Income for Life?<\/p>\n
A first look at these annuities shows something very attractive. I estimate that an income annuity within a 401(k) would pay 7.46% annually for a 65-year-old woman. That is, $100,000 would pay $622 a month, or $7,464 annually, in what they say is \u201cguaranteed lifetime income.\u201d Compare that with a 30-year Treasury yielding only 5.12%, or only $5,122, annually. The argument I\u2019ve heard many times is that the annuity can pay a higher income due to risk pooling\u2014meaning that those who die earlier will be subsidizing those with long lives.<\/p>\n
While there is some truth to the benefits of risk pooling, it doesn\u2019t explain the vast majority of the higher cash flow over Treasuries. The Treasury bond really is income, as it\u2019s not eating into principal. The annuity, on the other hand, is not all income. A large portion is paying back principal that the investor has within the 401(k). I\u2019m not recommending a 30-year Treasury bond, but one could also spend down some of the bonds to live on. So, my first point is that an annuity is really a cash payment of both principal and interest and is not income for life.<\/p>\n
The Inflation Worry<\/p>\n
My next point is that I teach all of my clients to \u201cget real.\u201d That means think in real inflation-adjusted terms. Jason mentions inflation, stating: \u201cInflation is another challenge because most payments are fixed and lose purchasing power over time.\u201d I agree wholeheartedly. Inflation is incredibly anxiety-inducing, and we are all feeling it now as the cost of almost everything is far more expensive than only a year ago. The April Consumer Price Index<\/a> came in at 0.6% over the previous month and 3.8% over the prior year. Without food and energy, prices rose 0.4% and 2.8%, respectively. If that weren\u2019t bad enough, the Producer Price Index<\/a> rose 1.4% over the prior month and 6% over the past year. The Producer Price Index is perhaps even more important, as it\u2019s indicative of the future CPI. All of these numbers are well above the Federal Reserve\u2019s 2% annual target. The US debt and deficit are in uncharted territory. It\u2019s not that I know the future, but the possibility of long-term high inflation does scare the heck out of me.<\/p>\n In the chart below, I show what happens to spending power based on what annual inflation ends up being in the next 30 years. If the Federal Reserve does manage to hit its long-term target of 2% annual inflation, which I would bet heavily against, 44% of the spending power would be wiped out in 30 years. But 10% annual inflation would wipe out over 96% of that spending power. I\u2019m not going to recommend rolling the dice and counting on low inflation. If inflation is high, the value of the longevity protection is virtually wiped out.<\/p>\n Some annuities can come with fixed cost-of-living adjustments, meaning they will increase by a fixed percentage point annually, such as 2%. Of course, they start at a much lower first payment, and counterintuitively, they actually increase inflation risk because the duration of the payments is longer. Even Vanguard, which just issued a paper titled \u201cVanguard\u2019s Principles for Retirement Income<\/a>,\u201d mentioned inflation 43 times, yet makes the assumption inflation will run at only 2% annually.<\/p>\n I don\u2019t believe I\u2019m alone in my inflation anxiety. I\u2019ve worked with a lot of actuaries and find them to be really smart people. Many years ago, the insurance industry offered annuities tied to the CPI, but they no longer exist. I believe it was because the insurance industry\u2019s actuaries were unwilling to take that risk. Though several folks from the insurance industry counter by telling me they dropped the product because few were buying, I\u2019m skeptical.<\/p>\n The \u2018Annuities\u2019 I Am Recommending<\/p>\n I have essentially bought two \u201cannuities,\u201d though they aren\u2019t through insurance companies. I recommend both.<\/p>\n The first was mentioned by Jason, who stated: \u201cDelaying Social Security can help maximize lifetime benefits, but many retirees may not have the flexibility to wait until age 70.\u201d By waiting until age 70, I\u2019m increasing my payment by 8 percentage points annually, and that extra payment increases with inflation. Beyond that, it has a survivor benefit in that my wife will get that payment when I pass, assuming she outlives me. Back when the insurance industry did offer inflation-adjusted annuities, I calculated that delaying Social Security was the equivalent of buying the annuity at a 40% discount. There is always some risk, of course, but I reframe the decision as if I were actually taking Social Security and using the funds to buy the best inflation-protected annuity on the planet.<\/p>\n I don\u2019t agree with Jason\u2019s comment in this context that some may not have the flexibility to wait, because one can always roll the 401(k) to an IRA and begin withdrawing some of the money. In other words, if they have the funds to buy the annuity, then they have the funds to withdraw money to live on in the meantime and buy the better \u201cannuity\u201d known as Social Security.<\/p>\n![\"Exhibit](\"https:\/\/www.newsbeep.com\/us\/wp-content\/uploads\/2026\/06\/NKZGYSERQZGV3DFT7TNOCXS7HI.png\")
<\/p>\n