Episode Show Notes
So I had a conversation with my aunt over the holidays — she’s sixty-four, just retired from a school district job in Knoxville — and she was so proud of herself. She’d done her homework, compared a bunch of annuity options, locked in what she felt was a solid monthly payment. And I was genuinely happy for her. But then she said something that kind of stopped me cold.
What did she say?
She said, ‘I’m getting four hundred and eighty dollars a month, and that covers my utility bills and groceries with a little left over.’ And I thought — okay, that’s true today. But what about in fifteen years?
Yeah. And that’s the thing — she’s not wrong about the number. The number is real. It’s just that the number doesn’t change, and everything around it does.
Right, and I think that’s the piece that gets lost when people are shopping around and comparing Tennessee annuity rates. They’re looking at the monthly payment figure and treating it like the whole story.
It’s the most visible number, so it makes sense that it gets the most attention. But inflation is doing this slow, quiet work in the background the entire time. And over a retirement that could run twenty-five, thirty years — that adds up to something really significant.
How significant are we actually talking? Like, give me a concrete sense of it.
Okay, so think about a three percent annual inflation rate — which is actually pretty modest, historically speaking. At that rate, over twenty-five years, purchasing power gets cut nearly in half. So that four hundred and eighty dollars your aunt is collecting today? In purchasing power terms, it could feel closer to two hundred and fifty dollars a month by the time she’s in her late eighties.
That’s a brutal way to think about it.
It is. And it’s not meant to be scary — it’s just the math. The payment never changes. What it covers does.
And healthcare is the part that really worries me in that scenario. Because healthcare costs tend to rise faster than general inflation anyway, and that’s exactly when you’re leaning on it the most — later in retirement.
Exactly. The years when a fixed payment feels the most inadequate are often the years when your expenses are climbing the fastest. That’s the squeeze.
So what’s the actual solution here? Is there a version of an annuity that accounts for this?
There is. It’s called an inflation-adjusted annuity — you’ll also hear it called a COLA annuity, which stands for cost-of-living adjustment. The basic idea is that instead of a flat payment for life, your payment increases each year by a set percentage. Could be one percent, two percent, three percent — or in some contracts, it’s tied to a published inflation index.
Okay, that sounds like an obvious win. Why doesn’t everyone just do that?
Because you pay for it upfront. The starting payment on an inflation-adjusted contract is meaningfully lower than what you’d get from a standard fixed contract with the same premium.
How much lower?
So this is illustrative — and I want to be clear these numbers will vary based on your age, the carrier, the state, all of it — but as a rough example: a fifty-five-year-old putting a hundred thousand dollars into a standard fixed immediate annuity might see something in the neighborhood of four hundred and twenty dollars a month. That same person, same premium, going with an inflation-adjusted version? Might start around two hundred and sixty-eight dollars a month.
Wait — that’s like thirty-six percent less right out of the gate.
About that, yeah. And that gap is real and it matters, especially in the early years of retirement when you might actually need that income the most.
So you’re basically betting on living long enough for the inflation-adjusted version to catch up and eventually pass the fixed payment.
That’s a fair way to frame it. The compounding increases eventually close the gap — and then surpass it. But it takes time. And the longer your retirement runs, the more that structure works in your favor.
But if you’re someone who retires at sixty-two and lives to seventy-five — which is not an unreasonable scenario — you might actually have been better off with the higher fixed payment the whole time.
Possibly, yes. And that’s why this isn’t a one-size-fits-all answer. It genuinely depends on your time horizon, your health, your other income sources. There’s no version of this where I can say ‘inflation-adjusted is always the right call.’
Which I appreciate you saying, because I feel like sometimes this stuff gets presented as — oh, you obviously want the inflation protection, why wouldn’t you?
Right, and that framing ignores the real cost of accepting a lower starting payment. If the difference between those two monthly figures is the difference between covering your rent or not — that’s not a theoretical problem, that’s a real problem happening right now.
