Category Archives: Podcast

Episode Show Notes

So I had a conversation with my aunt last month — she’s sixty-eight, lives outside Knoxville, just finished working — and she called me because she’d been Googling ‘best fixed annuity’ for like two hours and was completely overwhelmed. And honestly, Caleb, I didn’t know what to tell her.

That’s such a common starting point. You search for the best rate, you get a wall of numbers, and none of it tells you whether any of those products actually fit your situation.

Right, and she’s not unsophisticated. She managed a department for thirty years. But fixed annuities — the terminology alone is a lot.

Let’s just start at the foundation then, because I think it helps to get the framing right. A fixed annuity is an insurance contract. Not an investment product. That distinction matters legally and practically.

Why does that distinction matter to someone like my aunt, though? In plain terms.

Because the rules are different. The protections are different. It’s issued by an insurance company, regulated by the state insurance department, and if something goes wrong with the carrier, you’re covered by the state guaranty association — not the FDIC. Those are different safety nets.

Okay, so let’s actually walk through what the product does. You hand over money and then what?

You make a lump-sum payment — most fixed annuities are single premium, meaning one payment — and the carrier credits your account with a declared interest rate for a set period. Could be two years, could be ten. At the end of that period, you’ve got options: renew, convert it into an income stream, or move the money somewhere else.

And the two main types are MYGAs and SPIAs, right? I always have to slow down on the acronyms.

Yeah. MYGA — multi-year guaranteed annuity — locks in that declared rate for the whole term. So if you buy a five-year MYGA, you know exactly what rate you’re getting for those five years. SPIA is a single premium immediate annuity, which is a totally different animal.

The one where income starts almost right away.

Exactly. You hand over a lump sum and within about thirty days, you’re getting income payments. Monthly, quarterly, whatever the contract specifies. There’s no accumulation phase — you’re converting directly to income.

So for someone like my aunt who needs income now, a SPIA might be more relevant than a MYGA.

Potentially, yeah. It really depends on whether she needs that income to start immediately or whether she has other income sources and wants to grow a chunk of money tax-deferred for a few years first.

That’s actually the first question she should answer before she even looks at rates.

One hundred percent. What’s the goal? Growth or income? That narrows the field dramatically before you ever look at a rate table.

Okay, so let’s talk about rates, because that’s what everyone fixates on. How does a carrier even come up with the rate they’re offering?

It’s tied pretty directly to the bond market. Carriers take your premium, they invest it primarily in U.S. Treasuries and investment-grade corporate bonds, and the yield they earn on those bonds is what funds the rate they can offer you. So when bond yields go up, fixed annuity rates tend to follow. When yields fall—

The rates come down too.

Right. And this is why rates can shift week to week. It’s not arbitrary — it’s tracking something real in the market.

Which means if you see a rate you like today, waiting a month might mean that rate is gone.

It could go up, it could go down. You genuinely don’t know. That’s one reason it helps to work with an agent who’s watching this regularly, because they’ll know when something attractive is available and whether it’s likely to stick around.

Now here’s where I want to push back a little on the whole rate-chasing thing, because I feel like that’s the trap a lot of people fall into. My aunt was literally ranking carriers by rate alone.

Oh, that’s such a common mistake. And I get it — higher rate looks better on paper. But the rate is only one piece of what you’re evaluating.

So what else should she be looking at?

First thing I’d look at is the carrier’s financial strength rating. AM Best, Moody’s, S&P — they all publish ratings for insurance companies. You want to see an A rating or better from AM Best. A carrier offering a slightly higher rate but carrying a weaker financial rating — that’s not a trade-off worth making.

Because if the carrier gets into trouble, you’re relying on the state guaranty association, and that has limits.

Exactly. Tennessee’s Life and Health Insurance Guaranty Association does provide protection if a carrier becomes insolvent, but there are coverage limits. It’s not unlimited. So the financial strength of the carrier you pick genuinely matters.

What’s the second thing after financial strength?

Surrender charges. This is the one that catches people off guard more than almost anything else.

Explain that for someone who’s never seen one.

So when you put money into a fixed annuity, you’re agreeing to leave it there for the contract term. If you need to pull money out early — before the surrender period ends — the carrier charges you a penalty. And those penalties can be significant in the early years. Like, a ten-year contract might have a surrender charge of eight or nine percent in year one, stepping down each year.

Wait, so if someone puts in a hundred thousand dollars and needs it back in year two—

They could lose several thousand dollars to the surrender charge, depending on the contract. That’s why matching the contract term to your actual time horizon is so important.

How long can you actually leave this money untouched? That’s the real question.

Right. And most contracts do have what’s called a free withdrawal provision — usually you can pull out up to ten percent of your account value each year without triggering the surrender charge. But it varies by contract, so you need to confirm that before you sign.

Ten percent per year is something at least. That’s not nothing.

It’s meaningful if you need a little liquidity. But if you need your full principal back, that’s a different story.

There’s another thing I’ve heard people ask about — renewal rates. Like, what happens when the initial term ends?

This is a big one. Some carriers will offer a very attractive initial rate to get you in the door, and then when the term renews, the renewal rate drops considerably. It’s not illegal, but it’s something you should ask about before you commit.

How do you even find that out? Like, can you look up a carrier’s renewal rate history?

A good independent agent will know this. They work with these carriers repeatedly and they see what renewal rates look like. It’s one of those things that doesn’t show up on a rate table but matters a lot in practice.

Okay, so I want to get into the CD comparison because I think that’s where a lot of Tennessee savers are coming from. They’re used to CDs, they understand CDs, and someone tells them a fixed annuity is kind of like a CD.

It’s a fair comparison to start with, but there are real differences. The surface-level similarity is that both offer a declared rate over a set term. You know what you’re getting going in.

But then the differences start to pile up.

The big one is tax treatment. Interest in a CD — you’re paying taxes on that every year, even if you’re not taking it out. Inside a fixed annuity, the growth is tax-deferred. You don’t owe anything until you take a distribution.

Which, for someone who’s trying to grow a chunk of money over five or seven years, that compounding without the annual tax drag can actually add up.

It can, yeah. Especially in a higher rate environment. Now, Tennessee is interesting here because the state eliminated the Hall Income Tax back in twenty twenty-one, so there’s no state income tax on annuity distributions for Tennessee residents. But federal tax still applies to the earnings.

And if you funded the annuity with pre-tax money — like rolling over a traditional IRA — the whole distribution is taxable at the federal level, not just the earnings.

Exactly right. The tax rules get complicated fast, which is why we always say talk to a qualified tax professional before making any decisions based on tax treatment.

What about the FDIC piece? Because I think that’s where some people get nervous.

CDs at FDIC-member banks have federal deposit insurance. Fixed annuities don’t. They’re backed by the issuing insurance company and covered within limits by the state guaranty association. Different protection mechanism.

And the liquidity difference is real too. If you need to break a CD early, the penalty is usually pretty modest.

Yeah, CD early withdrawal penalties are typically just a few months of interest. Fixed annuity surrender charges can be much steeper, especially in the early years of the contract. That’s the trade-off for the potentially higher rate and the tax deferral.

Have MYGA rates actually been higher than CD rates? Because I’ve heard that but I don’t want to just take it on faith.

In recent years, yes, MYGA rates have frequently come in above comparable CD rates. But I want to be careful here — that’s not a promise of anything going forward. It varies by carrier, by term, by the rate environment at any given moment. And past rate relationships don’t tell you what next month looks like.

Fair. So let’s talk about who this actually makes sense for. Because I don’t think fixed annuities are for everyone.

They’re definitely not. The people who tend to get the most out of them are folks who are within, say, five to fifteen years of retirement and want to protect a portion of their savings from market swings. Or people who’ve already maxed out their IRA and four-oh-one-k contributions and want another bucket of tax-deferred growth.

Or someone already retired who needs predictable income to cover the basics — mortgage, utilities, groceries.

Right. That’s where a SPIA can be really powerful. You know exactly what’s coming in every month. There’s no market volatility affecting that number.

And who’s it not for?

Someone who might need access to their full principal in the short term — that’s a mismatch with the surrender charge structure. And someone who’s comfortable with market exposure and is really looking for long-term growth potential — there are other tools better suited to that.

I think that’s actually the thing people miss. A fixed annuity isn’t trying to beat the market. That’s not the job.

That’s a really good way to put it. The job is predictability. Stability. Knowing what you’re going to have. If that’s what you need, it can be a solid fit. If you’re chasing growth, it’s probably not the right tool.

Let me ask you something that I think a lot of people in Tennessee specifically wonder about. Does it matter where in the state you are? Like, does being in Memphis versus Nashville versus Knoxville change anything about what’s available to you?

Not really, no. Tennessee is one state, one regulatory environment. The carriers available to you and the rates they offer are going to be the same whether you’re in Memphis or Johnson City. What might differ is the agent you’re working with and their familiarity with certain carriers.

So it’s less about geography and more about who you’re working with.

Exactly. An independent agent who has access to multiple carriers is going to be able to do a real comparison for you. Someone who’s captive to one company can only show you what that company offers.

Okay, let’s do a practical scenario. Picture a couple, both sixty-five, they’ve got a hundred thousand dollars they want to put to work. They’re not going to need this money for at least five years. What’s the thought process?

So first question is — do they have other income covering their expenses? Social Security, pension, whatever. If the answer is yes, this hundred thousand is really a growth bucket, and a five-year MYGA might make a lot of sense. Lock in a declared rate, let it grow tax-deferred, revisit in five years.

And if the answer is no — they need some of this to cover expenses?

Then you’re looking at something different. Maybe they put a portion into a SPIA to generate income now, and keep the rest somewhere more liquid. You wouldn’t want to put everything into a MYGA if you’re going to need income from it in year two.

Because of the surrender charges.

Right. And this is exactly why the ‘define your goal first’ step is so important. The product has to match the need.

I also want to flag something about death benefits because I think people don’t always realize this is part of the contract.

Yeah, most fixed annuities include a death benefit provision. If you pass away before the contract matures, the remaining value goes to your named beneficiary — typically without going through probate. For people who want to leave a specific dollar amount to heirs, that’s a meaningful feature.

That’s actually something my aunt mentioned. She wants to make sure her daughter gets something. And I didn’t even think to connect that to the annuity conversation.

It’s one of those features that often gets overlooked when people are focused on the rate. But it’s in the contract. It’s worth understanding.

