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When you sit down with an annuity salesperson, they’ll probably start with a question that cuts straight to your fears:
“What if you live to 100? Wouldn’t you rather have a guaranteed check every month?”
It sounds comforting — but the truth is, most annuity checks are just your own money coming back to you, with a little interest, minus their cut.
Let’s run some numbers.
Imagine you’re 65 years old with $500,000 in retirement savings. You have two options:
We’ll run both options over 20 years.
The First 5 Years
| Year | Annuity Payment | “Balance”* | Portfolio Withdrawal | Portfolio Balance |
| 1 | $27,500 | $472,500 | $20,000 | $508,800 |
| 2 | $27,500 | $445,000 | $20,600 | $517,492 |
| 3 | $27,500 | $417,500 | $21,218 | $526,050 |
| 4 | $27,500 | $390,000 | $21,855 | $534,448 |
| 5 | $27,500 | $362,500 | $22,510 | $542,654 |
*Annuities don’t actually give you a running balance, but this shows how much of your original $500k is left if you think of the payments as coming from your own principal.
Already you can see the difference — the annuity “balance” steadily drops, while the portfolio balance is growing, even though you’re taking withdrawals.
By Year 20:
While a self-managed portfolio often outperforms, annuities do have a place for certain people:
In other words, annuities are less about beating the market and more about removing uncertainty.
What This Means
The Real Takeaway
The “you might outlive your money” scare works because we humans hate uncertainty more than we hate paying high fees. But with a balanced investment plan, a modest withdrawal rate, and a little patience during market swings, your odds of running out of money are already very low — without locking yourself into an inflexible annuity.
In other words: Some of us can create your own “annuity” — and often, it’ll be bigger, more flexible, and better for your heirs.
These are my thoughts – What did I get wrong?
Note: Research, data and math was AI assisted to help speed up my thoughts.
If you die early the ins company wins, so does Social Security and a pension trust, but your life insurance company loses.
All this theoretical stuff leaves out the human factor. Winning or losing isn’t the goal, minimizing worry over money and a steady income with minimum risk and ongoing decision making are the goals for most people.
You don’t put all your eggs in the annuity basket, just enough to pay the bills you need to pay without worrying about the next withdrawal.
I think about the people who claim they are fine with 80% even 70% income replacement. I sure wouldn’t want to cut it that close and have most of it subject to my investment skills or the uncontrollable stock markets.
The entire concept of maximizing lifetime anything be it SS or annuity is superfluous.
Retirees need to focus on income and maximizing that income when they most need it. Who cares if you beat the actuarial odds be it SS or an annuity?
>>If you die early the ins company wins
In case of annuities (and assuming it is not joint), you can still opt for 10Y or 20Y guaranteed. In this case the annuitants heirs or estate will get the “paychecks”.
This pedantic detail aside, I totally agree with your larger point – this isn’t a win or lose game. It is exactly as you said “Retirees need to focus on income and maximizing that income when they most need it”. And if you can get this with some peace of mind, then all is good.
And of course you pay extra for that extended coverage.
Right you’re, you do pay a bit to get this additional coverage. Here is an example for a couple aged 65 and starting payments in 10 years, for a life time monthly payment of $2500.00, the premiums would be
just joint life: $222,272 – minimum payout 0 (“zero”)
Joint life with 10Y certain: $221,819 – minimum payout 300,000
Joint life with 20Y certain: $239,890 – minimum payout 600,000
As you can see the difference is not bad (IMO).
…minimizing worry over money and a steady income with minimum risk …
Studies I have read conclude that retirees with guaranteed income sources are more content than those without.
I second that. I know I am.
I love your question and mindset.
Before I dive into my answer, I want to amplify Mark Eckman’s point, which is backed by Wade Pfau’s research (see Pfau’s Retirement Planning Guidebook). Pfau found some people have a safety-first/commitment mindset/need in their retirement planning, while others are comfortable with a probability-based plan which provides more options/flexibility. So there is a psychological aspect of this to consider. Personal finance is personal.