So what questions should someone actually be asking themselves when they’re trying to figure out which direction makes sense?
I’d start with: what does the rest of your income picture look like? Because if you’ve got Social Security coming in, and Social Security has its own cost-of-living adjustments built in — imperfect as they are — then maybe you don’t need to build inflation protection into the annuity contract itself. The annuity can just be the stable base layer.
So you’re using Social Security as your inflation hedge and the fixed annuity as the predictable floor.
Exactly. Or if you’ve got a pension with COLA provisions, same idea. The annuity doesn’t have to do everything. It just has to do its part.
That’s actually a really useful reframe. I don’t think I’d thought about it that way — like, you’re building a stack of income sources and each one has different characteristics.
And the question is whether the stack as a whole has enough inflation resilience. Not whether any single piece does.
Okay, what’s another approach? Because I know some people don’t want to rely on Social Security for that — either because they’re skeptical of future adjustments or because they’re retiring early and delaying Social Security.
Yeah, so another approach that comes up a lot is laddering. Instead of putting all your premium into one annuity contract right now, you spread it across multiple contracts purchased at different ages.
Walk me through how that actually works in practice.
So picture someone who retires at sixty-two with, say, three hundred thousand dollars they want to put toward annuity income. Instead of buying one big contract today, they might buy a contract now with a hundred thousand, then another one at sixty-seven with another hundred thousand, and a third at seventy-two with the last hundred thousand. Each later contract is priced on whatever Tennessee annuity rates are at that time, and the payments from those later contracts tend to be higher because of age and — hopefully — favorable rate environments.
So the later contracts naturally provide more income, which compensates for the fact that the earlier contract’s purchasing power has eroded a bit.
That’s the idea. It’s not a perfect inflation hedge — if rates are low when you go to buy that second or third contract, it doesn’t work as cleanly. But it does give you flexibility and multiple entry points.
The downside being — you have to actually have the discipline to not spend that money sitting in reserve waiting for the next purchase.
Ha — yes. That is a real behavioral challenge that doesn’t get talked about enough. The money has to go somewhere safe and accessible in the meantime, and you have to resist the temptation to redirect it.
I’m thinking of a listener who wrote in a few months ago — she was sixty, had a chunk of money she wanted to annuitize, and her financial situation was pretty tight. She was really torn between the higher fixed payment she could get now versus the inflation-adjusted version. And honestly, reading her situation, I kept thinking — she needs that higher payment now. She can’t afford to wait for the compounding to kick in.
And that’s a completely legitimate conclusion. The inflation-adjusted structure is genuinely better in a long-horizon scenario where your near-term budget has some flexibility. But if you’re running lean right now, taking a thirty-plus percent haircut on your starting income is a real sacrifice.
It’s not just a math problem — it’s a cash flow problem.
Exactly. And I think that’s where some of the oversimplified advice falls apart. People say ‘always get the inflation protection’ without accounting for what that costs you in year one, year two, year three.
Let me ask you something about the rate environment piece, because you mentioned it briefly. How do current interest rates factor into this decision?
So this is actually a pretty important nuance. When prevailing interest rates are higher, annuity payments in general tend to be more competitive — including fixed payments. That means the gap between what a fixed contract pays and what an inflation-adjusted contract pays can look different depending on when you’re buying.
So in a high-rate environment, the fixed payment is more attractive relative to the inflation-adjusted version?
It can be, yeah. Because the fixed payment is higher in absolute terms, so the sacrifice you’re making by taking the inflation-adjusted version feels steeper. Whereas in a low-rate environment, fixed payments are compressed anyway, so the relative cost of buying inflation protection is sometimes a little less painful.
That’s counterintuitive. I would have thought high rates make everything better.
High rates make the fixed payment better. But they also make the trade-off more expensive if you want the COLA version. It’s one of those things where you really do need to look at actual quotes side by side rather than just assuming one structure is always superior.