Okay, so let’s say someone’s listening to this and they’re ready to actually start shopping. What does that process look like?

Step one, figure out your goal — growth or income. Step two, figure out your time horizon honestly. Not how long you think you should be able to leave the money, but how long you actually can. Step three, work with a licensed agent who can pull quotes from multiple carriers, not just one.

And then actually read what you’re signing.

Please. Read the contract summary. Specifically the surrender charge schedule, the free withdrawal provision, and the renewal rate terms. Those three things will tell you a lot about whether this contract actually works for your life.

I feel like the surrender charge schedule is the thing people skip because it’s the least exciting part of the document.

And then it becomes the most important part of the document the moment they need their money back early. It’s not fun to read, but it matters.

What about people who are doing this research online and just comparing rate tables? Is that a useful starting point or is it kind of misleading?

It’s a starting point. It can help you get a sense of the range of rates available and which terms are competitive. But a rate table doesn’t tell you the carrier’s financial strength, the surrender schedule, the renewal rate history, or whether the contract has the free withdrawal provisions you need. It’s like reading a menu that only shows prices but not what’s actually in the dish.

Ha. That’s a good way to put it.

You need the full picture before you order.

One last thing I want to touch on — and this is something I know comes up — is the idea that there’s one objectively best fixed annuity out there. Like, if you just search hard enough, you’ll find it.

There isn’t. I mean that genuinely. The contract that’s right for a sixty-two-year-old in Nashville with a pension and Social Security already covering expenses is going to be completely different from what’s right for a fifty-eight-year-old in Memphis who’s self-employed and has no pension.

Same state, same product category, totally different needs.

And that’s before you factor in tax situation, whether they have other liquid savings, what their heirs situation looks like. The ‘best’ fixed annuity is the one that fits your specific picture. Which is why the conversation with a licensed agent isn’t optional — it’s really the whole point.

And a licensed Tennessee agent specifically, because they know the state regulatory environment, they know the guaranty association rules, they know which carriers are actively writing business here.

Exactly. This isn’t a product category where you can really DIY your way to the right answer. The research you do ahead of time — understanding how rates are set, what surrender charges mean, what to look for in a carrier — that makes you a much better consumer when you sit down with an agent. But the agent is still the step you can’t skip.

I’m going to call my aunt and tell her to stop Googling and start that conversation.

Tell her to bring a list of questions. She’ll get a lot more out of that meeting if she walks in knowing what to ask.

Episode Show Notes

So I had a conversation with my aunt over the holidays — she’s in Knoxville, just turned sixty-seven, and she’s got about eighty thousand dollars sitting in a savings account doing basically nothing. And she kept going back and forth between putting it in a CD or some kind of annuity. And honestly, she couldn’t figure out why they even felt different. They both sounded the same to her.

That’s such a common place to get stuck. On the surface they really do look similar. You get a stated interest rate, it runs for a set period, and neither one is tied to the stock market. So people hear that and think — okay, these are basically the same thing with different names.

Right, and that’s where she was. But they’re not the same thing, and I think the differences actually matter a lot depending on what you’re trying to do with the money.

They really do. And I’d say the biggest difference — the one that catches people off guard the most — is how taxes work. Because with a CD, the bank is reporting your interest to the IRS every single year on a Form 1099-INT. Even if you haven’t touched the money. Even if you’re just letting it sit there and compound.

Wait, so you’re paying taxes on money you haven’t actually received yet?

Essentially, yes. The interest is credited to your account, so technically you have access to it, which is why the IRS treats it as income. But if you’re in a decent income year — still doing some part-time work, taking Social Security, whatever — that extra taxable income can push you into a higher bracket.

Okay that’s actually a bigger deal than I think most people realize. My aunt is still doing some consulting work, so she’s not in a low-income year by any stretch.

And that’s exactly the kind of situation where the tax-deferral on a fixed annuity starts to look attractive. With an annuity, the interest grows inside the contract and you don’t owe taxes on it until you actually take money out. So you have some control over when that income hits your tax return.

Which is useful if you think you’ll be in a lower bracket later.

Exactly. And Tennessee is interesting because there’s no state income tax on wages or retirement income at the state level — but annuity distributions are still subject to federal income tax. So the ability to time those distributions, to pull money in a year when your income is lower, that has real dollar value.

Okay but I want to push back a little here because I feel like you’re making annuities sound like the obvious winner on taxes, and I don’t think it’s that clean.

No, you’re right to push back. It’s not that clean at all.

Because if someone puts money into an annuity inside an IRA, for example, the IRA already has tax-deferral. So the annuity’s tax-deferral isn’t adding anything extra in that case.

That’s a really important point. If the money is already in a tax-deferred account, the annuity wrapper isn’t giving you an additional tax benefit. The deferral advantage is really most meaningful when you’re using non-IRA money — what people call non-qualified funds.

Good. Okay, so taxes are one big difference. What else?

Liquidity is a huge one. And this is where I think a lot of people get burned — or at least surprised. Both products penalize you for pulling money out early, but the way they do it is pretty different.

With a CD it’s pretty simple, right? You break it early, you give up some interest.

Usually a few months’ worth of interest, yeah. It stings a little but it’s not catastrophic. With a fixed annuity, you’ve got what’s called a surrender charge period — and that can run anywhere from three years to ten years depending on the contract. And if you pull out more than what the contract allows — typically up to ten percent per year without a charge — you’re paying a percentage of the amount you withdraw.

And that percentage can be significant in the early years.

It can be. It usually steps down over time — so year one might be seven or eight percent, year five might be three percent, and by the end of the surrender period it’s gone. But if you need that money in year two for an emergency, you’re feeling it.

This is actually what I think about with my aunt’s situation. She’s sixty-seven. She’s not sure when she might need to tap into this. She’s got some other savings but this would be a pretty significant chunk.

And that uncertainty is a real factor. If there’s any real chance she needs that eighty thousand in the next couple of years, a long surrender period is a problem. A shorter-term CD — or even a CD ladder — might be a better fit for that portion of her savings.

Explain the ladder thing because I know some people swear by it and I’ve never totally understood why.

So instead of putting all your money into one CD with one maturity date, you split it up. Maybe you put some into a one-year CD, some into a two-year, some into a three-year. As each one matures, you either spend it or roll it into a new CD. The idea is that you always have something coming due relatively soon, so you’re not completely locked up.

It’s basically building in your own liquidity schedule.

Right. And some people do a version of this with annuities too — staggering contracts with different terms — but the CD ladder is a more common approach for people who want that rolling access.

Okay so let’s talk about the rate structure because I think this is another place where people assume CDs and annuities work the same way and they really don’t.

Yeah, this is a nuance that matters. With a CD, the rate you lock in at purchase is the rate for the whole term. Full stop. When it renews, it renews at whatever rates are current at that time, which could be higher or lower. But during the term, you know exactly what you’re getting.

And with a fixed annuity it’s more complicated.

It can be. Some fixed annuities set an initial rate for a certain period — say the first year or two — and then the rate can adjust after that. It can’t go below the contract’s stated minimum, so there’s a floor, but it’s not necessarily locked in for the full term.

Which sounds a little less predictable than a CD.

In that structure, yes. But there’s a specific type of annuity called a multi-year guaranteed annuity — people call it a MYGA — and that one locks in a rate for the entire term, similar to how a CD works. So if you want the predictability of a fixed rate but you also want the tax-deferral benefit, a MYGA is often what people are looking at.

So the MYGA is kind of the closest apples-to-apples comparison to a CD in the annuity world.

Structurally, yeah. Same idea — you know the rate going in, it holds for the full term. The differences are still there on the tax side and the liquidity side, but the rate certainty is similar.

Alright, here’s the one that I think is actually the most underappreciated difference. What happens at the end of the term.

Oh, this is the big one for retirement planning.

Because with a CD, when it matures, you get your principal back plus the interest. Done. You can roll it, you can spend it, but that’s the end of the road for that contract.

And that’s fine for a lot of purposes. But a fixed annuity gives you options that a CD simply cannot. You can take a lump sum, sure. You can set up payments over a defined number of years. Or — and this is the one that’s really unique to annuities — you can elect a lifetime income stream. Payments that continue for as long as you live, no matter how long that is.

Which is the thing that no CD can do.

No CD, no savings account, no bond ladder can do that. The longevity protection piece is genuinely unique to insurance contracts. If you live to ninety-five, the payments keep coming.

I think about my aunt again here — she’s sixty-seven, she could easily live another twenty-five years. And if she runs out of money at eighty-five that’s a real problem.

That’s exactly the scenario where the lifetime income option becomes really compelling. It’s essentially transferring the longevity risk — the risk of outliving your money — to the insurance company.

But I want to make sure we say this clearly — the strength of that protection depends on the financial health of the insurance company, right? It’s not backed by the FDIC.

That’s an important distinction. CDs are FDIC insured up to the applicable limits — generally two hundred fifty thousand dollars per depositor per institution. Annuities don’t have that. What they have is the claims-paying ability of the issuing insurance company, and states do have guaranty associations that provide some protection, but it’s not the same as FDIC insurance.

So for someone who really values that federal deposit insurance, the CD has a genuine advantage there.

Absolutely. That’s not a trivial thing. Especially for someone who’s more conservative and wants that explicit government-backed protection on their principal.

Okay so let’s try to put this together practically. Because I feel like we’ve laid out a lot of differences and I don’t want people to walk away thinking one is always better than the other.

They’re not. They’re genuinely different tools for different jobs. If you’re saving for something specific in the next one to three years — a home purchase, a car, a planned expense — a CD’s shorter terms and simpler structure probably make more sense. You know when the money comes back, you’ve got FDIC protection, and you’re not locked into a long surrender period.

But if you’re further out from needing the money and you’re thinking about retirement income—

Then the tax deferral and the lifetime income options start to matter a lot more. And the surrender charge period is less of a concern if you’re genuinely not going to need the money for seven or ten years anyway.

I actually know someone — a guy I went to college with, his dad is sixty-two, just retired early, had about a hundred and twenty thousand dollars to figure out what to do with. And he was looking at a five-year CD versus a MYGA. And the thing that tipped him toward the MYGA wasn’t even the rate — it was the tax piece. He had a really high-income year from selling some property and he did not want more taxable income showing up on his return for the next five years.