The portfolio alternative you’re modeling in this comparison is perhaps based on average annual market returns for investments. But what if we start retirement in a period like December 1964 – December 1981, when the DJIA slid sideways for 17 years (DJIA 874.12 on Dec 31, 1964 and 875.00 on Dec 31, 1981)? Or we hit a drawdown period like Sep 1929 through June 1932 when the U.S. market fell about 86%?
Not only do we not know the date of our death, and our partner’s death, we really don’t know what the next 20, 30, or 40 years of investment returns will be. We can look back at 125 years of market history, which provides a good measure of optimism, but we really don’t know. YMMV.
For me, it’s not a question of SPIA vs. portfolio draws (or other portfolio income strategies). We have both. We’re using SPIAs to create a safety margin in our financial plan. We hold two income annuities, one issued by NY Life, and the other by MassMutual, both financially strong providers with a long, successful history.
Our SPIAs will top off our future Social Security benefits so the combined income covers all our core expenses, leaving income from our investment portfolio to cover discretionary spending, inevitable surprises, and legacy. Surprises can include an extended bout of inflation which shreds the buying power of our annuities w/their 3% COLA. It could also cover one of the annuity issuers “risking out” with no backstop by our state insurance fund.
This approach makes managing our finances much simpler after I’m gone and my spouse is left to the task. That simplicity is also really useful for us.
David,
See my response below to Mark. There is a risk that comes with having your funds locked up. It seems to me that is part of the risk trade off that is not mentioned as people look at reducing overall “risk” – what do you think?
Cheers
Our annuities investment was less than 10% of our total portfolio and we have a lot of “dry powder”. The insurance agency we used to buy both asks a lot of questions, in their application process, which get at your concern.
I believe the math is meaningless for a comparison of annuities vs. holding your own investments, and I’m a CPA! Tell me exactly when you will die and then do the math to support the answer.
The issue is your comfort with the assumption of risk. Buy an annuity and you have sold the risk. For whatever reason, some people don’t want the risk, some do.
You’re exactly right — none of us can know the year we’ll pass, and that’s what annuities are designed for: they let you transfer that longevity risk. For some people, that peace of mind is invaluable, and I fully respect that choice.
For me, though, it’s more about freedom and control. Once funds are annuitized, they’re locked up, and that too is a form of risk — because life throws curveballs. Health issues, family needs, or unexpected opportunities all require flexibility. If my money is tied up in an annuity, I can’t easily adapt, and to me that’s as real a risk as outliving my savings.
So while annuities make perfect sense for people who value certainty above all else, I personally prefer to keep control in my own hands — Different personalities value different things, and I think that’s what makes these conversations so helpful.
Isn’t your money tied up in a salary while working and wouldn’t you have to rely on other assets to deal with curve balls? What’s the difference? Again, we are not -at least I’m not- suggesting annuitizing all retirement assets.
Several of us pointed this out in the discussion below, if you’re setting aside 10 or 20% your portfolio to annuities, I would like to think that “control” is a moot issue since you control the other 80-90%.
If one were to plunk down the entire portfolio into an annuity of any kind (which no one here has suggested), then you would be correct that you lose control.
The phrase that I see used quite often in this discussion is, “using annuity as part of your overall plan”. And to me this means 10-20% of your investable assets.
I should add that if someone is lucky enough to have a pension with guaranteed monthly income, then this would obviate the need for an annuity.
Think of it this way, you have no more or no less control over this annuity than you have over a company pension (if you’re lucky to have one). And that pension is a portion of assets/income stream.
You have that right.
