A 65-year-old retiree with $400,000 set aside is considering an annuity that pays roughly $2,600 a month, guaranteed for life. That’s about $31,200 a year, paid like clockwork until they die. No market risk. No sequence-of-returns worry. No spreadsheet to maintain.
It’s a tempting deal, especially when the 10-year Treasury has already swung from about 4% to nearly 4.7% over the past year. But there’s a trade-off: roughly $190,000 in expected estate value the retiree gives up over a normal lifespan.
Baby Boomers currently hold an average 401(k) balance around $267,900, and a $400,000 nest egg sits comfortably in the “enough to consider annuitizing some of it” range. Clark Howard has fielded the annuity question for years, telling listeners to run their pension or lump sum through immediateannuities.com to see what the market will actually pay before deciding.
Why $2,600 a Month Looks Better Than It Is
A single-premium immediate annuity (SPIA) converts a lump sum into lifetime income. The insurer prices the payout off long-term interest rates, primarily the 10-year Treasury, currently around 4.4%. The $2,600 figure looks like a fat yield, but most of each check is return of principal. The insurer is paying you back your own money plus a modest interest layer, then keeping whatever’s left when you die.
A 65-year-old today has remaining life expectancy of about 20.6 years. If that same $400,000 stayed invested in a 4% balanced portfolio with the retiree pulling $31,200 a year out of it, the math projects roughly $190,000 of residual value still sitting in the account at death. On a life-only SPIA, that residual goes to the insurance company. Your heirs get zero.
The second cost is inflation. The 2026 Social Security COLA was 2.8%, and Core PCE currently sits at a 91st-percentile reading versus the past year. A fixed $2,600 check buys measurably less every year.
Model the same $400,000 against a self-managed 4% withdrawal and you can see why the insurance-company guarantee comes at a cost that compounds across two decades.
Annuity Types
Not every SPIA strips out the inheritance. Here are three common structures:
- Life-only pays the highest monthly amount but stops the day you die, even if that’s six months after signing. This is the version that produces the full $2,600.
- Period-certain (typically 10 or 20 years) guarantees payments for a set window. If you die in year 5 of a 20-year-certain contract, your beneficiary collects the remaining 15 years. The monthly check drops, often by 10% to 20%.
- Joint-and-survivor continues payments to a spouse after the first death. Payouts shrink further, but it solves the “what if I go first” problem for married couples.
Another Option: Annuitize a Slice
If retirees are set on an annuity, some advisors recommend annuitizing just a slice of the retirement funds. Consider partial annuitization that covers your essentials gap (the fixed spending Social Security doesn’t already handle) and invest the rest.
If Social Security delivers $2,400 a month and your fixed costs are $4,000 a month, you need to guarantee $1,600 a month. That requires roughly $250,000 in a SPIA, leaving $150,000 outside the contract. The remaining $150,000 stays liquid, inheritable, and exposed to market growth.
Two refinements worth considering:
- Ladder your annuity purchases. Buy a SPIA now, another in three years, another in six. You diversify interest-rate risk and lock in higher payouts as you age, since older buyers get more income per dollar.
- Look at inflation-adjusted SPIAs. These start with a lower initial payment, often 25% to 30% less, but rise with CPI. With Core PCE running hot, the long-term math could favor them for healthy 65-year-olds.
What to Decide First
- Calculate your essentials gap before you size any annuity. Annuitizing more than the gap converts inheritable wealth into insurance-company profit you’ll never see.
- If you’re married, default to joint-and-survivor or period-certain. Life-only contracts have orphaned many surviving spouses, and the income boost rarely justifies the risk.
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