Which is why — and I know we say this a lot — talking to an actual licensed agent who can pull real numbers from multiple carriers is so important. Because you can’t just reason your way to the right answer in the abstract.
You really can’t. Tennessee annuity rates vary by carrier, by contract type, by your age and gender — there are a lot of variables. The only way to actually see the trade-off clearly is to have real quotes in front of you.
Okay, I want to make sure we cover the Tennessee tax piece before we wrap up, because I think this surprises a lot of people.
Yeah, this is worth spending a minute on. Tennessee doesn’t have a state income tax on wages or salaries — most people know that. And the Hall Income Tax, which used to apply to interest and dividend income, was fully repealed as of twenty twenty-one.
So does that mean annuity income is tax-free in Tennessee?
At the state level, largely yes — but that’s only part of the picture. Federal income tax still applies to annuity payments, and how much you owe depends on how the contract was funded. If you bought the annuity with pre-tax money — like from a traditional IRA or a four-oh-one-k rollover — the payments are generally fully taxable as ordinary income at the federal level.
And if it was after-tax money?
Then it gets more nuanced. Part of each payment is considered a return of your original premium — which isn’t taxable — and part is considered earnings, which is. The IRS has a formula for figuring out that ratio, called the exclusion ratio. It’s not complicated once you understand it, but it does mean the tax treatment isn’t the same for every contract.
So ‘Tennessee doesn’t have income tax’ is true but potentially misleading if someone thinks that means their annuity payments are just… free and clear.
Right. The federal piece is still very much in play. And this is genuinely a conversation to have with a tax professional before you buy, not after. Because how you fund the contract and how you structure the payments can affect your tax situation for decades.
That’s a detail I don’t think my aunt fully worked through, honestly. She was focused on the monthly number and the carrier, which — fair — but the tax side of it can change what that number actually means for your take-home.
And it’s not a reason to avoid annuities — it’s just a reason to go in with full information. Which is kind of the theme of this whole conversation, right? The monthly payment number is the starting point, not the ending point.
So if I’m pulling this together — the core tension is: fixed annuity gives you a higher payment now but loses purchasing power over time, inflation-adjusted gives you a lower payment now but keeps pace better over a long retirement. And neither one is automatically right.
That’s the core of it. And then layered on top of that: what does the rest of your income stack look like, how long is your time horizon, how sensitive is your near-term budget to a lower starting payment, and what are current Tennessee annuity rates actually offering across carriers — because that affects the math in ways you can’t see without real quotes.
And there are other tools in the mix too — the laddering approach, combining a fixed annuity with other assets managed separately. It’s not just a binary choice between these two contract types.
Exactly. Some people build a really elegant income plan that uses a standard fixed annuity as the bedrock and handles inflation risk through other parts of their portfolio. That can work really well — it just requires having those other parts actually in place and managed thoughtfully.
Which is why the conversation with a licensed professional isn’t optional. You can’t really model these scenarios against each other without someone who knows the products and the current rate environment.
And ideally someone who can pull quotes from multiple carriers, not just one. Because the spread between what different carriers are offering on the same contract type can be meaningful — especially over a twenty or thirty year retirement.
Thirty years is a long time for a small difference to compound into a big one.
It really is. And I think that’s the thing people underestimate most — not just about inflation, but about all of these decisions. The time horizon in retirement is long. Longer than most people feel in their gut when they’re signing the paperwork at sixty-two or sixty-five.
My aunt is sixty-four. She could easily be looking at a twenty-five year retirement. The person she is at eighty-nine is going to have very different needs than the person she is right now.
And the contract she signs today is going to be with her for that entire journey. That’s not a reason to be paralyzed — it’s a reason to be thorough before you commit.
Yeah. Get the quotes, understand the trade-offs, talk to someone who actually knows the Tennessee market and the carriers operating in it. Don’t just anchor on the biggest monthly number and call it done.
The biggest number today isn’t always the best number for the whole retirement. That’s really the whole point.