This article is part of the Retirement Financial Life Equation (RFLE) series. It was initially published on July 10, 2019, and updated in December 2025
I recently helped a friend evaluate an annuity product he was considering for part of his retirement savings.
Like many of us, he wanted to protect some of his assets from gut-wrenching stock market volatility. He also wanted to ensure he would have enough income when he retired in a few years.
His financial advisor had proposed an annuity product—the fixed-index variety—that would provide lifetime income, downside protection, and the potential for some of the stock market’s upside.
Fixed-index annuities have their growth tied to a stock market index (such as the S&P 500) rather than to prevailing long-term interest rates (as is typical of deferred annuities and single premium immediate income annuities—SPIAs). They typically carry floor and ceiling limits, hence the reference to downside protection and the possibility of some market gains.
These products are often sold with “lifetime income riders” (at an additional cost) that provide lifetime income guarantees, regardless of the stock market’s movements.
My friend is an intelligent guy, but like so many who get these kinds of proposals, he was having trouble making sense of it. That’s because they tend to be very complicated (i.e., lots of small print); I had to spend quite a bit of time reviewing the recommendation myself.
This wasn’t the first such proposal I’ve looked at, and, in my opinion, the product itself wasn’t bad—in fact, in many ways, it was better than most.
My main objective wasn’t to tell my friend whether to buy an annuity. Rather, it was to help him fully understand his advisor’s proposal. I wanted to make sure he had the whole picture so that he could make an informed decision.
Are annuities biblical?
As far as I know, annuities are not in the Bible. But neither are many of the modern financial instruments we have access to today. And I don’t think buying an annuity violates any biblical principles. However, as with all such things, we must guard our hearts and not look to anything—annuities included—as our ultimate source of retirement security.
I recently read this quote from a sermon delivered by Kevin DeYoung:
If there is one balloon the Bible is constantly popping, it is the myth of financial security. It is a lie to think that we can ever, apart from the Lord, be truly secure.
I wholeheartedly agree with that statement. As DeYoung later points out, God understands our intrinsic desire for safety and security for ourselves and our families. But he reminds us that the Bible continually challenges our attempts to find our ultimate financial security in anything other than God. Real security is not financial; it is the security we have in the merciful saving love and grace of God.
But I don’t think our ultimate dependency on God negates the need to wisely steward whatever resources God has entrusted to us, including our retirement savings. Annuities can, therefore, be something that God has given to us by his common grace to help us better steward the money he has given us. We have a choice whether to use them. And regardless of what we decide, we are no less dependent on God.
Taking a fresh look at immediate annuities
Annuities are an undeniably important part of the contemporary retirement planning landscape. I have been reading about and studying annuities for several years. I have also written about them before. It’s been a while, and my conversations with my friend have prompted me to revisit them as a possible addition to my retirement income plan.
I am not a financial advisor or insurance professional, and certainly no expert on annuities. I am just a retired IT guy trying to figure out whether they make sense for me. You may be in the same boat (or perhaps you will be in the future).
I do, however, have a pretty good understanding of where annuities might fit into someone’s overall retirement plan. My perspective is that they are most useful in “filling the gap” between guaranteed income sources such as pensions and Social Security and the less reliable income from a risk-based stock-and-bond portfolio (what is called the “floor-with-upside” strategy). Annuities can help retirees establish a steady stream of retirement income they won’t outlive. They can also be a good strategy for those with fewer savings to maximize their income.
My starting retirement-income strategy has been to combine income from a conservatively invested, income-oriented stock-and-bond portfolio with the Social Security benefits my wife and I receive. Therefore, Social Security is the “guaranteed,” inflation-adjusted component, and my investments—which are heavily weighted toward dividend-paying stock and bond funds—are the riskier portion.
At this point, I am only considering immediate-income annuities, which are different than the fixed-index annuity product my friend was proposing. They are not investments, per se—they are best described as “longevity insurance” whereby you hand an insurance company a lump sum, and they contract to pay it back to you, as principal and interest, usually in fixed monthly payments, for as long as you (or your surviving spouse) live.
I will take another look at fixed-index annuities in the next article. I will also explain why I currently have little or no interest in the third kind: variable annuities.
Annuities as a bonds-replacement strategy
Many people, like my friend, initially think of annuities as a way to tamp down the stock-market volatility in their retirement portfolio. But rather than focusing on stocks, some respected retirement-planning professionals suggest that annuities are better used in place of bonds to generate reliable, lifetime retirement income.