That’s a really common trigger for the annuity conversation, actually. A liquidity event — selling a business, selling property, an inheritance — where someone suddenly has a chunk of money and they’re trying to manage the tax impact.

And the MYGA let him defer that. The interest just sits inside the contract, doesn’t show up on his 1099 every year.

Right. Now, he will eventually pay federal income tax on those earnings when he withdraws. It’s not that the tax goes away — it’s that he gets to choose when. And if his income is lower in five years than it is today, he comes out ahead.

That timing control is actually really valuable and I don’t think it gets talked about enough.

It doesn’t. People focus on the rate — which rate is higher — and that’s understandable. But the after-tax outcome is what actually matters, and that’s a harder calculation that depends on your specific situation.

Which is why we keep saying — talk to a licensed agent. Not because we’re dodging the question, but because the right answer genuinely depends on things we don’t know about your tax situation, your timeline, your other income sources.

And a licensed agent who works with both products can actually run the numbers for your specific situation. They can show you current MYGA rates, walk you through the surrender schedule on a particular contract, help you think through how either product fits with whatever else you’ve got going on.

And I think the other thing worth saying is that it doesn’t have to be either/or. You can do both.

Totally. Some people use CDs for the near-term money — the stuff they might need in the next year or two — and then put a longer-term chunk into a fixed annuity or MYGA for the tax-deferred growth. You’re not choosing a team. You’re just matching the right tool to the right job.

So if someone’s sitting down to think through this decision, what are the questions they should actually be asking themselves before they walk into that conversation with an agent?

First one — how soon might I actually need this money? Be honest with yourself. If there’s a real chance you need it in eighteen months, a long surrender period is a problem regardless of anything else.

That’s the one people underestimate. They think they won’t need it and then life happens.

Second question — what’s my tax situation likely to look like when I retire? Am I going to be in a lower bracket, a higher bracket, about the same? Because that determines how much the tax deferral is actually worth to you.

And third — do I want the option of lifetime income, or is a lump sum at the end of the term enough for what I’m trying to do?

That one’s really about what role this money plays in your overall retirement picture. If you’ve got a pension and Social Security covering your basic expenses, a lump sum at maturity might be totally fine. If this is a significant part of how you’re going to fund your retirement, the lifetime income option is worth taking seriously.

And then the FDIC question — how important is that federal deposit insurance to you versus the contractual protections of an annuity.

Which is partly a comfort question and partly a practical question about how much you’re putting in. If you’re over the FDIC limits at one institution, you’ve got to think about that differently anyway.

Right. Okay, I feel like we’ve covered a lot of ground here. The tax treatment is different, the liquidity mechanics are different, the rate structure can be different depending on the annuity type, and what you can do with the money at the end is very different.

And none of those differences make one product universally better. They make each product better for certain situations. A sixty-year-old in Memphis building toward retirement income is in a very different situation than a forty-five-year-old in Nashville saving for a down payment in three years.

And what works for one of them could be the wrong call for the other.

Exactly. That’s why this conversation — the annuity versus CD conversation — really needs to start with what you’re trying to accomplish, not with which rate looks higher on a website today.

Because the rate is one variable in a much bigger picture.

One variable. And not always the most important one.

Episode Show Notes

So I had a conversation with my aunt a few weeks ago — she’s sixty-eight, lives outside of Knoxville, recently retired — and she was telling me all about her Social Security timing decision, when she claimed, how much she’s getting monthly. And I thought, okay, that’s great. But then I asked her, what’s your plan if you need help taking care of yourself in ten years? And she just kind of went quiet.

That silence is really common. And it’s not because people don’t care — it’s because the whole long-term care conversation feels either too far away or too scary to sit with.

Right, it’s like, I’ll deal with that when I get there. But the whole point is that by the time you get there, your options have already shrunk.

Exactly. And there’s a statistic that I think reframes this pretty fast — close to half of all adults over sixty-five will eventually need some form of paid long-term care. That’s not a worst-case scenario. That’s a planning reality.

Half. That’s not a small number.

And then when you layer in cognitive impairment specifically — we’re talking roughly two in three people over a lifetime experiencing some form of it — you start to see why this can’t just be a footnote in a retirement plan.

And cognitive decline is the part that really complicates the financial side, right? Because it’s not just that you need care — it’s that your ability to manage money and make decisions starts to slip at the same time.

That’s the part people underestimate. It rarely shows up all at once. It’s gradual — a missed bill here, a forgotten password there. And by the time it’s obvious to everyone around you, some of the most important decisions you needed to make may already be harder to execute.

Which is why the timing of planning matters so much. You want to set things up while you’re still in a clear-headed position to do it.

Exactly. And I’d say there are really five practical areas where people can take action now. The first one is building what I’d call a trusted financial circle.

Okay, walk me through that. Because I think people hear that and they assume it means handing over control of your money to someone.

That’s a really common misread. It’s not about giving up control — it’s about making sure the right people know where things stand and can move quickly if something changes. So you’re identifying one or two people — could be a family member, a close friend, a licensed fiduciary, an attorney — who could step in if needed.

And what if someone doesn’t have close family nearby? That’s actually a lot of retirees, especially folks who’ve maybe outlived a spouse or whose kids are across the country.

Tennessee actually has professional fiduciary and guardianship services for exactly that situation. A licensed agent or an elder law attorney can point you toward reputable options in your area. It’s not as unusual as people think.

That’s good to know. What’s the second piece?

Simplifying and automating your finances. This one sounds almost too basic, but complexity becomes a real liability over time. Consolidating accounts, setting up automatic bill payments, getting direct deposit set up for every income source — Social Security, pension, annuity income — all of it.

And documenting passwords. I feel like that’s the thing nobody wants to think about but everyone needs to do.

Yes, and having a backup access method somewhere that a trusted person can actually find. The goal is that if you couldn’t manage things for a month, the financial life keeps running without everything falling apart.

Okay, the third area — this is the legal documents piece, right? And I know a lot of people have heard of these things but haven’t actually done them.

Right. There are three that really form the foundation. A durable power of attorney, which authorizes a trusted person to manage financial decisions on your behalf if you can’t. A revocable living trust, which lets assets transfer efficiently without going through probate. And a healthcare directive — sometimes called a living will — which spells out your medical wishes.

And I think people sign these once and think they’re done forever.

Which is a mistake. These documents need to be reviewed every three to five years, or after any major life change — a divorce, the death of a spouse, moving to a different state, a big shift in your financial picture.

The moving to a different state one is interesting. Does that actually affect the documents?

It can. State laws around powers of attorney and trusts vary, so what’s airtight in Tennessee might have gaps if you relocate. It’s worth having an attorney review them when you move.

Okay. Now let’s get into the long-term care costs piece, because I think this is where a lot of people get a real shock.

Yeah, the numbers are significant. In-home care assistance in Tennessee can run forty thousand dollars or more per year. Memory care facilities — we’re often talking over a hundred thousand annually.

A hundred thousand a year.

And those aren’t outlier numbers. Those are real expenses that real families in Tennessee are dealing with right now.

So what does Medicare actually cover in this scenario? Because I think most people assume Medicare is going to handle it.

This is probably the biggest misconception in retirement planning. Medicare covers very little long-term care. It covers short-term skilled nursing after a hospital stay, under specific conditions, for a limited window. It is not designed for ongoing custodial care — help with bathing, dressing, daily activities.

So then people fall back on Medicaid?

Medicaid does cover more, but generally only after someone has spent down most of their assets. So you’re essentially depleting your savings before the coverage kicks in. That’s a very different situation than having a plan in place ahead of time.

And that spend-down process — that affects a spouse too, right? If one person in a couple needs care, the other one is watching the assets drain.

Exactly. There are some Medicaid spousal protection rules, but they’re complicated and they have limits. It’s not a clean solution. Which is why having a plan before you need one is so much better than trying to navigate it in the middle of a crisis.

Okay, so this brings us to the fifth piece — the annuity contracts that are designed to do more than one thing. Because I think this is where Tennessee annuity rates come back into the conversation.

Right. So there’s a category of annuity contracts — sometimes called hybrid annuities, or annuities with long-term care riders — that are structured to address both retirement income and long-term care needs within a single insurance contract.

And I want to make sure we’re clear here — annuities are insurance contracts, not investments. That framing matters.

It does. These are insurance products. And the way a hybrid annuity might work — and I’m speaking generally here because the specifics vary a lot by carrier and contract — is that you have a base contract that provides a steady income stream in retirement, but it also includes provisions that can provide enhanced benefits specifically for qualified care expenses.

So like a multiplier on the benefit if you need care?

In some cases, yes. Some fixed indexed annuities with long-term care riders can provide a multiple of the original premium amount for care-related expenses. So if you put in, say, a hundred thousand dollars, the care benefit available to you might be two or three times that amount, depending on the contract.

Wait — so you’re not just drawing down your own money. The contract is actually providing more than what you put in for care costs.

That’s how some of these are structured, yes. But I want to be careful here — the exact multipliers, the eligibility requirements, what qualifies as a care expense, the Tennessee annuity rates attached to the contract — all of that varies significantly from one carrier to the next. You really need to look at specific contract terms.

And these aren’t right for everyone.

Not at all. Whether a hybrid annuity makes sense depends on your health at the time of application, what existing coverage you have, what your income needs are, and your overall financial picture. This is not a one-size-fits-all product.

The health piece is interesting — so if you wait too long and your health has declined, you might not even qualify?

That’s a real possibility. Some of these contracts have underwriting requirements. Which circles back to the whole point — planning before you need to is what keeps your options open.

That’s kind of the central tension of this whole conversation, isn’t it? The time when you most need to have made these decisions is the time when it’s hardest to make them.

That’s a really good way to put it. And it applies to all five of these areas — the legal documents, the financial circle, the care cost planning, the annuity contracts. All of them are easier to do well when you’re healthy, clear-headed, and not under pressure.

I want to come back to something you said earlier about diversifying income sources, because I think that’s an underrated piece of this.

Yeah, depending on a single income stream in retirement creates fragility. If you’ve got Social Security, maybe a pension, annuity income, and thoughtful withdrawals from savings — you’ve got more flexibility to absorb unexpected costs, including care costs, without everything unraveling.

And care costs are exactly the kind of unexpected expense that can blow up a plan that looked fine on paper.

