How a Life Annuity Can Reduce Retirement Costs

Written by Ariel Stern Updated March 14, 2026

When you prepare for retirement, you need to be honest with yourself about whether or not you have enough money to last your retirement.

Answering this question is never simple. There are variables that you can’t control or predict, like what inflation will be, how your health will be (and how much it will cost), how financial markets will perform, and what unexpected expenses may come up.

Many people turn to income annuities like an Immediate Annuity or Deferred Income Annuity to supplement their retirement income. An income annuity can guarantee retirement income to you that you can’t outlive, ensuring you don’t outlive your nest egg.

Why Retirees Worry About Their Nest Egg

It’s no wonder people worry about running out of money in retirement. According to a study by the Social Security Administration, over half of all people over 65 relied on social security benefits for 50% of their income, and close to one quarter rely on it for over 90% of their income.

On top of this, KFF (formerly known as the Kaiser Family Foundation), expects that healthcare costs will continue to increase for Americans. In fact, KFF notes that one in three insured adults report not getting healthcare due to cost.

Inflation has become a real worry to retirees as they see their spending power decline as costs go up. It’s important to remember that inflation does not just impact nice-to-haves, but also necessities like gas, electric, and groceries.

How an Income Annuity Can Reduce Retirement Costs

For many people, guaranteed income for life sounds great. But for many, the price of an annuity gives them sticker shock. Annuities come with a big price tag, but you are buying guaranteed income and security.

If you self-invest, you are exchanging the guarantees the insurer gives you for more control over your money. You have more liquidity than an immediate annuity, but you are subject to market fluctuations and managing your money into your retirement.

On top of that, it could very well cost you more in the long-run to self-invest than to buy an annuity.

If you sit down and run the numbers (don’t worry we’ll do it for you), you’ll soon see that the cost of an immediate annuity is actually quite reasonable and can save you money in the long run compared to self-funding your income needs through regular distributions.

What You Need To Get $1,000 Per Month For Life?

The Immediate Annuity

Let’s say you are 65 years old and need $1000 per month for life. In order to get this, you can buy a life only annuity or invest your money and make distributions to yourself. For our example, we’ll use a “life only” annuity because it is the payout option that usually has the highest payout rate.

To buy this kind of annuity, it would cost about $154,500 for a man and $159,700 for a woman as of this article’s publication. The reason for the discrepancy between men and women is insurers factoring women’s longer life expectancies into their rates.

Does this lump-sum payment seem too much for $1000 a month? If it does, let’s look at how you’d fare self investing.

Self-Investing and Making Distributions

To explore this, we’ll look at what it would cost you to pay $1,000 to yourself throughout time at differing interest rates: 2%, 4%, and 6%. These are average rates you might expect from a relatively safe investment (savings), a moderate investment (bonds), and a high risk, high reward investment (stock market).

While we assume rates are level throughout time, in reality they will change over your lifetime. Sometimes you will yield better than their average, and other times less.

It’s important to understand that market volatility can have a big impact on how long your money lasts. If you have to skip taking money out, that’s money you don’t have to spend. If you have to take money out when markets plunge, this is bad for your account values and can make you run out of money faster.

How An Annuity and Self-Distributing Compare

If you look at this chart, you’ll see how much cash you need for all these investment options based on how long you live.

Depending on your average investment returns, the annuity becomes cheaper at:

• Safe Account (2%): Male (80), Female (80)
• Moderate Account (4%): Male (83), Female (84)
• Risky Account (6%): Male (90), Female (91)

Key Takeaways: While self-investing might be cheaper intially, as you age the annuity gains more and more value.

Below we have a table showing how much it would cost for you to pay yourself $1,000 per month out of an investment account at ages 75, 80, 85, 90, 95. You’ll see that if you live a long time, buying an immediate annuity pays off quite a bit.

Annuity Fees Can Actually Be Cheaper

One thing many people ask us is what the commissions or fees are for annuities. Fees generally change product to product and company to company. We have an article dedicated to annuity commissions you might find helpful.

However, for an immediate annuity somewhere around a 3% commission would be quite standard. While this may seem high to you, this is a one-time commission paid to the agent directly from the insurance company: you do not pay anything additional to the agent.

Yes, the insurance company factors in their overhead, like commissions, when setting their rates. However, if you instead decide to self-fund your retirement through an investment service, you could very reasonably be paying 1% to the investment service every year.

It doesn't take long for that 1% annual investment fee to be more than the agent's single commission for an immediate annuity. This is the difference between a one-time fee and a recurring annual fee.

Can An Annuity Reduce Costs For You?

At this point, you may be wondering if an annuity is right for you. If you are looking for guaranteed, lifetime income, an immediate annuity can be a great way to satisfy that goal. If you think you’re going to live a long time, a lifetime annuity can really pay off.

That being said, there are other pros and cons to immediate annuities you should also consider, and we’d recommend checking out our Annuity Shopper Buyer’s Guide as a good place to start exploring annuities.

Or, simply get a free income annuity quote. The blue quote calculator on this page is fast, free, easy, and no phone number is required. You’ll get guaranteed rates from top insurance companies instantly online. There’s no obligation and we respect your privacy.

If you have other questions about annuities, call our annuity experts at (866) 866-1999. Our U.S.-based annuity experts are here to answer your questions honestly without any sales talk.

References

• The Importance of Social Security Benefits to the Income of the Aged Population, Social Security Administration, November 2017
• "Health Care Costs and Affordability" KFF, October 2025.