For most retirees seeking guaranteed income, a single premium immediate annuity (SPIA) or a fixed index annuity with a guaranteed lifetime withdrawal benefit (GLWB) provides the most reliable retirement paycheck. The best choice depends on when you need income and how much flexibility you want.
A Single Premium Immediate Annuity (SPIA) converts a lump sum into a guaranteed income stream that begins within one month of purchase and continues for your lifetime (or a set term). It's the simplest income annuity: you hand over a fixed amount of money, and the insurer pays you a monthly income you can't outlive. SPIAs offer the highest payout rate of any annuity type but sacrifice all liquidity, once purchased, the principal is no longer yours to access.
A Fixed Index Annuity (FIA) with a Guaranteed Lifetime Withdrawal Benefit (GLWB) offers guaranteed income combined with flexibility. The annuity's underlying value grows based on a portion of market index gains (with a floor of zero, you can't lose principal). The GLWB rider guarantees that even if the underlying account value depletes, you will receive a minimum income for life. Many FIAs also allow penalty-free withdrawals for medical emergencies or long-term care, something a SPIA doesn't offer.
For the gap between retirement and Social Security, a deferred income annuity (DIA) or QLAC is often more appropriate. You purchase it now, income starts at age 75 or 80, and the deferral period dramatically increases the eventual payout rate. A $100,000 DIA purchased at age 65 with income beginning at 80 can generate significantly more monthly income than a SPIA purchased at 80 with the same premium.
Illinois doesn't tax IRA or annuity distributions from retirement accounts, which matters when funding an annuity with IRA money (a 'qualified annuity'). Non-qualified annuities (funded with after-tax money) are taxed under the exclusion ratio, a portion of each payment is a return of your basis and isn't taxable.
Key facts
- SPIA: highest immediate payout rate; no liquidity after purchase; income begins within 30 days
- FIA with GLWB: income guaranteed for life; underlying account retains some liquidity; growth tied to market index with 0% floor
- MYGA (Multi-Year Guaranteed Annuity): fixed rate for 3-10 years; best for accumulation, not income
- Illinois doesn't tax qualified annuity distributions (funded from IRA/401k), no state income tax applies
- Non-qualified annuity taxation: exclusion ratio applies, a portion of each payment is tax-free return of basis
- Surrender periods: most deferred annuities have 5-10 year surrender charge periods, understand liquidity constraints before purchasing
How much of my retirement assets should I put in an annuity?
There's no universal percentage. The goal is to match your guaranteed income sources (Social Security, pension, annuity) to your essential monthly expenses. If Social Security covers your essential needs, you may not need an annuity at all. If there's a gap, essential expenses exceed guaranteed income, an annuity to cover that gap is worth considering. We run an income floor analysis before recommending any annuity purchase.
Are annuities safe if the insurance company fails?
Annuities are backed by the financial strength of the issuing insurance company, not FDIC insurance. Illinois is a member of the Illinois Life and Health Insurance Guaranty Association, which provides coverage up to $300,000 in annuity benefits per insurance company if an insurer becomes insolvent. We recommend purchasing annuities only from highly-rated insurers (A or better from AM Best) and consider spreading across multiple insurers for large purchases.