Right. A retirement plan that only accounts for monthly income and doesn’t address what happens if you need significant care is genuinely incomplete. It’s not a pessimistic view — it’s just realistic planning.

Let’s talk about the ongoing habits piece, because I think people do the initial planning and then kind of set it and forget it.

The annual financial review is something I feel strongly about. Treat it like an annual physical. You’re checking that beneficiary designations are still current — because those override your will, by the way — that your legal documents still reflect your actual wishes, and that your income plan still makes sense given any changes in your life.

The beneficiary designation thing trips people up constantly. I’ve heard of situations where someone’s ex-spouse is still listed on an account because nobody updated it after a divorce.

It happens more than you’d think. And it can create real legal and family complications that are completely avoidable.

What about the conversation piece — actually talking to family members about this stuff? Because that’s the one a lot of people avoid.

It’s uncomfortable, but it’s so much easier to have before a crisis than during one. Telling your adult kids where the important documents are, what your wishes are, who has authority to act on your behalf — that conversation takes maybe an hour. Not having it can cost families weeks of scrambling at the worst possible moment.

And it doesn’t have to be a heavy sit-down. Sometimes it’s just — here’s where the folder is, here’s who to call.

Exactly. It doesn’t need to be a formal family meeting with everyone in suits. It just needs to happen.

There was actually something in the article that I found kind of refreshing — the point about staying mentally and physically active as part of the retirement plan. Because we tend to separate lifestyle from financial planning.

But they’re connected. Cognitive decline is not a certainty. Regular mental engagement, physical activity, social connection — these are all associated with better brain health over time. And if you’re healthier longer, your financial plan has to do less heavy lifting.

It’s almost like the best long-term care plan is the one you never have to fully use.

Well, right. But you still want it in place. Because the alternative — having no plan and needing care — is a much harder situation.

So if someone is listening to this and thinking, okay, I need to actually do something — what’s the practical first step? Like, not the whole five-step plan at once, just the thing to do this week.

Honestly? Have the conversation. With your spouse, your adult kids, whoever is in your life. Tell them where things are. That costs nothing and takes almost no time, and it opens the door to everything else.

And then from there, if you want to look at the annuity contract side of things — the hybrid products, the long-term care riders, what Tennessee annuity rates look like right now across different carriers —

That’s where a licensed agent who works with Tennessee residents is really the right resource. They can pull current rates and contract terms across multiple carriers, walk you through how specific contracts are actually structured, and help you figure out whether any of this fits your situation. That’s not something to try to piece together on your own from the internet.

Because the contracts are genuinely complicated. The riders, the benefit triggers, the eligibility conditions — there’s a lot of fine print.

There is. And the fine print is where the real planning happens. The headline rate is one number, but what the contract actually does for you in a care scenario — that’s the conversation worth having with someone who’s read the whole thing.

I keep coming back to my aunt in Knoxville. She had the income conversation down cold. She knew her Social Security number to the dollar. But she had no plan for the other half of the picture.

And that’s so common. Monthly income is the visible part of retirement planning. The care cost piece, the legal documents, the trusted circle — those are invisible until you need them. And by then, you really need them.

The most resilient retirement plans are built around systems that keep working even when you’re not actively managing every detail yourself. I think that’s the line that stuck with me most.

That’s the whole thing, really. You’re not just building a plan for the version of yourself that’s healthy and sharp and on top of everything. You’re building a plan for every version of yourself that might show up over the next twenty or thirty years.

And the earlier you build it, the more options you have. That’s the part I want people to actually hear.

The earlier you build it, the more options you have. Full stop.

Episode Show Notes

So I had a conversation with my aunt over the holidays — she’s sixty-eight, just moved from Ohio to Nashville — and she kept saying, ‘Jessica, I feel like I’m missing something, because my tax bill just looks so much smaller than it used to.’ And I kept thinking, yeah, there’s actually a real story there.

She’s not missing anything. She’s just in a state that genuinely doesn’t tax most retirement income. Tennessee is one of those places where the tax picture is almost surprisingly clean once you understand what’s actually on the books — or more accurately, what’s been taken off the books.

Right, and I think that’s the thing people don’t realize until they’re already living there. So let’s actually walk through it, because I want people to understand the mechanics, not just hear ‘Tennessee is tax-friendly’ and move on.

Totally agree. So the big one — Tennessee does not have a broad state income tax. No tax on wages, no tax on retirement income, no tax on annuity payments. And there used to be something called the Hall Income Tax, which caught a lot of people off guard because it applied to interest and dividend income.

Wait, so people who had dividend-paying accounts were getting taxed even though Tennessee was supposedly low-tax?

Exactly, and it tripped people up for years. But that was fully repealed as of January first, twenty twenty-one. So it’s gone. Done. That means if you’re a Tennessee retiree drawing income from an annuity contract, a pension, Social Security — the state takes nothing from any of that.

Okay so that’s a big deal. But I want to make sure we’re being precise here, because the federal piece is still very much alive, right?

Oh, absolutely. The IRS doesn’t care what state you live in. Federal taxes on annuity income are still very real, and the way they work depends a lot on how you funded the contract in the first place.

Walk me through that, because I think this is where people get confused. They hear ‘annuity income’ and assume it’s all taxed the same way.

So there are basically two buckets. If you funded the annuity with after-tax dollars — meaning you already paid income tax on that money before it went into the contract — then only the earnings portion of each payment is taxable federally. The part that’s just your original premium coming back to you? Not taxed again.

That makes sense. You already paid tax on that money.

Right. But if you funded it with pre-tax dollars — say you rolled over a traditional IRA into an annuity — then the full payment is generally taxable as ordinary income at the federal level. Because none of that money has ever been taxed.

Okay, and there’s a term for how they calculate the split in that first scenario, isn’t there? I’ve heard it but I always have to think for a second.

The exclusion ratio. It’s the IRS mechanism for figuring out what percentage of each payment is a return of your original premium versus what’s earnings. Your annuity carrier can usually help you figure that out, and honestly a tax professional should be in that conversation too.

Yeah, and I want to flag that for listeners — we’re not tax advisors, we’re not giving anyone personalized tax advice here. This is the framework. Your actual numbers need to come from a professional who knows your specific situation.

Couldn’t agree more. The framework matters though, because if you don’t understand the exclusion ratio concept going in, you might be surprised by your first tax bill after you start taking payments.

So let me bring this back to something practical. When people are shopping for annuity rates in Tennessee — and that’s a real thing people do, they’re comparing rates across carriers — how does the tax environment actually affect what a rate is worth to them?

This is actually one of my favorite things to explain, because the quoted rate is only part of the story. Picture two retirees — same age, same contract, same rate. One lives in Tennessee, one lives in a state with a five percent income tax on retirement distributions. The Tennessee retiree keeps more of every single payment. The effective value of that rate is higher here.

So it’s not just about finding the highest rate on a comparison sheet. It’s about what actually lands in your checking account.

Exactly. And that’s why when people are looking at Tennessee annuity rates specifically, the state tax context is part of the math. A rate that looks modest on paper might actually outperform a higher rate in a higher-tax state once you run the net income numbers.

Okay but I want to push back a little, because I think there’s a risk of people hearing that and thinking ‘great, I don’t need to shop around as hard because Tennessee already gives me a boost.’ That’s not right either.

No, that’s a fair pushback. Rates still vary — sometimes significantly — by carrier, by contract type, by term length, by your age. You absolutely still need to compare. The Tennessee tax advantage amplifies whatever rate you get, it doesn’t replace the work of finding a competitive rate in the first place.

Good. Okay, so let’s talk about the types of contracts people are actually using, because I get questions about this a lot. Especially from people who are like, ‘I just want something simple, I don’t want to think about the market.’

So the most common starting point for that kind of person is usually a fixed annuity or a MYGA — multi-year guaranteed annuity. The MYGA is basically a fixed annuity that locks in a specific rate for a set term. Three years, five years, seven years — it depends on the contract.

And the rate doesn’t move during that term?

That’s the contractual structure, yes. It’s stated in the contract. Now, I want to be careful here — I’m not saying that makes it a no-downside product, because there are surrender charges if you need to get out early, and there are other trade-offs. But the rate itself is defined in the contract for that term.

Surrender charges — that’s the part people always forget to ask about until it’s too late.

Always. And the surrender period can be long. Some contracts have surrender schedules that run seven, eight, even ten years. If you need liquidity before that window closes, you’re looking at a penalty. So the question isn’t just ‘what’s the rate,’ it’s ‘can I actually leave this money alone for this long?’

I had a listener — I’ll keep it vague — who bought a seven-year MYGA and then had a family situation come up in year three. And the surrender charge at that point was still pretty steep. She hadn’t really internalized what that schedule looked like when she signed.

That’s such a common story. And it’s not that the product was wrong for her necessarily — it’s that the conversation about liquidity needs didn’t happen thoroughly enough before the purchase.

Right. Okay, so what about people who are already retired and need income now? Not accumulation — income.

That’s where a SPIA comes in — single premium immediate annuity. You hand over a lump sum, and payments start almost right away. Usually within a month or so. It’s a way to convert a chunk of savings into a predictable income stream.

And the trade-off there is that you’re giving up control of that principal, right? Like, once you hand it over, it’s gone.

In most structures, yes. You’re essentially exchanging a lump sum for a stream of payments. There are variations — some contracts have period-certain options, some have return-of-premium features — but the basic SPIA structure is you give up the lump sum, you get the income. That’s the deal.

Which for some people is exactly what they want. They don’t want to manage it, they don’t want to worry about it, they just want the check.

And in Tennessee, where that income isn’t being taxed at the state level, that check goes a little further. It’s not a huge number in isolation, but over a twenty-year retirement it adds up.

Let’s talk about the annuity versus CD question, because I feel like this comes up constantly, especially with older retirees who are used to just putting money in a CD at their bank.

It’s probably the most common comparison I hear. And they’re not crazy to compare them — both offer a defined rate for a set period, both feel familiar. But they are fundamentally different products and the tax treatment alone is a meaningful distinction.

How so?

CD interest is generally taxable in the year it’s credited. So even if you’re not touching the money, you’re getting a tax bill on the growth every year. With an annuity, the earnings grow tax-deferred. You don’t owe federal income tax on the growth until you actually take a distribution.

So you’re not getting a surprise tax bill every April just because the annuity earned interest that year.

Exactly. And that compounding effect of deferral over a multi-year term can actually be pretty significant, even if the stated rates are similar.

