Annuities; Historical Cost and Benefit.

Last month, I wrote a piece about decision making called “Flip the Value.” In the article, I discuss the various thought exercises we face when making a decision to spend money. I also talk about the idea of flipping the value proposition to help build perspective and encourage confidence in the decision making process.

Flipping the value is a helpful tool and works for many types of decisions, large and small. However, there is no doubt that larger decisions require more though - more scrutiny - in general. If the stakes are higher, more time and thought are needed.

I recently talked about flipping the value on the Milmo Show. Listen here.

The retirement decision

Of the biggest decisions, deciding when (or how) to retire is among the most difficult and drawn out. It is difficult because it is opaque and difficult to predict. It is drawn out because we think about it for decades. We know it will come and, especially early on, it is nearly impossible to imagine or plan for effectively. As we get closer to the goal, certain ideas begin to take shape: Where we might live. What we might do. What our hobbies and priorities might be. However, even as these thoughts begin to crystallize, there is an important factor that every part of retirement relies on - cash flow.

Cash flow

I preach cash flow in almost everything I write. The importance of positive cash flow is probably evident to anyone, or at least it makes sense. Spend less than you make. Check. However, in retirement, the idea of cash flow takes on an entirely different kind of importance. Instead of being a critical part of financial health, cash flow feels more like survival.

Impact on net worth

One of the main differences in cash flow prior to and in retirement is where the income is coming from. Prior to retirement, the income side of our cash flow is coming from an outside source. Since the income comes from an outside source, positive cash flow contributes to our net worth. It creates and grows wealth.

In retirement, a positive cash flow is supported from our own investments. Since we are taking assets from our retirement accounts (from the asset side of out net worth), cash flow acts as a drag on our investments and/or can cause our net worth to dwindle. It is not a good feeling. Even if we responsibly take distributions from our retirement accounts and live a prosperous life, we might watch our retirement accounts - and our net worth - decrease.

The insurance solution

Again, watching our net worth decrease is a terrible feeling. As our wealth fades, the worry about future income can compound into increasing levels of anxiety into our latest years.

Many people in this situation seek answers and solutions. One of those solutions, widely advertised and eagerly sold, is annuities. Annuities are insurance products that assist in easing the instability of retirement income along with the anxiety that comes along with it. Before we dive into the numbers, it’s important to understand how annuities work and how they are classified as insurance.

Yes, annuities are insurance

When you purchase insurance, any insurance, you are offloading the risk of some undesirable event onto the insurance company. With homeowner’s insurance, you are offloading the financial risk of something bad happening to your home. Likewise with auto and son on. It is important to note that you are purchasing this benefit. You are paying an amount of money for the protection and peace of mind that insurance brings. Yes, even with annuities. With annuities you are purchasing the benefit of guaranteed income for the rest of your life along with the emotional relief.

Side note: It’s important to note that the value of insurance is directly tied to the likelihood a risk may occur. For instance, term life insurance for a young person is usually very affordable. That is because the likelihood of that person dying within the term is very low. Permanent life insurance, on the other hand, is very expensive. That is because, if the policy is kept, the likelihood of the person dying within the term is 100%.

With annuities, the risk of running out of money is off loaded to the insurer, and the payout is guaranteed. That is, the insurance company has a 100% chance of paying out benefits, often times immediately. The risk plays out over time as the insurance company waits for the annuitant (the person receiving the money) to pass away. The longer the annuitant lives, the less beneficial the arrangement is for the insurance company. As you might guess, the cost of this 100% payout and related risk over time is very, very high.

What you’re really paying

For the rest of this article, I’m going to use the easiest and most common form of annuities: the single life immediate fixed annuity. I’m using this annuity because, among the annuity products out there, it provides the best “value” to the person receiving the benefit. The best bang for your buck.

