For most of your working life, your paycheck simply showed up. In retirement, you decide when income starts, and many of those choices cannot be undone once the first payment arrives. So the real question is simple: buy your paycheck now, or buy it for later?
Key Takeaways
- Immediate annuities pay within a year; deferred annuities pay later.
- Waiting can mean larger payments, but keep emergency money within reach.
- Compare any deferred annuity with delaying Social Security.
- Federal employees: price the TSP annuity, then compare other insurers.
Two Ways to Buy a Paycheck
An immediate annuity is your paycheck now. You pay one lump sum, and income begins within one year of purchase, often within the first month. There is no growth phase.
A deferred annuity is your paycheck later. Your money first goes through an accumulation period, growing tax-deferred, and then turns into income at a future date you choose.
The “paycheck later” idea fits best with a deferred income annuity, including a QLAC, covered below. A deferred fixed, indexed or variable annuity with an income rider works differently and may carry rider fees. Features vary by contract.
The Case for Buying Your Paycheck Now
An immediate annuity often makes sense when your last paycheck is close and you want a dependable amount covering the essentials. With a fixed immediate annuity, the payment does not rise or fall with the market.
The trade-offs:
- Access. Once income starts, you typically give up access to that lump sum.
- Inflation. According to the Social Security Administration, the 2027 cost-of-living adjustment is 3.6%, while FERS annuitants generally receive 2.6% because their formula subtracts one point when inflation tops 3%. A level annuity payment gets no adjustment at all, which is why it can quietly lose buying power.
The Case for Buying Your Paycheck Later
A deferred annuity often fits when retirement is still years away or other income already covers the bills. As a general rule, the longer income waits, the larger each payment can be: the money has more time to grow, and the insurer expects to pay over fewer years. Age, interest rates and payout option also matter.
- Surrender charges. Many contracts charge a fee for withdrawals above a set amount in the early years. Schedules vary widely.
- Discipline. A later paycheck works only if the rest of your plan carries you until then.
The Lower-Cost Way to Buy a Bigger Paycheck Later
According to the Social Security Administration, delaying benefits past full retirement age earns delayed retirement credits of two-thirds of 1% per month, or 8% per year, up to age 70. For anyone born in 1960 or later, full retirement age is 67, so waiting until 70 generally means 124% of the full benefit, or 24% more each month.
That increase is built into the benefit for life, receives future cost-of-living adjustments and can carry into the benefit a surviving spouse may receive. It may be worth comparing with any deferred annuity before you buy.
Same Savings, Different Timing
Hypothetical example for illustration.
Two neighbors, both 62, have similar savings set aside for income.
Denise is retiring this year after a long federal career. Her pension and Social Security will not quite cover her expenses, so an immediate annuity that fills the monthly gap may fit. Her first step is to price a TSP annuity, which the TSP buys from MetLife, then compare it with quotes from other insurers. Under TSP rules, the minimum purchase is $3,500, applied separately to traditional and Roth balances, and once the annuity is bought it cannot be changed or cancelled.
Marcus owns a small business and plans to work until about 70. His business covers his bills, so a deferred annuity may fit better. If his money sits in a traditional IRA or 401(k), a qualifying longevity annuity contract (QLAC) is one option: a deferred income annuity whose premium can be left out of the balance used to figure required minimum distributions until income starts, no later than age 85. The IRS limit for 2026 is $210,000 per person, so confirm the 2027 limit once it is published. QLACs apply only to pre-tax retirement money.
Same age, similar savings, two reasonable decisions, because their paychecks stop at different times.
Tax Basics
With non-qualified (after-tax) money, part of each annuitized payment is generally a tax-free return of what you paid in, using what the IRS calls the exclusion ratio. With qualified (pre-tax) money from an IRA, 401(k) or TSP, payments are generally fully taxable. Earnings taken out before age 59½ may also face a 10% additional federal tax, with some exceptions.
Six Questions to Ask Before You Choose
- When does my paycheck from work actually stop? If it is this year, income now may matter more than more income later.
- What covers my bills in the meantime? A pension, Social Security, a spouse’s income or savings may let you wait.
- How much might I need for emergencies? Keep that cushion out of income you cannot undo.
- Who else depends on this income? If a spouse would rely on it, the payout option matters as much as the start date.
- Have I compared this with delaying Social Security?
- Have I gotten quotes from the TSP and more than one insurer?
Some people buy income in stages rather than all at once.
Retirement Isn’t an Age. It’s an Income.
We look at every retirement through six areas: market, taxes, medical, income, protection and legacy. Annuity timing sits in two of them: income, meaning when each paycheck turns on, and taxes, meaning how each one is taxed when it arrives.
Before you buy, review payout options, surrender schedules and fees. Guarantees depend on the claims-paying ability of the issuing insurance company.
See How Your Income Timing Fits Together
Join us for our complimentary Executive Retirement Briefing, “Is Your Retirement Actually Positioned?”.
- See where annuities, Social Security and your pension or TSP fit on your income timeline.
- Learn which retirement decisions are permanent before you make them.
Reserve your complimentary seat
This article is for educational purposes only and is not tax, legal or investment advice. Annuity features, payouts and charges vary by contract and state. Annuities are insurance products, and guarantees depend on the claims-paying ability of the issuing insurer.