Okay but CDs have FDIC insurance. That’s a real thing. Annuities don’t have that.

Right, and I’m glad you brought that up because it’s an important distinction. Annuities are backed by the claims-paying ability of the issuing insurance company — not a federal agency. Tennessee does have the Life and Health Insurance Guaranty Association, which provides a layer of protection within statutory limits, but it’s not the same as FDIC coverage.

So that’s why financial strength ratings matter when you’re picking a carrier.

That’s exactly why. It’s one of the questions you should be asking before you sign anything. What is the carrier’s financial strength rating? A.M. Best, Moody’s, S&P — those ratings exist for a reason.

And this is not a case of one product being better than the other across the board. It depends on what you need.

Completely. If you need that money in eighteen months and you want FDIC protection, a CD might make more sense. If you’re parking money for five or seven years and you want tax-deferred growth, a MYGA might be worth a serious look. But that’s a conversation to have with a licensed agent who knows your full picture.

Let me bring up something else in the article that I think people gloss over — the Social Security piece. Tennessee doesn’t tax Social Security either, right?

Correct. No state tax on Social Security benefits. And when you layer that on top of no state tax on annuity income, no state tax on pension income — you start to see why retirees who are drawing from multiple sources find Tennessee pretty appealing.

My aunt was literally drawing from a pension, Social Security, and an annuity she bought before she moved. And she kept saying, ‘Why did nobody tell me about this state?’ Like she felt like she’d been overpaying for years.

And she probably was, relative to what she’s paying now. That’s a real difference in take-home income every single month.

There’s also the property tax relief programs, which I think are worth at least a mention. Because a lot of retirees are homeowners and property taxes are a real line item.

Yeah, Tennessee has programs for qualifying elderly and disabled homeowners. The details vary by county — Nashville, Knoxville, Memphis all have their own trustee offices that administer this — so you’d want to check locally for current eligibility. But it’s worth knowing those programs exist.

The one caveat I always want to throw in is the sales tax situation. Tennessee’s sales tax is on the higher side. So it’s not like everything is cheap — you’re going to feel it at the register.

That’s a fair point. The income tax picture is excellent. The sales tax picture is less rosy. So when you’re building a retirement budget, you can’t just look at one number and declare victory. You have to look at the whole thing.

Okay, so let’s bring this home a little. If someone is sitting in Tennessee right now — or thinking about moving there — and they’re trying to figure out whether an annuity makes sense for their retirement income plan, what are the questions they should actually be walking into that conversation with?

First one is the contractual rate and how long it’s in effect. Not a projected rate, not a hypothetical — what does the contract actually say, and for what term.

And then the surrender schedule.

Right away. What are the surrender charges, what does the schedule look like year by year, and what are your liquidity options if something comes up. Some contracts have free withdrawal provisions — usually around ten percent per year — but you need to know the specifics.

Then the income options, right? Because not everyone is buying for accumulation. Some people want to know exactly how they’ll eventually turn this into income.

Yes, and that’s where the federal tax treatment of those income payments becomes really important to understand before you commit. How much of each payment is taxable? What does the exclusion ratio look like for your specific contract? These aren’t questions to answer after the fact.

And the carrier’s financial strength rating — you mentioned that earlier but it bears repeating.

It does. Because you might be in a contract for ten, fifteen, twenty years. The company needs to be around and financially healthy for the life of that contract. Ratings aren’t a perfect crystal ball, but they’re a meaningful data point.

The last one I’d add is the big picture question — how does this fit into everything else? Because an annuity in isolation is just a product. An annuity as part of a retirement income plan is a tool.

That’s well put. And that’s really the work of a good licensed agent — not just presenting you with a rate sheet, but helping you figure out how a contract fits alongside Social Security, a pension if you have one, other savings. The Tennessee tax environment makes that conversation a little more favorable, but the planning work is still the planning work.

I think the thing I keep coming back to is that the tax advantage is real, but it’s not a substitute for doing the homework. Like, you can’t just say ‘Tennessee doesn’t tax my annuity income, therefore I’m all set.’

No, because you still have federal taxes to deal with, you still have to pick the right contract type for your situation, you still have to understand the surrender schedule, you still have to evaluate the carrier. The state tax piece is genuinely favorable — it just doesn’t do all the work for you.

And the federal piece can still be significant depending on how you funded the contract. If you rolled a big traditional IRA into an annuity, those payments are ordinary income at the federal level. That’s not nothing.

Right. And that’s exactly why a tax professional needs to be in this conversation, not just an insurance agent. The agent can tell you about the contract. The tax professional can tell you about the implications of how you funded it and how you’ll be taking distributions.

So the team approach. Licensed agent, tax professional, maybe a financial planner depending on how complex the picture is.

That’s the move. Especially for someone with a meaningful sum to deploy — say, a couple both in their mid-sixties with two hundred thousand dollars they’re trying to figure out what to do with. That’s not a one-conversation, one-product decision.

And Tennessee’s tax structure means that when they do land on the right plan, more of it stays with them. Which is kind of the whole point of retirement planning.

That’s the bottom line. The state isn’t going to take a cut of your annuity income, your Social Security, your pension. The federal government still will, to varying degrees depending on your situation. But the state piece — that’s genuinely off the table in Tennessee, and that matters.

I’m going to tell my aunt she made a good call moving to Nashville. Even if she complains about the sales tax every time she goes to the grocery store.

Tell her to look at her net monthly income from all those sources and then look at what she was paying in Ohio. I think she’ll feel better about the grocery bill.

Episode Show Notes

So I had a conversation with my aunt over the holidays — she just moved to Knoxville, she’s sixty-eight, and the first thing she asked me was, okay, I’m in Tennessee now, does the state take a cut of my annuity income? And I realized I didn’t have a clean answer for her.

That is such a common question. And the short answer is no — Tennessee does not have a broad state income tax. But here’s where I always pump the brakes a little, because ‘no state income tax’ does not mean ‘no taxes on your annuity.’ There’s still a federal layer that matters a lot.

Right, and I think that’s exactly where people get confused. They hear Tennessee, no income tax, and they think they’re done. Tax planning complete.

Yeah, and that’s a mistake. So let’s actually back up and talk about what Tennessee does and doesn’t do, because the history here is relevant. There used to be something called the Hall Income Tax.

Oh, I’ve heard that name. What was that exactly?

So the Hall Tax was a state tax specifically on interest and dividend income. It wasn’t a full income tax — it didn’t touch wages or most retirement income — but if you had investment dividends or interest earnings, Tennessee was taking a slice. That was fully repealed as of January first, twenty twenty-one.

So it’s completely gone now.

Completely gone. Which means Tennessee residents today — whether you’re in Nashville, Memphis, Knoxville, wherever — you’re not paying state income tax on wages, on pension payments, on IRA withdrawals, on annuity distributions. None of it.

Okay so that’s genuinely good news for retirees. But you said there’s still a federal layer.

Always. And the way federal taxes hit your annuity depends almost entirely on how the annuity was funded — specifically, whether the money going in was pre-tax or after-tax. That distinction drives almost everything.

Walk me through that. Because I think a lot of people don’t realize their annuity could be taxed completely differently depending on where the money came from.

So there are two buckets. First bucket — qualified annuities. These are funded with pre-tax dollars. Think of an annuity held inside a traditional IRA, or one that came from a rollover from a four-oh-one-k. Because you never paid income tax on that money going in, the IRS taxes the full distribution when it comes out. Every dollar is ordinary income.

So you’re just deferring the tax bill, not avoiding it.

Exactly. You’re deferring it, which can still be strategically valuable — but yes, it’s coming. Now the second bucket is non-qualified annuities. These are funded with after-tax dollars, money you’ve already paid income tax on. And this is where it gets a little more nuanced.

How so?

Because with a non-qualified annuity, only the earnings portion of each payment is taxable. The part that represents your original premium — the money you already paid tax on — comes back to you income-tax-free. There’s a formula for figuring out what percentage of each payment is earnings versus return of principal. It’s called the exclusion ratio.

Okay, so picture my aunt. She puts a hundred thousand dollars of after-tax savings into a single premium immediate annuity. She starts getting monthly checks. Not all of that check is taxable.

Right. A portion of each payment is considered a return of her original premium, and that portion is excluded from federal income tax. The actual ratio depends on her age, the contract terms, the payout period — a tax professional can calculate that specifically for her situation. But the point is, it’s not all taxable.

That’s actually a meaningful difference in monthly cash flow if you’re living on that income.

Huge difference. And this is why I always say the type of annuity you own matters as much as the rate. Two people could have the same monthly payment and owe very different amounts in federal tax depending on how their contract is structured.

Okay, so what about a MYGA? I know we talk about those a lot — multi-year guaranteed annuities. How does tax treatment work there?

So a MYGA held outside of a retirement account — non-qualified — the interest accumulates on a tax-deferred basis. You don’t owe federal income tax on the growth while it’s sitting there compounding. You only owe tax when you actually take a distribution.

Which is one of the things that makes them appealing compared to, say, a regular bank CD, where you’re paying tax on the interest every year even if you don’t touch it.

That’s a really important distinction. With a CD, you’re getting a tax form every year on interest you may not have even withdrawn. With a non-qualified MYGA, that tax event gets pushed to when you actually take money out. Now, if it’s inside an IRA, same rules as any qualified account — distributions are ordinary income when they come out.

I want to go back to something you said earlier — that Tennessee residents often keep more of their annuity income than retirees in other states. Is that actually a significant difference, or is it more marginal?

It depends on the comparison. Some neighboring states do have income taxes that apply to retirement distributions, pension income, annuity payouts. So if you’re comparing Tennessee to one of those states, yes — the difference can be real money over a twenty or thirty year retirement.

Especially if you’re drawing down a sizable annuity.

Right. But I want to be careful not to oversell this. Taxes are one factor. Cost of living, healthcare, proximity to family — those all matter too. I’ve talked to people who moved to Tennessee partly for the tax climate and then were surprised by the sales tax.

Oh, that’s a good point. Tennessee has one of the highest combined state and local sales tax rates in the country, right?

It does. And property taxes vary by county — Shelby County, Knox County, Davidson County all have different rates. So your overall tax picture in retirement isn’t just about income tax. It’s the full picture.

