Outliving Your Money? Let’s Do the Math on Annuities

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:

1. Buy an immediate fixed annuity with a 5.5% payout rate. That means you’ll get $27,500 a year for life, no matter how long you live.
2. Invest in a self-managed portfolio of low-cost ETFs like VOO (S&P 500) or VYM (high-dividend stocks), withdraw 4% in the first year, and adjust withdrawals for inflation. Assume a 6% average annual return.

We’ll run both options over 20 years.

The First 5 Years

*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:

• Annuity: Still pays $27,500/year, but inflation has eaten away a big chunk of its buying power — that check now feels like only about $15,200 in today’s dollars.
• Portfolio: You’re taking out over $36,000/year (inflation-adjusted) and still have about $670,000 left in your account.

While a self-managed portfolio often outperforms, annuities do have a place for certain people:

• No desire (or ability) to manage investments — some retirees simply don’t want the responsibility or stress.
• No pension — an annuity can act like a “DIY pension,” covering essential living expenses alongside Social Security.
• Extreme longevity risk — if your family history suggests you might live into your late 90s or beyond, an annuity can be a form of insurance.
• Peace-of-mind value — for some, the guaranteed check is worth more than the potential for higher returns.

In other words, annuities are less about beating the market and more about removing uncertainty.

What This Means

• Annuity Pros: You’ll never get a “zero balance” notice — the insurance company keeps paying as long as you live. If you make it to 95+, you might come out ahead.
• Annuity Cons: Payments are fixed unless you buy expensive inflation riders. If you die early, the insurance company wins — your heirs get nothing (unless you pay extra for that option).
• Portfolio Pros: Lower fees, more growth, keeps up with inflation, full liquidity, and your heirs inherit the remainder.
• Portfolio Cons: Market volatility means you need a cash buffer and discipline not to sell in a downturn.

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.