William, I encourage you to read chapter 5: Annuities and Risk Pooling in: Retirement Planning Guidebook, 2nd edition 2025, by Dr. Wade Pfau for a very detailed and math based examination of the question you ask, comparing an annuity to investing the same $ and withdrawing at a planned rate (the “Sustainable Spending from Investments” planned rate decision being addressed in Chapter 4). Chapter 5 examines different types of annuities, including the types discussed in this HD discussion. Dr. Pfau does a fantastic job throughout the book of laying out the different options for the topic being examined, and comparing the math outcomes. He also adds in other influences including emotion and psychology, to allow the reader to consider all factors when reaching their own conclusions on the best path forward for them for the topic being examined. Chapter 5 includes his response to the “no COLA” in an annuity issue and a discussion of where an annuity may, for some people, fit into the entire plan. The entire book, and his podcast (Retire with Style), are similarly detailed and great (in my opinion). He is a great teacher who can clearly explain complex (to me) issues and math.
Dr. Wade Pfau is a principal director at McLean Asset Management.
This article reminded me to recalculate my financial situation with moving into a CCRC early next year. We sold the business 25 years ago, and my savings will cover us for another 13-17 years after we move into a CCRC. If we’re lucky enough to run out of money, we have two contingency plans: move into higher-level care and trigger LTCI, or allow the CCRC to use our entrance fee refund to pay our monthly fees. Either way, my kids will never support either one of us—full disclosure: no annuities here.
I don’t believe you can choose when to move to a higher level of care. It’s determined by your health status. (Or would one of you already qualify without the health aide I believe you mentioned?) Also, what happens when/if the entry fee is exhausted?
I would like to offer a slightly different take. Like you, I too used to be deeply averse to anything *annuities* and I too used to lump all the different flavors of annuities into the distasteful bucket, up until 2021. I now have a more nuanced view.
When I was yield hunting in 2021-22, I came across MYGA (multi year guaranteed annuity) – in a simplistic sense these are CD’s offered by the insurance companies (yes, I know there are differences but broadly similar). Annuities don’t have FDIC but they do have state level protections (level of protection varies between states). These were offering around 2+ percent when most aggregate bond funds were offering less than a 1%. I got few of these (from insurance companies that were rated AA or higher) for a 3Y duration and it worked well. Did these have “hidden” fees? Possibly but all I cared for at that time was, everything else being equal I was getting a better yield and my principal back. And I got them both.
And in 2023, I need a cash flow “bridge” for 5 years and I learnt about SPIA (single premium immediate annuity). I paid the insurance company a single lump sum for a “term certain” (as opposed to lifetime) and in return, they (another AA+ insurance company) give me a monthly “paycheck” for 5 years. Now are they just returning my money? Yes they are but in addition they are also giving a return, albeit a small one compared to the market. The IRR on this product is 4.04% and yes, this is quite a bit less than what the “market” has done thus far. But this market return is in hindsight (and with some level of volatility, I might add) and possibly continue to do well in the next 5 years. DO these have fees? I am sure but hey I would love to get this from the US treasury with zero fees, with the liquidity that the UST offers but this return. Unfortunately I don’t they exist.
I also needed a DIA (deferred income annuity) for a few years down the road, DIA works similar to the SPIA except my annuitization date is greater than 13 months. And the longer I move, better return for me. At that point, I elected to build a treasury bond ladder instead (early 2024). This bond ladder was conceptually similar to the DIA but with slightly a lesser return (liquidity risk premium as I see it). Whereas I can sell my bond ladder anytime, not so with the DIA (or the SPIA) – I would be “locked” in.
I might yet move this bond ladder to a DIA with a current IRR of 4.36% (again a AA+ company).
I am also exploring a qualified (from my IRA) “lifetime” DIA using a small portion of my IRA. I recently learnt about FIA (fixed *indexed* annuity), slightly a more complicated product with what sounds like ghastly fees but if you look at purely the “income” component better than a DIA. Since these are for lifetime incomes, I would take slightly a less payout but get a “20Y guaranteed”.
These are, in my humble view not bad products and one should not make the mistake of clubbing all annuities with the variable annuities. You can’t compare this to the “market” (as in equities) anymore than you can compare bonds to the equities market. In my view, these products (I am *only* referring to the aforementioned MYGA, SPIA & DIA) should be compared to a bond return and not the S&P500.