Which is why you can’t just look at one number and call it a day. My aunt, actually — when she was deciding between Knoxville and a couple of other cities, she was so focused on the income tax piece that she almost didn’t think about what her grocery bill was going to look like with the sales tax on top.

Yeah, and that’s a really common blind spot. The income tax headline is attractive, and it should be — it’s genuinely favorable. But retirement budgeting is more than income tax.

Let’s talk about Social Security for a second, because I know that’s a big income source for a lot of retirees. Does Tennessee touch that?

No. Tennessee does not tax Social Security benefits at the state level. Zero.

Okay but federal does, right? That’s the thing people forget.

Federal absolutely does, depending on your combined income. Up to eighty-five percent of your Social Security benefit can be subject to federal income tax if your income is above certain thresholds. So even in a state with no income tax, if you’ve got Social Security plus annuity distributions plus maybe a pension, the federal tax on Social Security could be meaningful.

And this is where withdrawal sequencing actually matters. Like, the order in which you pull from different accounts can affect how much of your Social Security gets taxed federally.

Exactly. And that’s a conversation for a qualified tax professional, not something to figure out on your own. But the point is — Tennessee not taxing Social Security at the state level is genuinely good, and it still doesn’t mean you’re off the hook at the federal level.

What about pensions? I know Tennessee has a state pension system — the TCRS, Tennessee Consolidated Retirement System. How does that get treated?

Same as everything else at the state level — Tennessee doesn’t tax it. Whether you were a public school teacher, a state employee, or you worked in the private sector and have a company pension, the state is not taking a cut of those distributions.

Federal taxes still apply though.

Federal taxes still apply. Most pension distributions are ordinary income at the federal level because the contributions were pre-tax. So again — state is favorable, federal is still there.

I want to go back to something you said about annuity structure, because I think there’s a scenario worth walking through. Let’s say someone is sixty-five, they’ve got a hundred thousand dollars sitting in a traditional IRA, and they’re thinking about putting it into a deferred annuity inside that IRA. Does the annuity add any tax benefit in that situation?

That’s a really sharp question, and the honest answer is — the tax deferral benefit of the annuity itself is already baked into the IRA. The IRA is already tax-deferred. So you’re not getting an extra layer of tax deferral by putting an annuity inside it.

So the annuity inside an IRA is more about the contract features — income guarantees, death benefits, that kind of thing — not about adding tax efficiency.

Right. The tax treatment of a qualified annuity inside an IRA is the same as any other IRA distribution — ordinary income when it comes out. The annuity’s value in that scenario is the insurance contract features, not additional tax benefits.

Whereas if someone has after-tax money — money sitting in a savings account or a brokerage account — and they put that into a non-qualified annuity, now the tax deferral on the growth is actually adding something they didn’t have before.

That’s the scenario where the tax deferral feature of the annuity itself is doing real work. Because that money would otherwise be generating taxable interest or dividends every year. Inside a non-qualified annuity, the growth is deferred until distribution.

Okay, I want to push on one thing. We’ve been talking about this like the tax picture in Tennessee is pretty clean — no state income tax, federal rules apply, know your contract type. But are there situations where it gets messier? Like, edge cases?

A few. One that comes up — if someone takes a lump sum distribution from an annuity rather than spreading it out over time, that can push them into a higher federal tax bracket in that year. So the timing of distributions matters.

Because you’re stacking income.

You’re stacking income in a single tax year. Another one — surrender charges. If you take money out of an annuity during the surrender period, you might owe surrender charges to the insurance company on top of any taxes. Those are separate things, but people sometimes conflate them.

Right, the surrender charge is a contract penalty, not a tax.

Correct. And then there’s the ten percent federal early withdrawal penalty if you’re under fifty-nine and a half — same as with IRAs. That applies to annuities too. So if someone is younger and thinking about tapping an annuity early, they need to factor that in.

That’s a big one that I don’t think gets enough airtime. People think of annuities as retirement income tools, which they are, but they don’t always think about what happens if they need the money before they’re sixty.

And that’s exactly why the liquidity provisions in the contract matter. Some annuities allow a certain percentage of the account value to be withdrawn each year without surrender charges — but the federal penalty for being under fifty-nine and a half is a separate issue. You’d still owe that.

So to bring this back to Tennessee specifically — the state is genuinely favorable. But the federal piece is where the real planning work happens.

That’s a fair summary. Tennessee essentially gets out of the way. It doesn’t add a state layer on top of your annuity income, your Social Security, your pension, your IRA withdrawals. But the federal rules are the same for a Tennessee retiree as they are for anyone else in the country. And those rules are complex enough that they warrant real planning.

I think the thing I’d want someone to take away from this is — don’t let ‘no state income tax’ be the end of the conversation. It’s a great starting point, but it’s not the whole story.

Completely agree. And I’d add — the structure of your annuity contract is going to matter more than most people realize. Whether it’s qualified or non-qualified, whether it’s a SPIA or a MYGA or a deferred annuity, whether it’s inside or outside a retirement account — all of that affects your actual after-tax income in retirement.

Which is why this is not a do-it-yourself exercise. Like, you can understand the concepts, and I think it’s really valuable to understand them — that’s what we’re trying to do here — but the actual decisions need to involve a licensed agent and probably a tax professional who knows Tennessee.

A hundred percent. Someone who can look at your specific income sources, your contract terms, your withdrawal timeline, and tell you what your actual tax picture looks like — not a general overview, but your situation.

And the good news is, if you’re in Tennessee, you’re starting from a pretty favorable place compared to a lot of states. The state just isn’t going to be an obstacle in the way it would be somewhere else.

That’s true. And for retirees who’ve relocated to Tennessee from states that do have income taxes — or who are considering that move — the difference in state-level tax treatment can be a meaningful part of the retirement income math. Just don’t forget to look at the full picture, including sales tax and property tax, before you decide where to plant the flag.

My aunt would say the mountains around Knoxville helped her decision more than the tax code. But hey, the tax code didn’t hurt.

The mountains are a solid tiebreaker. But knowing you’re not going to owe state income tax on your annuity distributions is a pretty good reason to feel good about the financial side of that decision too.

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.

---

Doing your annuity homework? Start with our free comparison guide and the 7 questions to ask any advisor. Ready for real numbers? Talk to a licensed advisor in your state — we serve all 50 states.

Episode Show Notes

Okay, so I want to start with something that kind of stopped me in my tracks when I was reading through this. There’s research out of Michigan State — an economist named Todd Elder — and he found that more than half of Americans between fifty-eight and sixty-one underestimate how long they’re going to live.

Yeah, and the numbers get pretty striking when you dig into them. People who said they had zero chance of making it to seventy-five — nearly half of them actually did. And the ones who gave themselves a ten percent shot? About sixty percent made it.

Which is wild, right? Because we’re not talking about a small margin of error. We’re talking about people who genuinely believed they were not going to be around — and then they were.

And the retirement planning consequences of that are enormous. If you build your income plan around a shorter lifespan than you actually end up living, you can run out of money at exactly the wrong moment.

My aunt is a perfect example of this. She retired at sixty-three, figured she’d be fine, had some savings, had Social Security. She’s eighty-one now and she’s doing okay, but she’s told me more than once that she did not plan for eighty-one.

That’s the longevity risk problem in a nutshell. And it used to be somewhat cushioned by pensions — you know, you worked for a company for thirty years, you got a check every month for the rest of your life no matter what. That model is mostly gone now.

Right, it’s all four-oh-one-k’s and IRAs now, which puts the whole burden of figuring out how to turn a lump sum into lifetime income on the individual.

Exactly. And most people are not trained for that. It’s genuinely hard. You have to decide how much to withdraw each year, you have to hope the market cooperates, you have to not outlive the money.

So this is where annuities come in. And I want to be careful here because I know we always say this — annuities are insurance contracts, not investments. Can you just explain what that distinction actually means in practice?

Sure. So when you buy an annuity, you’re entering into a contract with an insurance company. You’re essentially transferring a specific risk — in this case, the risk of outliving your money — to the insurer. In exchange, they agree to pay you income, sometimes for a fixed period, sometimes for as long as you live.

And the ‘as long as you live’ part is the key piece when we’re talking about longevity risk.

That’s the whole point of a lifetime income annuity. It doesn’t matter if you live to eighty-five or a hundred and five — the payments keep coming. The insurance company takes on that uncertainty.

Okay, so let’s talk about how your life expectancy actually affects what you get paid. Because I think a lot of people assume the annuity rate is just… the rate. Like a CD.

It’s much more personalized than that. When an insurance company calculates your income payment, your age — and therefore your expected lifespan — is one of the primary inputs. The longer they expect to be paying you, the lower your monthly check is going to be.

Which makes sense from their side. They’re covering more payments.

Right. So a sixty-five-year-old is going to get a lower monthly payment than a seventy-five-year-old who puts in the same amount of money, because statistically the sixty-five-year-old has more years ahead of them.

And then there are different payout structures on top of that, which I think is where people get really confused.

Yeah, this is the part that has a lot of moving pieces. So the simplest version is a single life annuity — income for your life only. That typically gives you the highest monthly payment because the insurer’s obligation ends when you pass away.

But if you die early, that’s it. Your spouse or your kids don’t see anything else from it.

Correct. Which is why some people add a refund feature — if you pass away before you’ve received back your full premium, the remaining balance goes to a named beneficiary. You get a somewhat lower monthly payment in exchange for that protection.

And then there’s the joint and survivor option, which I think is the one most married couples should at least be thinking about.

It’s definitely worth understanding. With a joint and survivor annuity, income continues to your spouse after you pass away — sometimes at the full amount, sometimes at a reduced percentage. And because the insurer is now covering two lifespans instead of one, the monthly payment is lower than a single life contract.

So you’re basically paying for that continued income security for your spouse with a lower monthly check while you’re both alive.

That’s a good way to put it. And this is where Tennessee annuity rates really vary, because you’ve got your age, your spouse’s age, the payout option, the carrier, and current interest rate conditions all playing into what you’re actually quoted.

Wait, I want to push on that for a second. When you say Tennessee annuity rates vary by carrier — how much are we actually talking? Like is it a few dollars a month difference, or is it meaningful?

It can be very meaningful. On a hundred-thousand-dollar premium, the spread between the highest and lowest payout from different carriers can be hundreds of dollars a month. Over a twenty-year retirement, that adds up to tens of thousands of dollars.