In a single life fixed immediate annuity, the annuitant pays a lump sum to the insurance company in exchange for a fixed amount paid back every month over the rest of their lifetime, however long that may be. At the end of annuitant’s life, the payments stop and nothing else is collected. There is no additional death benefit, inflation protection, shared life benefit, or rider for other benefits. Those benefits are available, but decrease the general value of the annuity. That is, more complexity = more cost. Therefore, we’ll use the single life fixed immediate annuity because it provides the best benefit for the annuitant.

The monthly benefit received varies based on when the annuity was purchased. This is because the insurance company takes the initial payment and invests it in order to provide the benefit for the annuitant and profit for the company. Since the vast majority of insurance companies invest in bonds, the benefit offered to the annuitant is usually closely tied to interest rates and related bond yields.

Over the last 100 years, interest rates have varied and, therefore, annuity payouts have varied as well. Averaged by decade, here are the average annuity payouts for a 65 year old immediate annuitant:

1925–1934: 5.0%

1935–1944: 5.2%

1945–1954: 5.5%

1955–1964: 6.0%

1965–1974: 6.5%

1975–1984: 9.0%

1985–1994: 7.5%

1995–2004: 6.5%

2005–2014: 5.0%

2015–2024: 4.5%

Over the last 100 years, the average annuity rate for a 65 year old single life annuitant was 6.07%. In practical terms, a 6.07% distribution means a 65 year old would receive about $505/month for life for every $100,000 they initially invested.

Opportunity cost

This benefit, as mentioned above, comes with a cost for the annuitant. After all, insurance companies exist to make a profit. However, in order to weigh the true cost of the annuity, it’s important to explore alternatives to buying an annuity. Therein is the cost paid by the annuitant; the opportunity cost.

The most popular alternative to annuities is also the most common form of retirement income (aside from Social Security). That is, regular withdrawals from retirement accounts and investments.. Of course, this alternative comes with risk and uncertainty, as there is no insurance company guaranteeing you any benefit. You are on your own.

No crystal ball

The risk and uncertainty of withdrawals from retirement accounts is you have no idea of the future. You can estimate, predict, and take cautious withdrawals, but there is still no way to know for sure.

However, we do have historical data. Looking back, the annualized rolling 20 year return of the US stock market from 1925-2005 was 10.65%. That is, the annualized geometric average return of 1925-1945, 1926-1946, and so on. The average of all of those 20 year periods is 10.65%.

This obviously vastly outpaces the 6.07% average received by 65 year old annuitants over that time, but what about the worst case scenario? Has there ever been a 20 year period where an annuitant would have benefitted from an annuity instead of investing? Let’s look at that scenario.

The worst case scenario

Not surprisingly, the worst 20 year return of US investments in the last 100 years was from 1929-1949 when US equities returned an annualized geometric average of 3.81%. This was during a time when annuities were paying around 5%. That means, a $100,000 annuity would provide $416/mo for the annuitant’s life. If the retiree chose to invest $100,000 in the US stock market with an expected annualized return of 3.81%, they could have withdrawn $596/mo for 20 years before running out of money.

Wait… why? Isn’t 5.0% greater than 3.81%? The difference lies within how the interest rates are applied. The distribution rate of the annuity is the principal multiplied by the interest rate and then divided by 12 months. Hence $416. For the investor the principal grows each year, on an average of 3.81%. This growth allows for greater distributions before running out in 20 years.

Of course, one of the major pitfalls of investing is the possibility of running out of money. In the example above, sure the annuitant could have received an extra $180/mo from investing themself, but this added benefit would come at an even greater cost: running out of money at age 85. Not ideal.

What if the investor decided that the $416 was enough, but still chose to invest? That is, they invested their $100,000 in the US stock market and took $416/mo in distributions. In that case, not only did they not run out of money by age 85, but they would still have $64,436 in their account after 20 years. Yes, that means they would have received the same benefit offered by the annuity companies without sacrificing the entire principal. In this scenario, the investor would run out of money around their 102nd birthday.

The averages

As mentioned, that is the worst case scenario. The averages paint a more clear picture.

