways to get the annuity question wrong, and they point in exactly opposite directions.
The first mistake is annuitizing too much. Somebody hands an insurance company half their savings because guaranteed income sounds safe, and in doing it they lock up money they never needed to lock up — money that was supposed to grow for the next thirty years, or sit liquid for the surprises. They bought certainty they didn’t need and gave up flexibility they did.
The second mistake is annuitizing too little — usually nothing at all. This person keeps every dollar invested, feels in control, and funds their groceries and their mortgage by selling investments every single month. Their essential spending — the stuff that doesn’t stop when the market drops — is riding on the market. They feel safe right up until the first bad year, when they find out they weren’t.
Same question, two opposite errors. And almost every piece of advice you’ll read tries to split the difference with a percentage — “put 20% in an annuity,” “25 to 40% of your savings.” I want to be honest with you about that: the percentage is the wrong question. You don’t pick a percentage. You size it to your gap. Let me show you what that means and how to find your number.
Why “what percentage?” is the wrong question
A percentage rule treats everybody’s retirement as the same shape. It isn’t.
Two people can have the identical $1,000,000 portfolio and need wildly different amounts of guaranteed income. One of them has a $30,000-a-year pension and modest expenses, so Social Security plus the pension already covers everything they have to pay. The other has no pension, higher fixed costs, and a real shortfall between what shows up guaranteed and what they have to spend. Tell both of them to “annuitize 25%” and you’ve given one person something they don’t need and the other person not nearly enough.
The percentage doesn’t know your expenses. It doesn’t know your Social Security. It doesn’t know whether you have a pension or whether you’re covering one life or two. So it can’t possibly land on your right answer — it’s a guess dressed up as a rule. The right answer comes from a number the percentage rules never ask you for: your gap.
The honest framework: size it to your gap
Here’s the actual method, and it’s four steps. No round percentages — just your own numbers.
Step one: add up your floor. Your floor is the spending that doesn’t stop when the market drops — housing, food, utilities, insurance, the basics. Say that comes to $65,000 a year. That’s the spending you need covered no matter what stocks do.
Step two: subtract the guaranteed income you already have. Social Security goes here. A pension, if you’re one of the lucky ones, goes here. Say Social Security brings in $40,000. Subtract it from the floor.
Step three: what’s left is your gap. Sixty-five thousand minus forty thousand is a $25,000 gap — the slice of your essential spending that is not currently guaranteed. Right now you’re filling that $25,000 by selling investments every month, which is exactly the part that’s exposed to a bad market in the wrong year.
Step four: the amount to consider annuitizing is the lump sum that produces that gap-income — not a percentage of your portfolio. You’re not asking “what slice of my million should I convert?” You’re asking “how much does it cost to buy $25,000 a year of guaranteed income for life at my age?” That dollar figure — the cost of closing the gap — is the amount to put on the table. As an illustration only: producing roughly $25,000 a year of lifetime income might take somewhere in the neighborhood of $400,000 to $450,000 depending on your age, the rate environment, and whether you’re covering one life or two. That’s the number that matters — not “20% of my portfolio.” (The estimator at the end will run your version of this, because the real figure moves with all three of those things.)
Notice what just happened. We never picked a percentage. We found the gap, then priced the gap. If your gap is bigger, the amount is bigger. If your gap is zero, the amount is zero. The portfolio size never entered the calculation — your spending did. That’s the whole difference between sizing it to your gap and guessing at a percentage.
The honest answer to “what percentage should I annuitize?” is: none of them. You don’t annuitize a percentage of your portfolio — you annuitize the cost of your gap. Find the gap first, and the amount answers itself.
See what closing your gap would actually cost — and what monthly income it would buy at your age. Run yours →
The guardrails: what you never annuitize
Sizing to the gap tells you the most you should consider. The guardrails tell you what to keep out of it, because annuitizing money that had another job is its own mistake.
Never annuitize money you need liquid. A lifetime income annuity trades access for income — that’s the deal, and for floor money it’s usually a good deal. But your emergency cash and any near-term big expense — the roof, the new car, the help with a grandkid’s tuition — that money needs to stay reachable. Income annuity money is committed. Don’t commit dollars that have a date on them.
Keep a growth bucket. Your $65,000 floor today is not your floor at 85 — inflation will have quietly turned it into something closer to $90,000. The portion of your savings you don’t annuitize stays invested precisely so it can grow for the back half of a long retirement and the wants on top of the needs. Annuitize the floor; let the rest grow. (If “floor and growth and a cash cushion” sounds like a structure, it is — it’s the three-buckets framework, and the guaranteed slice we’re sizing here is bucket one.)
Treat the rules of thumb as starting points, not answers. When you read “25 to 40% of savings,” hold it loosely. It’s a sanity check, not a verdict. If your gap-sized number lands inside that range, fine — that’s a coincidence worth noticing, not a confirmation. If it lands well outside it, trust your gap, not the rule of thumb. Your gap is the answer. The percentage was only ever a guess at it.
Some people should annuitize nothing — and that’s the honest part
Here’s where most annuity material goes quiet, so let me say it plainly: a lot of people have no gap, and those people should annuitize nothing.
If your Social Security and your pension already cover your floor, you’re done. There’s nothing to close. Buying an annuity on top of that is solving a problem you don’t have — you’d be locking up money for income you already receive. Don’t do it.
You should also pass if everything is already earmarked. If your savings are spoken for — illiquid, committed to other goals, needed for known near-term expenses — there’s nothing free to convert without breaking a different part of the plan.
And you can reasonably pass if your portfolio is very large relative to your spending. When your savings dwarf what you actually spend, sequence-of-returns risk gets a lot smaller — you can absorb a bad decade out of sheer surplus. At that point an annuity becomes optional rather than protective, and “optional” for a big enough portfolio often means “skip it.” Some of the wealthiest retirees self-fund their floor and never buy a contract, and that’s a perfectly sound choice for them.
The point isn’t that annuities are always the answer or never the answer. The point is that your gap decides — and for some people, honestly, the gap is zero. We’d rather tell you that than sell you something.
Find your gap, then see exactly what closing it would cost and what it would pay you for life. Run yours →
It takes about a minute. It’ll show you, roughly, the monthly income a portion of your savings could turn into at your age — which is the real version of the four-step math above. If you want to talk through whether your gap is big enough to bother closing — or whether you’ve already got it covered and don’t need to do anything — a licensed specialist will walk through it honestly. And if the answer is “your floor’s already covered, leave it alone,” we’ll tell you that too.
OwnYourPension is an education and resource brand. We are not a pension provider, and the income tools here are not PBGC- or FDIC-insured. “Guaranteed” lifetime income refers to the contractual promise of the issuing insurance company and depends on that carrier’s claims-paying ability. Annuities and insurance products are offered through partnered licensed agencies and are sold for a commission. The “growth bucket” refers to a general diversified investment portfolio; its value will fluctuate, returns are not guaranteed, and nothing here recommends any specific security or investment strategy. Examples are illustrative and use round numbers for clarity; the lump sum required to produce a given income, and the income a given lump sum produces, depend on your age, the rate environment, your expenses, and the specific contract. Nothing here is tax, legal, or individualized financial or investment advice — confirm specifics with a licensed professional and your own tax advisor.