Okay, that is not a small difference. That’s the kind of thing where you really do need to compare quotes and not just go with whoever calls you first.

Exactly. And this is why we always say talk to a licensed agent who can pull quotes from multiple carriers. One company’s offer is not the market.

Alright, so let’s shift to timing, because I think this is one of the more interesting parts of this whole conversation. When you start taking income actually changes the math in a pretty significant way.

Yeah, this is the immediate versus deferred question. So with an immediate annuity — sometimes called a SPIA, single premium immediate annuity — you hand over your premium and income starts within thirty days to a year. The carrier prices your payment based on your age right now.

And a deferred income annuity is the opposite — you buy it now but you don’t start getting paid until some point in the future.

Right. And often we’re talking about deferring to your late seventies or even early eighties. And the monthly income when it does start is substantially higher than if you’d started immediately.

Why is that? Is it just the time value of money thing, or is there something else going on?

It’s a few things. The insurer has had more time to grow your premium. But also — and this is the key part — by the time you’re eighty, your remaining life expectancy is shorter. So the insurer expects to make fewer total payments, which means each payment can be larger.

Oh, that’s actually a really elegant mechanism when you think about it. You’re essentially buying protection against the scenario where you live a really long time.

That’s exactly what it is. There was a Brookings Institution study — this is from twenty-fourteen — that looked specifically at longevity annuities and found strong support for them as a tool for middle- and upper-income retirees who want to protect against outliving their money.

And the logic being — if you only live to seventy-eight, you never collect on it, but if you live to ninety-two, that income stream becomes incredibly valuable.

Right. The longer you actually live, the more valuable that lifetime income becomes relative to just drawing down a savings account.

I had a listener reach out a few months ago — she was sixty-eight, her husband was seventy-one — and they were trying to figure out whether to take income now or wait. And I think the thing that tripped them up was they kept looking at the monthly number and thinking bigger is always better.

That’s such a common mistake. The highest monthly number is not automatically the right answer. It depends entirely on their situation — what other income they have, whether they need the money now to cover expenses, how they’re thinking about their health.

Right, and she mentioned that her husband had some health issues, which changes the calculus, doesn’t it?

It does. And this is a place where I want to be careful because we can’t give personalized advice here — but yes, your health is a real factor. Some carriers offer what are called impaired risk or substandard health annuities, where if you have a documented health condition that shortens your expected lifespan, you might actually qualify for a higher payout.

Wait, really? So a health condition could actually work in your favor from a payout standpoint?

In some cases, yes. Because from the insurer’s perspective, if they expect to make fewer payments, they can afford to make each one larger. It’s not universal — not every carrier offers this, and it requires underwriting — but it’s worth asking about.

That’s one of those things nobody tells you about. You’d just assume a health problem means you’re out of luck.

Which is why it matters to work with someone who actually knows the market and can ask the right questions. There are nuances in these contracts that aren’t obvious from the outside.

Okay, so let’s talk about the questions someone should actually be thinking through before they go talk to an agent. Because I think a lot of people show up to those conversations without a clear sense of what they’re trying to solve.

The first one I’d put on the list is: do you have other income sources that already cover your basic expenses? If you’ve got a pension and Social Security that cover your mortgage and your groceries, you’re in a very different position than someone where Social Security is the only thing coming in.

Because in the first case, an annuity might be about supplementing lifestyle spending, whereas in the second case it might be about covering necessities.

Exactly. And that changes which structure makes sense. If you need income now to pay bills, a deferred annuity that doesn’t start paying until you’re eighty doesn’t solve your problem today.

What’s the next question?

Is your primary concern starting income now, or is it protecting against running out of money in your eighties and nineties? Those are actually two different problems with different solutions.

And I think most people conflate them. They think ‘I need retirement income’ and they don’t break it down further than that.

Right. And then the third one is: do you have a spouse or partner whose income security also needs to be addressed? Because if you buy a single life annuity and you pass away first, your spouse is left without that income stream.

Which could be devastating depending on their other resources.

Absolutely. And then the fourth question — which is the uncomfortable one — is how does your current health factor into your realistic life expectancy? Not the optimistic version, not the pessimistic version. The honest one.

And that’s hard for people to sit with. Nobody wants to think about that.

No, they don’t. But it’s one of the most important inputs into the decision. If you have a family history of longevity — grandparents who lived into their nineties — that’s relevant. If you have a chronic condition that affects your outlook, that’s also relevant.

I think there’s almost a psychological barrier there, where people feel like thinking about their own mortality is morbid. But the whole point is you’re planning so that you’re taken care of no matter what happens.

That’s exactly the reframe. It’s not about predicting when you’ll die. It’s about making sure you’re covered across a range of outcomes — including the outcome where you live much longer than you expected.

Which brings us back to that research we started with. The people who thought they had zero chance of making it to seventy-five — nearly half of them did. That’s not a small planning error.

And medical advances keep pushing that further. Average lifespans have been trending upward for decades. Planning only for an average lifespan might not be enough, because you might be above average.

I want to circle back to something you mentioned earlier — MYGAs. Because I know some people listening are thinking about fixed deferred annuities rather than income annuities. Can you just briefly explain how those fit into this conversation?

Sure. So a multi-year guaranteed annuity — MYGA — is a different animal from an income annuity. It’s a fixed-rate deferred contract, kind of like a CD in structure. You put money in, it grows at a declared rate for a set term, and then you can take it out or roll it into something else.

So it’s more of an accumulation tool than an income tool.

Generally, yes. Though you can eventually annuitize it into income if you want to. But the life expectancy conversation we’ve been having today is really most directly relevant to income annuities — the ones where you’re locking in a payment stream.

And Tennessee MYGA rates also vary by carrier, right? Same deal — you need to compare.

Same deal. The spread between carriers on MYGA rates can be significant too. One carrier might be offering four and a half percent on a five-year term while another is at five and a quarter. On a two-hundred-thousand-dollar premium, that’s real money over five years.

Okay, so the through-line for everything we’ve talked about today is really: don’t assume you know how long you’ll live, don’t assume one carrier’s offer is representative of the market, and don’t assume the highest monthly number is automatically the right choice.

That’s a pretty good summary. And I’d add: don’t assume the structure that sounds simplest is the right one for your situation. The single life annuity with the highest payout might look great on paper, but if your spouse depends on that income continuing after you’re gone, it could leave them in a really difficult spot.

Right. The number on the quote sheet is not the whole picture.

Never is. And that’s why the conversation with a licensed agent matters — not to get sold something, but to actually work through your specific situation. Your age, your health, your other income sources, your spouse’s needs. All of it together.

And current rates, because those move. What’s available today might look different in six months.

Annuity income rates move with interest rates. They’re not static. So if you’ve been putting off getting quotes because you’re waiting for the ‘right time’ — there’s no way to know when that is. The right time is when you need the income.

Or when you’re close enough to needing it that you want to understand your options before you’re in a rush.

That’s actually the better approach. Don’t wait until you’re sixty-nine and need income in three months to start figuring out how these contracts work. Give yourself time to compare, ask questions, and understand what you’re signing.

The contracts are not short documents.

They are not. And the surrender schedules, the payout options, the beneficiary provisions — there’s a lot in there that matters. You want to understand it before you commit, not after.

I think the biggest takeaway for me from everything we’ve covered today is just that the life expectancy piece is so underappreciated. People focus on the rate, they focus on the monthly number, and they don’t spend nearly enough time thinking about the range of scenarios they might actually be planning for.

And the scenarios that are most financially dangerous are the ones at the long end. Running out of money at eighty-eight is a much harder problem to solve than running out at seventy-two, because your options are more limited and your ability to earn more income is gone.

Which is exactly why the insurance mechanism exists. You’re not trying to predict the future. You’re covering yourself across multiple futures.

That’s the whole point of insurance. You don’t buy homeowner’s insurance because you know your house is going to flood. You buy it because you can’t afford the outcome if it does.

And for a lot of retirees, running out of income at eighty-five is the flood.

Exactly. That’s the risk they can’t absorb on their own. And that’s the risk a lifetime income annuity is designed to address.

---

Doing your annuity homework? Start with our free comparison guide and the 7 questions to ask any advisor. Ready for real numbers? Talk to a licensed advisor in your state — we serve all 50 states.

Episode Show Notes

So I had a conversation with my aunt over the holidays — she’s sixty-eight, lives outside of Knoxville, just sold her house — and she’s been watching annuity rates online for like six months waiting for them to go up before she buys. And I didn’t know what to tell her.

Oh, she’s not alone. That’s probably the most common thing I hear — people watching rates like they’re watching a stock ticker, waiting for the perfect moment.

Right, and I get the instinct. But I also wasn’t sure if that’s actually a smart move or if it’s one of those things that sounds smart but isn’t.

It’s a little of both, honestly. The instinct to pay attention to rates is correct. The idea that you can reliably time when to jump in — that part gets a lot more complicated.

Okay, so let’s back up. Because I think a lot of people — including me before I started doing this — don’t really understand why annuity rates move at all. Like, who’s setting these numbers?

So the starting point is understanding what an insurance company actually does with your money when you hand over a premium. Because this isn’t an investment product — it’s an insurance contract. The carrier takes on a legal obligation to pay you income, and they have to fund that obligation somehow.

And the way they fund it is by putting your money to work.

Exactly. And they do it in a pretty conservative, regulated way. The biggest chunk — we’re talking roughly sixty percent of a typical life insurer’s general account — goes into bonds. High-quality, long-duration bonds. Corporate bonds, government bonds.

So not stocks. Not real estate. Mostly bonds.

Stocks are usually fifteen percent or less. Mortgages and real estate maybe around ten. Cash and short-term stuff, another six or so. Bonds are the dominant holding by a wide margin.

And that matters because — walk me through this — the yield on those bonds is basically what determines what they can pay out to annuity holders?

That’s the core of it. The insurer earns a yield on the bonds they hold. A portion of that yield is what they can afford to pass along to you as an annuity payout. Higher bond yields, more room to offer higher payouts. Lower bond yields, less room.

So when people say Tennessee annuity rates went up or down, they’re really talking about something that happened in the bond market.

Almost always, yes. There’s a benchmark a lot of people in this industry watch — the Moody’s Aaa Corporate Bond index. It tracks highly rated bonds with maturities of twenty years or more. Historically, when that index moves up, annuity payout rates tend to follow. When it drops, payouts tend to drop with it.