Others who are less fond of annuities say that a bond or CD “ladder” can accomplish the same thing.
Since I have already reduced my allocation to stocks to around 35%, I might be interested in an annuity as a more reliable replacement for some portion of the bond fund/cash component of my investment portfolio. So, for me (and perhaps for others), the question seems to come down to this:
Is some kind of annuity a better choice than individual bonds and/or bond funds as a more stable and reliable source of income in retirement? And if so, what kind of annuity should I buy?
To answer this question, I need to look at the two most important aspects of each: risk and return.
Comparing returns
Back when I originally wrote this article in 2019, bond returns were relatively modest. Short-term rates were around 2%, and longer-term bonds were paying between 3-4%. The Federal Reserve had kept interest rates low for years following the 2008 financial crisis.
The Vanguard Total Bond Index Fund (VBMFX) was paying about 2.5%, and the Vanguard Long-Term Bond Index Fund (VBLTX) was paying around 3.33%.
In 2025, the landscape has changed dramatically. The Federal Reserve’s series of interest rate increases from 2022 to 2024 has pushed rates significantly higher, creating what many consider the most attractive environment for annuity purchases in over a decade.
Current bond yields (December 2025):
- Short-term Treasuries (2-year): approximately 4.0-4.3%
- Intermediate-term Treasuries (10-year): approximately 4.3-4.5%
- Investment-grade corporate bonds (5-10 years): 4.25-5.25%
- High-quality corporate bonds: approximately 4.5-5.0%
As in 2019, immediate-income annuities don’t pay interest the same way bonds and bond funds do. They distribute your principal back to you with interest while guaranteeing those payments for as long as you live. This works to your advantage because insurance companies use your money along with others to create “risk pools.” Since some percentage of annuitants will pass away before they get all of their principal back in the form of “guaranteed” payments, the insurance company can pay what is called “mortality credits” (basically a bonus for living longer).
These “mortality credits” are a crucial feature of income annuities because the payouts are based on longevity averages (as defined in actuarial tables). That essentially means that the money not paid to those who die sooner can be used to pay those who live longer. So, the longer you live, the more mortality credits you receive. The more credits you have, the more you’re likely to get back than you put in.
Current immediate annuity payouts (December 2025):
Let me use the same example: going to immediateannuities.com for a quote on a joint 100%-to-survivor annuity for my wife and me, now ages 73 and 72.
For a $250,000 premium, current rates for a 73-year-old male with a joint-and-100%-survivor benefit are approximately $1,696/month or about $20,352/year. This represents a payout rate of approximately 8.1%!
Compare that with the 5.83% I quoted in 2019, when I was 67. The improvement comes from three factors:
- I’m six years older (higher mortality credits)
- Interest rates are significantly higher
- The competitive annuity market
At this payout rate, I would get all my money back in about 12.3 years (when I’m 85), compared to 17 years in my 2019 example.
The critical comparison:
If I invested that same $250,000 in a bond fund paying 4.5% and withdrew 8.1% annually ($20,250), simple math shows I would deplete the principal in approximately 17 years (when I’m 90). The distinct advantage of an annuity is that I would never run out of money, even if my wife and I live to 100 or beyond. This is made possible by the “mortality credits” I mentioned earlier.
Should bond prices fall dramatically during that period (due to adverse economic conditions or rising interest rates), I could run out of money much sooner with the bond fund strategy unless I withdraw less. The annuity eliminates that risk entirely.
What About Risks?
Contrary to what many people think, bonds and bond funds have risks, most notably, credit and interest rate risk. Corporate bonds are riskier than Treasury bonds, which the U.S. government backs, and foreign bonds are often seen as riskier than domestic ones.
Credit risk is the possibility that a company will get into financial trouble and default on its loan obligations. (This is reflected in the companies’ bond ratings: AAA, AA, BB, etc.) This risk can be mitigated somewhat by investing in “investment grade” bonds and diversifying across different companies and industries.
Interest rate risk is the impact of rising interest rates (such as the Fed Funds rate) on bond prices: when rates rise, bond prices fall. So, if you are holding a bunch of intermediate and long-term bonds or bond funds, and interest rates rise rapidly, the value of those investments could fall precipitously. (The reason is that they become less valuable to investors who can invest in newer bonds paying higher interest.)
Although annuity payments are said to be “guaranteed,” they also carry some risk. The payouts are only as reliable as the insurance companies that provide them. This is called “solvency risk.” It is akin to bond default risk, as it hinges on the insurer’s financial health. Although the risk may be low, especially for highly rated companies, it is still there.
