How Much Of Your Nest Egg Should Be In An Annuity?

There is no magic number for how much of your savings should go into an annuity. The right amount depends on your specific situation. But here is a framework to help you think about it.

Start with your income gap. Add up your essential monthly expenses and subtract your guaranteed income sources (Social Security, pension). The difference is what you need to cover. An annuity can fill that gap permanently.

Next, consider your emergency reserves. You should have 1 to 3 years of living expenses in liquid assets before putting any money into a long-term annuity. This ensures you will not need to access the annuity funds early and trigger surrender charges.

Then think about your risk tolerance. If a market downturn would keep you up at night, you may want a larger allocation to protected products like fixed or fixed indexed annuities. If you are comfortable with market fluctuations, you may want a smaller allocation.

A common approach is to put enough into an annuity to cover essential expenses, then leave the rest in growth-oriented investments for discretionary spending and legacy goals. This way, your basics are covered no matter what the market does.

Payout rates are still near multi-year highs. The amount of income each dollar of annuity premium buys today is higher than it has been in nearly 20 years. That window will not stay open forever.