Why would I consider these?
To be clear, I have been and still am a DIY investor (*NOT* a salesperson of any kind). What I have learnt as well is, this is the “personal” part of personal finance. These products are not for everyone but for some they do serve a purpose (just as bonds do in a balanced portfolio).
Annuities can be a useful vehicle for those with life insurance policies that have accumulated significant cash value:
I had a whole life insurance policy (major mistake BTW), which had accrued a significant cash value after being invested for over 20 years. To access the cash, however, I would have to take out “loans” at an interest rate of 5%. How nice of the insurance company to allow me to access MY money at 5% interest !
Earlier this year I did a 1035 exchange and rolled this policy into a 10 year certain SPIA. This permits me to “use” the accumulated value of the insurance policy. I get monthly payments for 10 years (so as to not overlap with RMDs), and the payments continue to my heirs if I die before the 10 years are up, so no risk of an early death and a loss of funds.
Though I was never a fan of annuities, this was a great way (1035 exchange) to utilize the gains in my regrettably purchased insurance policy.
100% agree, I did something similar doing a 1035 from a “Complife” (half whole and half term) to an annuity with a long term care insurance rider.
Great points in the article and in many of the comments!
Annuities aren’t a one-size-fits-all solution and, as you mentioned, they may underperform during a strong bull market.
However, a key benefit of annuities that’s often overlooked is their potential for downside protection. A portion of a retirement portfolio allocated to annuities could provide a valuable safety net, especially in a prolonged period of stagnant or contracting equity markets. Japan offers a great historical example of this, where their stock market experienced a significant downturn and then stagnated for many years, from around 1990 until the early 2010s. In such a scenario, a fixed annuity’s guaranteed income stream could have been a lifesaver for retirees, offering stability when their equity investments were faltering.
Ultimately, it comes down to diversification. Combining a growth-oriented equity portfolio with the stability of an annuity can help mitigate risk and create a more resilient retirement plan, no matter what the market does.
Perhaps it comes down to the retiree’s risk appetite.
You have articulated this better than I did above, totally agree, the last 2 paragraphs in particular.
TIAA is facing a class action suit for rigging their retirement calculator to always recommend their annuities and real estate mutual fund (“Ka-Ching”). There are situations where single annuities don’t make sense, eg if your IRA equivalent is fairly large and diversified with bonds, SS and money market funds available for short-term income needs.
Having studied retirement income options in detail, TIAA lifetime annuities appear as superior products, with higher payout rates than elsewhere. Considering the simplicity of a monthly check, I truly wished to annuitize my TIAA holdings upon retirement. That my 403b could have produced an income exceeding my working salary is an accomplishment I am proud of; the income might have also grown modestly over time (TIAA does not promise this but has a history of increasing payouts). Running the numbers and investigating tax consequences though, an annuity did not make sense. Instead, I use the account for fixed income and draw on it slowly through (as of now) non-required distributions. Long-term account holders at TIAA have yields on fixed income above money-market rates.
Fidelity and Vanguard are also facing class action suits, albeit not regarding annuities. Vanguard recently had a $40 million settlement regarding its target date funds rejected by a district judge.
The suit against TIAA doesn’t allege that its annuity is inferior to any other annuity.
TIAA has also been sued for continuing to reccommend its CREF growth fund despite the fact that it has underperformed the Russell Growth Fund Index by 186% since 2009.
And if I was getting a SPIA or DIA, I would run it through couple of calculators (Schwab, Fidelity , The Annuity Man)
Not sure how the annuity balance means anything to the individual.
So, if you had a pension that covered all your living expenses but no COLA, would you trade that for a lump sum payment?
what happens if that 6% assumption doesn’t work or for a few years?
you’re right about the “some of us” part, but most can’t
having a steady, reliable income stream to cover all living expenses in the form of SS, a pension, or an annuity in some combination is highly desirable for the vast majority of retirees IMO.
That does not preclude accumulating other investments to deal with inflation or cash emergencies which I see as necessary.
