When most people think about retirement, their first instinct is to focus on saving. But there’s another side to the equation that often gets overlooked: how you draw income once you retire.
Many retirees unknowingly end up paying more in taxes than necessary — not because they saved poorly, but because they didn’t structure their withdrawals strategically. One of the most underutilized tools in building a tax-efficient retirement income strategy is the annuity.
Let’s break down how annuities work, why they matter, and how they can be part of a well-rounded retirement plan.
What Exactly Is an Annuity?
At its core, an annuity is a contract with an insurance company. You invest a sum — either upfront or over time — and in return, the insurer guarantees you a stream of income, either right away or at a later date.
Common Types of Annuities:
Fixed Annuity: Offers a guaranteed interest rate over time.
Variable Annuity: Returns are linked to market performance (higher potential, higher risk).
Indexed Annuity: Tied to an index like the S&P 500, but usually with downside protection.
Immediate Annuity: Starts paying income almost immediately after funding.
Deferred Annuity: Grows over time and starts paying later, often years down the road.
Each type has its place — the key is understanding which one fits your retirement picture.
Why Consider Annuities for Retirement Income?
Retirees usually pull income from a mix of:
401(k)s and IRAs (taxable upon withdrawal)
Social Security (partially taxable)
Brokerage accounts (capital gains)
Savings (low interest, minimal growth)
Here’s where annuities can bring unique advantages:
Tax-Deferred Growth: No taxes on growth during accumulation.
Predictable Income: Regardless of what the stock market does.
Tax-Smart Withdrawals: Can be used alongside Roth conversions or blended income strategies to manage taxable income.
Legacy Planning: Certain annuities allow for structured inheritances with built-in beneficiary options.
Used thoughtfully, annuities help control when and how much income gets taxed — keeping retirees in lower tax brackets and potentially avoiding Medicare surcharges.
Real Example: A Strategic Annuity Setup
A 62-year-old with a healthy 401(k) and some investments was unsure if retirement at 65 was realistic. He had no pension, rising healthcare concerns, and wasn’t sure how to stretch his savings.
His strategy included:
A deferred annuity for long-term, tax-deferred growth
A fixed annuity kicking in at 68 for guaranteed income
Holding off on 401(k) withdrawals until Required Minimum Distributions (RMDs) at age 73
The outcome?
Greater control over taxes and withdrawals
The confidence to retire at 65
A plan that reduced market exposure and provided a lifelong income
How to Integrate Annuities into Your Plan
Designing a smart income strategy with annuities isn’t about buying a product — it’s about structuring timing and taxation properly. Here’s how the process usually works:
Income Discovery: Assess your savings, spending needs, healthcare plans, and retirement goals.
Scenario Modeling: Forecast your income over time — comparing strategies with and without annuities.
Annuity Comparison: Evaluate different carriers, fee structures, and payout options transparently.
Tax Optimization: Layer in strategies like Roth conversions or withdrawal sequencing to minimize taxes.
Ongoing Adjustments: Review the plan annually to adapt for life changes, market shifts, or new goals.
When to Start Thinking About Annuities
You don’t need to be on the brink of retirement to consider annuities. The ideal time is often 5–10 years before your target retirement age.
Consider annuities if:
You’re worried about outliving your savings
You want to reduce volatility in your income stream
You’re looking to minimize RMD taxes
You want to structure your Social Security or healthcare costs better
Frequently Asked Questions
Are annuities safe?
Yes — particularly fixed and indexed annuities. These are issued by regulated insurance companies and are designed for long-term security.
What about access to my money?
Some annuities come with surrender periods, but there are also options with liquidity features, withdrawal riders, or flexible income schedules.
Can annuities work with Roth IRAs?
Definitely. A Roth-funded annuity can offer tax-free income for life — a powerful combo for retirees.
— it’s a transition. And managing income, not just assets, is a big part of making that transition smooth.
Annuities, when used wisely, give retirees peace of mind: predictable income, tax control, and long-term stability. They won’t replace your 401(k) or Social Security — but they can fill the gaps those tools leave behind.
If you’re unsure where annuities might fit in your plan, consider speaking with a retirement income strategist who’s well-versed in both the math and the human side of financial planning.
Irina Tamarova, a seasoned consultant in retirement income planning, and her team at Macrotech have guided countless professionals through these exact decisions — not with a sales pitch, but with strategy. For those seeking clarity, not confusion, they’re a great place to start.