The most significant risk to annuity-based income remains inflation.
The inflation challenge
Historical perspective:
Since 1990, inflation has averaged 2.46% per year. From 2010 to 2019, it was even lower—a paltry 1.8%. But even with relatively low inflation, a dollar is worth about 50% less today than it was in 1990!
Recent inflation experience:
The 2022-2023 period reminded us that inflation can spike unexpectedly:
- 2022: 8.0% (peak of 9.1% in June)
- 2023: 4.1%
- 2024: 2.9%
- 2025 (through September): 3.0%
The impact on annuities:
If I were to purchase an 8.1% payout annuity today, and inflation averages 3% over the next 20 years, the purchasing power of that fixed payment would erode significantly. What buys $20,352 worth of goods and services today would require about $36,700 in 20 years to maintain the same standard of living.
This is why, if I were going to purchase an annuity, it would make sense to buy one with inflation protection—one with cost-of-living adjustments tied to the Consumer Price Index (CPI).
The inflation-adjusted annuity challenge:
To the best of my knowledge, only one major company offers immediate income annuities with true CPI-linked inflation protection (The Principal Life Insurance Company), so they have little competitive pressure. These annuities have significantly lower initial payout rates than fixed-income annuities—often 30-40% lower.
For example, an inflation-adjusted annuity might start at 5.5-6.0% instead of 8.1%, but the payments would increase with inflation each year. Whether this trade-off makes sense depends on:
- Your life expectancy
- Your inflation expectations
- Your other sources of inflation-protected income (like Social Security)
- Your comfort with declining real purchasing power
Inflation also affects bonds:
Interest rates tend to rise with higher inflation. However, as interest rates rise, bond prices fall. The best way to mitigate the effects of inflation on bonds is to buy Treasury Inflation-Protected Securities (TIPS), which adjust both principal and interest payments in response to CPI changes.
Moreover, although it isn’t an automatic hedge against inflation, a well-constructed stock/bond portfolio will often keep up with inflation over the long term. Not to mention that it would remain 100% liquid (i.e., I would not have to hand over a large pile of money to an insurance company).
The bottom line is that both annuities and bonds carry risk, but the contractual guarantees of annuities seem to weigh in their favor, especially over a very long lifetime. To truly take inflation risk off the table, I would need to either: 1) invest exclusively in TIPS; or 2) purchase an inflation-adjusted immediate annuity.
Keeping my options open
The immediate income annuity seems to have a decisive advantage over intermediate- and long-term bond funds for maintaining a stable, reliable income stream for as long as my wife and I live. This is especially true if I want to take longevity risk entirely off the table.
The 2025 opportunity:
Current interest rate conditions have created what many consider the best environment for annuity purchases in over a decade. With payout rates 30-40% higher than during 2012-2020, the value proposition is significantly more attractive than it was when I wrote this article in 2019.
My analysis suggests that an immediate income annuity, when used as some percentage of my stock/bond portfolio—perhaps with an allocation of 30/30/40 (stocks/bonds/annuity) or something similar—may be a wise strategy since it would allow me to add to Social Security to increase my guaranteed income floor.
However, several factors still give me pause:
- Inflation risk: Fixed annuities lose purchasing power over time
- Liquidity: Once committed, the lump sum is no longer accessible
- Flexibility: Can’t adjust withdrawals based on changing needs
- Legacy: Less potential to leave assets to heirs
- Inflation-adjusted options: Significantly lower initial payouts
Does this mean I would never purchase an immediate fixed-income annuity? No, but if I did, I would probably:
- Look for a good inflation-adjusted product
- Build an “annuity ladder” (purchasing annuities at different times to lock in different rates and reduce timing risk)
- Only annuitize a portion of my portfolio (perhaps 20-30%), keeping the rest liquid
- Wait until I’m older (say, 75-80) when payout rates are even higher, and life expectancy is shorter
These options make the most sense not only for locking in a steady income but also for maintaining purchasing power in the future.
What about other types of annuities?
At this point, I want to return to the situation with my friend I mentioned at the beginning of this article. As you recall, he was considering a fixed-index annuity, which, according to his financial advisor, offered downside protection while allowing him to participate in some of the market’s upside.
I have been wondering: could this be an answer to the inflation problem that immediate annuities have? Should I consider a fixed-index annuity, or maybe a variable annuity, instead?
I’ll tell you what I discovered in the next article of this three-part series.