Great analysis. The other thing is that you lose some flexibility to deploy cash above the withdrawals for other purposes. I still cant wrap my head around how this make sense for folks with a basic understanding of investments. I dont think they are for me, but I won’t yell at someone who chooses to buy one.
Excellent analysis, William! So glad my wife and I each have defined benefit pensions so that we don’t have to consider annuities versus other financial products!
Not sure I understand why a SPIA with no COLA provides against longevity risk better than a growing portfolio. It is likely to have lost a lot of purchasing power if you expect it to last 30 years.
Wade Pfau discusses this point in the Retirement Planning Guidebook (referenced in another comment). Essentially it is not either/or, it is both from his perspective. He acknowledges the loss of purchasing power of a SPIA and discusses a few points of how an annuity could fit into an overall financial plan. Those points include matching the annuity to basic expenses/needs (minimum dignity floor); it provides the real and psychological benefit of stable, guaranteed income; only using the annuity for a portion of the asset; and combining it with stocks for inflation protection if held long-term; and also combining the annuity with delayed SS. I’ve also seen him argue that one would need a smaller amount for the annuity purchase than allocated to bonds for the same return. I’ll have to admit when we built our TIPs ladder, which is essentially designed as personalized annuity with COLA and maintenance of liquidity, with the same purpose Pfau describes of liability-matching and building a floor, it took a chunk of change.
I assume you know that there isn’t a way of having a “growing portfolio” that has less risk than a SPIA.
Assuming you have the resources, you can purchase a SPIA that will provide you with significantly more than you currently need and put the additional proceeds into TIPS. Or, as others have noted, you can purchase additional annuities over time. Alternatively, you can follow Bill Bernsteins’s advice and forgo annuities in favor of TIPS ladders.
Or apportion the said money between a “guaranteed” income (annuity) and a growth portfolio (S&P500) or TIPS as you point out.
Because you can’t run out of money even while losing buying power, and what if the portfolio doesn’t grow for a period of time or decreases?
It’s a safety net the way I see it.
If you had the choice would you give up your non-COLA pension with the income security it provides for the cash in a lump sum to invest?
I sure wouldn’t give up mine.
Not sure the give up question is black and white. Surely it really depends on the terms of the deal offered. If someone offered you 25 x pension into a taxable IRA at your present age would you not even consider it?
I don’t think flat rate annuities particularly make a lot of sense for those capable of managing their own affairs (or with a decent fiduciary) for this reason.
If you’re really insuring against longevity risk then you also need inflation protection. That’s where you get value from the insurers in them taking the risk on.
But personal psychology plays a big part. I can see for instance that in an alternate retirement position Mr Quinn might have jumped massively into annuities as I think he continues to advocate for.
The calcs present make sense but it’s never possible to forward forecast the lumpiness of market returns i.e. sequence of returns risk. If we believe in sustainable withdrawal rate (SWR) it shouldn’t matter. But the person who has made the decision to not buy an annuity and finds the portfolio 40% down in the first year is likely to have some angst looking at a $280k balance.
You would be correct if assume that this is a all or nothing scenario – as in you put all of your money into an annuity. I would not recommend that.
Not massively into annuities at all. The idea is guaranteed income stream to cover all living expenses.
The average retiree is not equipped to manage investments to assure the needed income for a lifetime.
That may not be accurate here on HD, but it is in the everyday world.
I would never use all accumulated investments to buy an annuity, but I would use a portion for a immediate annuity along with SS to cover what is needed for basic expenses and allow me to sleep at night even when the markets are failing.
Seems simple, practical and logical to me.
“I would never use all accumulated investments to buy an annuity, but I would use a portion for a immediate annuity along with SS to cover what is needed for basic expenses and allow me to sleep at night even when the markets are failing.”
Exactly right, in my view.
Simple and practical for sure. Logical maybe, maybe not -depends on running the numbers and what you are leaving on the table for someone else for that peace of mind.