From 1925-2005, the average single life annuity payment offered to a 65 year old annuitant was $532/mo per $100,000 invested.

Over that period, an investor in the US stock market could withdraw an average of $1,107/m0 for 20 years for every $100,000 invested before running out of money.

Should the investor choose to take the much safer annuity distribution rate while also investing the market, they would be left with an average of $512,154 at the end of 20 years!

Further, there are only 5 20-year periods over the last 100 years where the annuity payment would result in a decreased principal at the end of 20 years if invested. 4 of those periods left over $90,000. 3 of them left over $96,000. The other 75 periods all left MORE than $100,000.

Safe withdrawal

Finally, many people wonder what the safe withdrawal rate really is. That is, what is the highest amount a retiree can take from their investments while preserving the principal exactly.

The safe withdrawal rate is significant because the goal of retirement is maximizing quality of life without the danger of running out of money. Therefore, an investor taking the annuity rate may be sacrificing quality of life, whereas the retiree taking the maximum distribution may run out of money too soon.

More historical data

To find the “safe” rate, we can again look at the 20 year rolling periods and find the amount that can be withdrawn each month for 20 years while keeping the initial investment ($100,000) in tact. Shockingly, the average amount was $888/mo. That is, on average, an investor in the US market could have withdrawn $888/mo for 20 years while keeping their $100,000 in tact. That’s an average distribution rate of 10.66%!

No surprise

While you may be surprised by the staggering opportunity cost of a fixed annuity, it is important to remember that these products exist for two reasons:

1) Provide fixed income for life

2) Create profit for the insurance company.

In order to provide both of these things, insurance companies will continue to invest in very secure investments, accept the risk, and eventually provide annuity payments that far underperform the market.

Flip the value

Ultimately, the value of these products varies depending on the retiree and their needs. As seen here, there is little sense to the financial proposition, but the true value must be considered against the retiree’s needs, risk tolerance, and experience with investing.

However, once you decide an annuity may serve your needs, just make sure to flip the value. After all, $512,154 in potential lost value is a high price for peace of mind.


To dig further into the data, download the excel file here.

Sources:

  1. The Annuity Expert. (2025, September 24). The best annuity rates | Current interest rates for September 24, 2025. Retrieved from https://www.annuityexpertadvice.com/rates/annuity/

  2. Rodeck, D. (2024, November 1). Best fixed annuity rates of 2025. Forbes Advisor. Retrieved from https://www.forbes.com/advisor/investing/best-fixed-annuity-rates/

  3. Annuity Rate Watch. (2025). Historic annuity information tool. Retrieved from https://www.us.annuityratewatch.com/historic-annuity-information

  4. Thrift Savings Plan. (2025). Historical annuity rates. Retrieved from https://www.tsp.gov/withdrawals-in-retirement/historical-annuity-rates/

  5. Immediate Annuities. (2025). Annuity rates & trends (updated monthly). Retrieved from https://www.immediateannuities.com/annuity-trends/

  6. The Measure of a Plan. (2025, January 2). U.S. stock market returns – a history from the 1870s to 2024. Retrieved from https://themeasureofaplan.com/us-stock-market-returns-1870s-to-present/

  7. Center for Research in Security Prices (CRSP). (2025). CRSP US Total Market Index. Retrieved from https://www.crsp.org/indexes/crsp-us-total-market-index/

  8. 1Stock1. (2025). Dow Jones Industrial Average (DJIA) yearly returns. Retrieved from https://1stock1.com/1stock1_795.html

Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute financial, investment, legal, or other professional advice. While we strive to ensure the accuracy and completeness of the content, we make no guarantees regarding its reliability or suitability for any particular purpose. Readers should consult with a qualified financial advisor before making any investment decisions. As a fiduciary Registered Investment Advisor (RIA), we are committed to acting in your best interests. However, past performance is not indicative of future results, and all investments carry risks, including the potential loss of principal.

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