I (Used to) Hate Annuities: Then I Looked at the Math
If you've written off annuities based on old opinions, you might be surprised to learn that higher interest rates and major product improvements have turned them into much more effective tools for modern retirement planning.
In the early 1980s, the 30-year Treasury yield topped 15%. Bond traders who had the foresight to lock in those coupons made the trade of a lifetime.
While everyone else chased the dot-com boom a decade later, those traders didn't need the market to cooperate. Their bonds just kept paying.
So, when the stock market went essentially nowhere from 2000 to 2013 (a flat market), many retirees who were in the market, focused on growth, struggled to maintain their lifestyle, while those who bought those bonds were able to sail through.
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They didn't win because they predicted the future, but because they recognized a good rate when they saw one and acted on it.
That same logic applies to annuities today. But it didn't always.
Why I couldn't stand them (around 2015)
When I entered the financial planning industry over a decade ago, the 10-year Treasury was hovering around 2%. That's one of the benchmarks that heavily influences what insurance companies can offer in lifetime income payouts. And at 2%, the payouts were, frankly, uninspiring.
For example, I remember seeing payout rates around 4% to 5%. With inflation risk and the time needed to feel like you'd get your money back at a reasonable rate, it didn't make sense to me.
It was difficult to rationalize putting a client's money into a product that generated negligible income when other strategies could do more with less restriction (see my article 10 Ways to Generate Income in Retirement).
The math, in my opinion, didn't work. So I avoided suggesting lifetime income for years.
What changed
Today, the 10-year Treasury sits around 4.5%, which is more than double where it was a decade ago. That shift isn't cosmetic ... It's structural. The underlying rates that support lifetime income payouts have fundamentally changed what annuities can offer.
Higher rates mean higher payout factors. A product that once generated a modest income stream from a given deposit now generates a meaningfully better one. For pre-retirees concerned about outliving their money, that changes the entire conversation.
Today, I'm seeing payouts around 7% (some more, and some less). Rates are obviously subject to change, but that seems like a good deal.
This isn't about being bullish on annuities. It's about recognizing that the tool has become more effective in today's rate environment, much like those bond traders recognized a historically favorable rate and acted accordingly.
A product that finally grew up
Beyond rates, the annuity itself has evolved. The early versions of lifetime income products were clunky. High fees, restrictive surrender schedules, limited flexibility and opaque terms made them difficult to recommend.
That's no longer the case. Modern innovations like guaranteed lifetime withdrawal benefit (GLWB) riders, lower internal costs, index-linked crediting strategies and more have made today's annuities a fundamentally different product category than what existed even 10 years ago.
The industry matured, and the products improved with it.
Not all annuities are the same
One of the biggest misconceptions is that all annuities work the same way. They don't.
Here's a quick breakdown of some that are available today:
Variable annuities seem to be the poster child of what people believe an annuity is. They have higher fees, limited options and so on. Yes, they have "more upside potential," but they also have downside risk.
The fees can put a drag on the performance every year. This is where many of the horror stories are found, in my experience.
Fixed annuities offer a guaranteed interest rate for a set period, kind of like a CD. When it matures, you get your money back plus interest. This is probably the simplest annuity.
Fixed-indexed annuities offer upside potential with downside protection. Some are designed more for cash growth as a bond fund alternative, while others offer better lifetime payouts. It just depends on what you want.
Immediate annuities (SPIAs) convert a lump sum into income payments that start right away, often used for pensionlike income.
Each serves a different purpose. And none of them is universally right or wrong.
It's just a tool
Let me ask you a question: How do you feel about hammers? Probably indifferent. You like them when you need one, and you only hate them when you use one wrong, like when you miss the nail and hit your thumb.
Annuities are no different. The people who hate them usually had a bad experience with the wrong type, at the wrong time, for the wrong reason.
The people who love them sometimes overlook the tradeoffs. Both sides would benefit from a more neutral starting point.
That's exactly why I wrote The DIY Annuity Guide. I wanted to help people move past the love-it-or-hate-it reflex and figure out whether the tool actually fits their situation.
The rate environment has changed. The products have changed. Give yourself permission to check your assumptions and explore whether an annuity belongs in your plan or not.
Either answer is a good one, as long as it's informed.
Related Content
- What are Annuities? The Different Types and How They Work
- Is an Annuity Your Missing Retirement Piece?
- Five Annuity Mistakes to Avoid
- The Bear Market Protocol: 3 Strategies to Consider in a Down Market
- Retirees' Anti-Bucket List: 10 Experiences You Don't Want