I do consider the theory that if you have annuitised income on your baseline needs it frees you up to be more aggressive on the growth part of your portfolio to be valid though. Worst worse case you’re still eating and paying your bills (assuming no insurer default). But to wholly subscribe to that you need to consider whether you are being too prudent with substantial cash buffers plus bond buffers etc.
Kathy, you’re absolutely correct. Like a defined benefit pension with no COLA, you will lose buying power.
I don’t own a SPIA and I doubt I will ever need one, but I wouldn’t rule one out in the future IF I felt it was necessary.
My thoughts on buying a SPIA. I wouldn’t ever dump all my money into a SPIA. I’d only buy enough annuity to cover my expenses that are not paid for by my other guaranteed sources of income. I may buy additional SPIAs later to supplement the loss of buying power (if I live that long).
That’s it. It’s not all or nothing using an annuity. I feel it should be the income stream for necessities and there should always be other investments to use as needed.
My 15 years retired is based on that idea. In my case the annuities are a pension and SS, but we have accumulated assets to deal with inflation and other necessary or desired spending not supported by annuity income.
I can’t see how the great majority of retirees should not follow that basic idea.
Those who are adept and comfortable managing investments for their income are in the great minority.
Thank you, William, for sharing your perspective and example. I find it helpful and thought provoking, as well as Rick and Dan’s comments. I’ve played around with Fidelity’s SPIA calculators with various optional benefits in the past. Dan likens the SPIA to an insurance product which makes me wonder if someone used the proceeds from a $500k life insurance policy to purchase the SPIA, would that affect your (or anyone’s) opinion on a SPIA vs. investing the proceeds? Basically replacing one “insurance policy” for another? This may actually be a decision that I may be faced with (but certainly hope not).
Jan, I hope for your sake you don’t have to face such a difficult situation. But should that happen, I think I would integrate the proceeds in my overall financial plan, and make decisions based on that. Life insurance proceeds can have a very different purpose depending on your age, family status, income, and many other variables. If you were already planning to purchase an annuity, the additional funds would certainly help. But I wouldn’t specifically target an annuity just because the proceeds came from an insurance policy.
Rick, I’m in total agreement with your answer.
Thank you for your reply, Rick. The many unexpected health crises that have happened in the last 2 months here for people that I know in this 55+ community coupled with all of the discussions around CCRC’s in HD created a certain urgency in me to make “what if” plans. I consequently mapped out an income source plan for us together and also in a worse case scenario if I were alone, through the year 2036, when my RMDs begin. I even researched a few CCRC’s in the Seattle area where one of my daughters live and made loose plans to visit them in a few months after hearing the urging to get on wait lists before you need care. Honestly, my brain has felt like a hamster on a wheel lately. Buying an annuity has been floating around in my head as a possible option for a sense of security. As in previous responses, I find your calm and measured opinion to be helpful.
Your observation that “we humans hate uncertainty more than we hate paying high fees” is spot on. And you mentioned “cutting straight to your fears”. Combine this with the difficulty many have understanding probability Rick Connor mentions, and one can see a mixture of emotions and lack of math insight which can pose a problem. I can see how folks who fit these descriptors might be attracted to SPIAs.
If you lock in when interest rates are favorable (annuity market timing?), fixed annuities don’t seem so bad. I’ve been collecting on my rate-dependent CB pension for almost 2 years. Despite that and my older age, an equivalent replacement annuity would cost me at least 10% more than my lump sum value if I were to buy one today.
Ken, Years ago when I was pondering whether to take my defined contribution pension in either a lump sum or as an annuity I researched the annuity markets and also found that an equivalent replacement annuity would cost me much more. This finding along with the fact that all I had to do was sign a paper and my employer would do the rest was also appealing. No research necessary on my part. Plus my pension is guaranteed by the Pension Benefit Guaranty Corporation (PBGC), whereas a commercial annuity would have no such protection.
Now per AI the compounded inflation rate since I claimed my benefits in January ‘23 is 5.5% with an average annual 2.71% rate. Not bad as if I had retired.
