One of the biggest fears retirees share isn’t market volatility. It’s uncertainty. Not knowing whether your money will last as long as you do can be far more stressful than watching short-term market swings. That’s why many retirement income strategies begin with a simple question:
How will your essential expenses be covered for the rest of your life?
This is where the concept of flooring comes in, and why annuities often become part of the conversation
What Is the “Income Floor” in Retirement?
Your income floor is the amount of guaranteed, dependable income you need each month to cover necessities such as:
- Housing
- Food
- Utilities
- Insurance
- Healthcare
These expenses don’t stop or shrink just because markets are volatile or because you live longer than expected. Flooring strategies are designed to ensure these basics are always covered, regardless of market conditions.
For many retirees, Social Security already provides part of this floor. Some choose to strengthen it further by adding an annuity to help close any remaining income gap.
Why Annuities Create Strong Opinions
Annuities are often misunderstood, and they tend to evoke emotional reactions. Some retirees see them as restrictive or fear “losing control” of their money. Others value the predictability and peace of mind they can provide.
The reality is this: Annuities are not about maximizing returns. They are about minimizing risk where certainty matters most.
Used appropriately, they can be a powerful tool. Used poorly, or without understanding the trade-offs, they can be frustrating.
Advantages of Using a Fixed Immediate Annuity for Flooring
When used specifically to cover essential expenses, fixed immediate annuities offer several notable benefits:
- Lifetime income protection - Annuities address longevity risk by paying income for as long as you live, no matter how long that turns out to be.
- Mortality pooling benefits - Those who live longer may receive more income than they initially contributed, thanks to shared risk among annuitants.
- Reduced market exposure for necessities - Essential spending is insulated from market volatility, allowing the rest of the portfolio to be invested more flexibly.
- Withdrawal discipline - Annuities help prevent overspending early in retirement and reduce the risk of depleting assets too quickly.
- Psychological comfort - When framed as income, not as an investment, annuities can help retirees feel more confident spending money without fear.
For retirees with a lower risk tolerance or anxiety around market fluctuations, this sense of stability can be invaluable.
The Trade-Offs: What You Give Up
Annuities also come with real disadvantages, which is why they should never be considered in isolation:
- Loss of liquidity - Once assets are annuitized, you typically cannot access that lump sum again.
- Limited legacy planning - In many cases, annuitized assets cannot be passed on to heirs unless specific (and often costly) riders are added.
- Poor outcome if death occurs early - If a retiree passes away shortly after annuitizing, they may not receive much value from the contract.
- Loss of investment control - For confident investors, giving up control over a portion of assets can feel restrictive.
- Potential redundancy - Since Social Security already functions like an inflation-adjusted annuity, additional annuitization may be unnecessary for some households.
- Pricing and interest rate sensitivity - Annuities can feel less attractive in low interest rate environments, and not all products are priced equally.
These trade-offs are often the source of annuity aversion...and they’re valid concerns.
Who Might Annuities Be Most Appropriate For?
Annuities tend to work best for retirees who:
- Prioritize certainty over flexibility for essential expenses
- Have limited pensions or guaranteed income sources
- Want to reduce anxiety around market volatility
- Prefer predictable income to managing withdrawals
They may be less appropriate for those who:
- Need high liquidity
- Strongly prioritize leaving assets to heirs
- Have sufficient guaranteed income already
The Bottom Line
Annuities aren’t an all-or-nothing decision. They are a tool, not a strategy by themselves.
When used thoughtfully, often in combination with Social Security and a diversified investment portfolio, they can help create a stable foundation that allows retirees to spend with confidence and invest the rest of their assets more comfortably.
The key is understanding the puzzle pieces, the trade-offs, and how they fit your goals.
That’s where personalized planning makes all the difference.