$750,000 Annuity Locks In $4,200 a Month for Life, but Gives Up $610,000 Inheritance

The pitch sounds clean. Hand an insurance company $750,000 and receive $4,200 a month for life, regardless of what the market does. For a 65-year-old single woman staring down 25 or 30 years of retirement, that promise carries real emotional value. But explore the arithmetic underneath the policy: roughly $610,000 of inheritance value that disappears the day she signs.

This scenario shows up constantly on Bogleheads threads. A widowed or single retiree, recently rolled over from a 401(k), sits across from an agent who frames the single premium immediate annuity (SPIA) as the responsible choice. The pitch has surface appeal, but the framing is incomplete.

A Case Study

• Retiree profile: Single woman, age 65, with no dependents she is legally obligated to support but wants to leave money to nieces and a charity
• Investable assets: $750,000 rollover IRA, plus Social Security
• The offer: A SPIA paying $50,400 per year for life, a 6.7% payout rate
• The cost: Total illiquidity, no inflation rider, and zero estate value at death
• What is at stake: Whether her entire nest egg becomes an income stream she cannot reverse

Annuity agents lead with the payout rate because 6.7% sounds generous next to a 30-year Treasury yielding about 5%. The payout rate blends interest, mortality credits, and a return of her own principal.

The internal rate of return (IRR) depends entirely on how long she lives. If she lives to age 85, the median life expectancy for a 65-year-old female, the IRR works out to roughly 2.8% nominal. Living to 90 lifts it to about 4.0%. Reaching 95 gets her to roughly 4.8%.

Every one of those numbers loses to a 20-year Treasury at 5%, and all of them lose badly to a balanced portfolio. The S&P 500 has returned 79.83% over the last five years. Over the last decade, that stock benchmark has returned nearly 15% annualized. The Vanguard Total Bond Market ETF (NASDAQ:BND | BND Price Prediction) has added a cumulative 18% over a decade. A 60/40 mix has historically compounded near 6.5% nominal.

The Three Costs Agents Rarely Volunteer

Inflation is the first. The SPIA in our example pays a flat $4,200 every month for life. Headline PCE inflation is running near 4% year-over-year, with services inflation around 3.5%. At even 2.5% inflation, that monthly check buys about 30% less by year 15. Healthcare and housing, the categories that dominate late-retirement spending, are running even hotter.

Illiquidity is the second. A new roof, an assisted-living deposit, or a medical event cannot be paid from an annuitized balance. The principal is gone the moment the contract is signed.

Insurer credit risk is the third. State guaranty associations typically cap protection between $250,000 and $500,000 per insurer per state. A $750,000 single-carrier contract sits above that cap, potentially exposing her to counterparty risk on an asset she cannot move.

Three Potential Alternative Paths

1. Self-manage a 60/40 portfolio and draw the same $50,400. This is the right answer for most people in this position, many advisers say. It preserves liquidity, keeps an estate intact, and historically produces a higher real return than the annuity at any reasonable life expectancy.
2. Annuitize a slice, not the whole. If guaranteed income on top of Social Security is the real goal, putting $200,000 to $300,000 into a SPIA creates a true income floor while leaving four-fifths of the portfolio working. The estate gap shrinks from $610,000 to something manageable.
3. Use a QLAC for genuine longevity insurance. A Qualified Longevity Annuity Contract inside the IRA lets her defer income to age 85, when longevity risk actually bites. The IRS allows up to $210,000 of IRA balance into a QLAC, and the deferred payout economics are dramatically better than an immediate annuity.

What to Do Before Signing Anything

Ask the agent in writing for the contract’s implied IRR at ages 80, 85, 90, and 95. Most will not volunteer this calculation because it reframes the product honestly. If the agent cannot produce it, that alone is the answer.

The common mistake here is treating “guaranteed income” as a synonym for “safe.” Surrendering $750,000 of liquid, inheritable capital for a flat check that loses purchasing power is its own kind of risk.