I am lucky that I didn’t claim two yers earlier as per AI the cumulative compounded inflation rate in the US has been 18.63% which translates to an average annual inflation rate of 4.36% during this period. This means that goods and services that cost $1 in 2021 would cost approximately $1.19 today, or almost a 20% loss of purchasing power.
Good points, David. Timing isn’t everything, but it does count for something. 2 years earlier (2021) the annuity interest rates that applied to my cash balance pension were so unfavorable I would have taken the lump sum.
“… whereas a commercial annuity would have no such protection.”
Don’t most states have a Fund set up to backstop commercial annuities?
Yes they do, some are better than others. NC for example has a backstop of $250,000.
William, good work, and thanks for an interesting post. Annuities are tough to evaluate, because we mortals can’t figure out how the actuaries apply mortality credits, and assign probabilistically distributed mortality.
I have one thought about evaluating the Annuity “Balance”. I think it would be fairer to decrement the balance by the inflation adjusted amount of the yearly payout. It looks like you used 3% inflation for the portfolio withdrawal rate. As you write, that would make the year 20 payment worth a little more than $15K. By my calculations, the annuity “balance” runs out after 19 years using the full $27,500 yearly payment. If you use the inflation adjusted yearly amount, the annuity “balance” is around $97K in year 20.
Looking at the invested portfolio and withdrawal scenario, I was able to exactly duplicate the first 5 years of your portfolio calculations, but have a difference at year 20. I get that the yearly withdrawal is $36,122 in year 21. But my beginning portfolio balance in year 21 is $613,511. At year 20 the amount of the yearly inflation adjusted withdrawal becomes larger than the amount replenished each year by the investment return. I assumed the withdrawal happened at the beginning of the year, and the remainder was left to grow by the 6% investment return. In year 20, the amount withdrawn, when divided by the remaining balance, exceeds the 6% return for the first time. From that point on the portfolio balance starts to decrease each year. It would take, however, to year 43 before the portfolio run out and couldn’t fund the inflation adjusted withdrawal.
William, you did a good job laying out both the pros and cons of single premium immediate annuities (SPIA). At the end of the day, a SPIA is an insurance policy that protects against longevity, similar to the way term life insurance protects the income of a family’s breadwinner against an early death. In both cases you will probably not need the insurance. But you might.
Having said that, a retiree is well served by using an hourly paid fiduciary who can analyze and help guide him/her/them through the process.
>>At the end of the day, a SPIA is an insurance policy that protects against longevity
Only if you get the “lifetime” annuity. There are also “term certain” SPIA/DIA’s that can serve as a “bridge” to say, social security or RMD.
Great addition rgscl. And yes, some of those will shave a few bucks off of your benefit, but not as much as you may think.
Two points: 1) It’s highly unlikely a salesperson will sell you a simple immediate fixed annuity that pays lifetime income. The commissions involved simply aren’t large enough.
2) On the other hand, the salesperson would be more than happy to sell you a variable annuity, or a variable annuity with some costly “living benefits” rider, or an index-linked annuity.
That means we should be careful to specify what sort of annuity we’re talking about. Otherwise, we run the risk of tainting a reasonable product with a a label that’s often scares folks off, and rightly so.
Jonathan, should we remove this? I was just thinking through my own needs and the math comparison between creating my own and purchasing an annuity. I don’t want to influence people one way or another.
Please DON’T remove this post!
As Dan writes below all the information HD holds help people make these difficult decisions.
William, I think your post is the reason HD exists; to help readers make informed decisions. I’m a defender of SPIAs, but I don’t own one. We are 73 and 70, our SS pays for everything at present. That may change in the future, and if it becomes necessary to take over 4% to live, I may purchase a SPIA. By that time our ages should buy us a very good benefit. I’d also add that I would never use over 50% of our assets to buy one.
No, your post is good. I just worry that folks will buy the wrong annuities and avoid the right ones.