Wait, twenty-year maturities? That’s a long time horizon.

It is, and that’s intentional. Think about what an insurer is promising — they might be on the hook to pay you income for twenty, twenty-five, thirty years if you live a long life. They need assets that match those long-term obligations.

That actually makes a lot of sense when you put it that way. Okay, so here’s the thing my aunt kept mentioning — she was watching the Fed. Every time there was a Fed announcement, she’d call me. ‘Did you hear what they did with rates?’

Yeah, and I understand why people do that. The Fed is very visible. The announcements are big news. But here’s where I’d push back a little on using the Fed as your signal for annuity timing.

Because the Fed doesn’t actually control the rates that matter for annuities?

Right. The Fed controls short-term rates — the overnight lending rate between banks. Annuity payouts are driven by long-term bond yields. And those two things don’t always move in the same direction at the same time.

Wait, really? I think most people assume they move together.

A lot of people do. But there are plenty of historical examples where the Fed cut short-term rates and long-term yields actually went up, or stayed flat, because of inflation expectations or investor demand. The relationship is real but it’s not a one-to-one thing.

So watching the Fed announcement and then deciding whether to buy an annuity based on that is kind of like — I don’t know, checking the weather in Nashville to decide what to wear in Memphis?

That’s actually a pretty good analogy. Related, but not the same thing. And the lag matters too — even when the Fed moves, insurers don’t reprice their annuity offerings overnight.

So back to my aunt. She’s been waiting six months. Is that a problem?

It depends on what she needs the money for and when she needs income. But here’s the thing that I think people underestimate — every month you delay buying an income annuity is a month of income you’re not receiving.

Right, the opportunity cost of waiting.

And it’s not just an abstract concept. If she’s waiting for rates to go up by, say, half a percent, she needs to calculate how long it would take for that higher payout to make up for all the months of income she missed while waiting. Sometimes that math works out. A lot of times it doesn’t.

Especially if rates don’t actually go up the way she’s expecting.

Exactly. And that’s the part that’s genuinely hard to predict — even for professional bond portfolio managers. Timing the bond market is notoriously difficult. For an individual trying to do it as a one-time annuity purchase decision, the odds are not great.

Okay but I want to push back on that a little, because I’ve also heard the opposite argument — that if rates are really low, you should absolutely wait because you’d be locking in a bad deal.

That’s fair, and I don’t want to completely dismiss that instinct. There’s a difference between ‘rates are low and I have a five-year runway before I need income’ versus ‘rates are low and I need income starting next year.’ Those are very different situations.

So the timeline of when you actually need the income changes the calculus.

Completely. If you need income within the next twelve months, waiting for a rate improvement has a real and immediate cost. If your timeline is five or more years out, a deferred product might give you more flexibility to let rates work in your favor.

And that’s where something like an annuity ladder comes in, right? I’ve heard that term but I’m not sure I fully understand it.

So the idea is pretty simple. Instead of putting all your money into one annuity contract at one moment in time, you spread purchases across multiple years. Maybe you buy a portion now, another portion in two years, another portion in four.

So you’re not betting everything on one rate environment.

Right. You’re averaging across different rate environments. If rates go up, your later purchases benefit. If rates stay flat or go down, you already locked in some income at the earlier rate. It’s a way of managing the uncertainty rather than trying to outsmart it.

I like that framing. It’s not about predicting — it’s about spreading the risk.

And it’s not the right approach for everyone. If you need a specific income amount starting at a specific date, a ladder might not work as cleanly. That’s why talking to a licensed agent about your actual situation matters — the strategy has to fit the person.

Okay, I want to come back to something you said earlier about different carriers offering different rates. Because I think people assume — I assumed — that if you’re shopping for an annuity, the rate is kind of the rate. Like there’s one number out there.

Oh, that’s a really common misconception. Rates vary meaningfully from carrier to carrier, even in the same rate environment, even on the same day.

Why? If they’re all investing in similar bonds, why would the payouts be different?

A few reasons. Different carriers have different portfolio compositions — some hold more corporate bonds, some lean more toward government bonds, some have different credit quality mixes. They also have different pricing philosophies, different overhead structures, different competitive pressures.

So one company might be willing to offer a higher payout to win business, even if their underlying portfolio is similar?

Sometimes, yes. And the differences aren’t trivial. On a hundred thousand dollar premium, a meaningful rate difference between carriers can translate to hundreds of dollars a month in income over a long period. That’s real money.

Which is why shopping multiple carriers matters. And I think this is where people in Tennessee — or anywhere — might just go with whatever their bank or their existing financial institution offers them.

And that might be fine. But you won’t know unless you compare. An independent agent who can pull quotes from multiple carriers simultaneously is really valuable here, because you get to see the range.

I want to ask about something that comes up a lot in listener questions — does it matter that you’re in Tennessee specifically? Like, do Tennessee annuity rates differ from what someone in Ohio or Texas would see?

So the payout rates themselves are set at the carrier level, not the state level. A sixty-five-year-old in Memphis buying a specific type of annuity from a specific carrier on the same day as a sixty-five-year-old in Seattle will generally see the same payout rate.

So the ‘Tennessee’ part of Tennessee annuity rates is kind of about where you’re shopping, not a rate that’s unique to the state.

Mostly, yes. Your state of residence can affect certain contract features and regulatory protections. And there are tax considerations that are specific to Tennessee — the state doesn’t have an income tax on wages, and how annuity income gets treated is worth talking through with a tax professional before you sign anything.

That’s actually a point I hadn’t thought about. The tax piece can affect the real value of what you’re getting.

Absolutely. Two people with identical payout rates can end up with very different after-tax income depending on their overall tax situation. That’s not something to figure out after the fact.

Okay, so let me try to pull this together from the perspective of someone who’s actually sitting there trying to make a decision. What are the things they should actually be thinking about?

I’d start with the income timeline question. Do you need income now, or are you trying to grow money for later? That determines whether you’re even looking at the same type of product.

Like, an immediate annuity versus a deferred annuity.

Right. And those products respond to the rate environment differently. Then I’d say — don’t anchor to what rates were five years ago. I hear this a lot: ‘Well, rates were so much better back in such-and-such year.’ Maybe they were. But that’s not the market you’re buying in today.

That’s a hard mental shift to make, though. If you remember getting a better deal, it’s hard not to feel like you’re settling.

It is. But the relevant question is whether the current rate meets your income need, not whether it’s better or worse than a rate that’s no longer available. You can’t buy yesterday’s rate.

That’s a good way to put it. And then the third thing — compare carriers.

Compare carriers, and understand that the rate you’re quoted is specific to your age, your gender, the type of annuity, and the carrier. It’s not a generic number. A sixty-year-old woman and a seventy-year-old man are going to see very different payouts even from the same carrier on the same day.

Because the carrier is pricing in life expectancy.

Exactly. For a lifetime income annuity, the carrier is essentially making a bet on how long you’ll live. Older buyers tend to see higher monthly payouts because the expected payout period is shorter. That’s just the actuarial math.

Which is why the same hundred thousand dollars produces very different monthly checks depending on who’s buying it.

Right. And that’s also why you can’t really compare your neighbor’s annuity payout to what you’d get. Their contract was priced for them, not for you.

My neighbor — actually this is a real story — he’s sixty-two, just retired early, and he was comparing his payout quote to his older brother’s and couldn’t figure out why his brother was getting so much more per month for the same amount.

Classic example. The brother is older, so the carrier expects to pay out over a shorter period. The monthly check is higher. Your neighbor at sixty-two might live another thirty years — the carrier has to price that in.

And he actually thought something was wrong with his quote. Like he’d been given a bad deal.

Which is why having someone explain the mechanics before you get the quote matters. Otherwise you’re comparing apples to something completely different.

Okay, I want to go back to the Fed question one more time because I know this is going to come up. If the Fed cuts rates — which is something people are always speculating about — what should someone who’s thinking about buying an annuity actually do with that information?

Honestly? File it as context, not as a trigger. A Fed cut might eventually put some downward pressure on long-term bond yields, which could eventually put some downward pressure on annuity payouts. But ‘might,’ ‘eventually,’ and ‘some’ are doing a lot of work in that sentence.

So it’s not a ‘buy now before rates drop’ alarm.

It’s not a reliable one. And the reverse is also true — a Fed hike doesn’t automatically mean annuity payouts are about to spike. The transmission mechanism between Fed policy and long-term bond yields is real but it’s not clean or immediate.

I think what I keep coming back to is that the question ‘is now a good time to buy an annuity’ is almost the wrong question.

That’s actually — yeah, I think that’s right. The better question is ‘does buying an annuity now meet my income need?’ Because if you need the income and the payout rate works for your situation, waiting for a theoretically better rate is a gamble with your actual income.

And if you don’t need the income yet, then you have more time to be thoughtful about it — but you’re probably looking at a different type of product anyway.

Exactly. The product type and the timing question are connected. Someone with a five-year runway before they need income has very different options than someone who needs checks starting next quarter.

So for my aunt in Knoxville — if she needs income soon and she’s been waiting six months already — what would you tell her?

I’d tell her to stop trying to predict the bond market and start talking to a licensed agent who can show her what she’d actually receive today from multiple carriers. Get the real numbers in front of her. Then she can make a decision based on her actual income need, not on speculation about where rates might go.

Because six more months of waiting is six more months of income she’s not getting.

And if rates move up by a quarter of a percent in that time — which is not guaranteed — it might take years of higher payments to make up for what she gave up waiting. The math doesn’t always favor patience.

That’s a really concrete way to think about it. It’s not just ‘rates might go up’ — it’s ‘rates would have to go up by enough, fast enough, to compensate for the income I didn’t collect.’

And you’d need to know that in advance. Which you don’t. Nobody does.

Okay, one last thing — because I know people are going to ask this. Is there any situation where waiting actually does make sense?

Sure. If you have a genuinely long time horizon before you need income, and you have other sources of income covering your needs in the meantime, and you’re considering a deferred product — then yes, you have more flexibility to be patient. A laddering approach might also make sense in that case, so you’re not making one all-or-nothing bet.

But even then, you’re not really timing the market — you’re just buying in stages.

Right. It’s a structural strategy, not a prediction. You’re acknowledging that you don’t know where rates are going and building that uncertainty into how you deploy your money. That’s very different from sitting on the sidelines waiting for a specific rate to materialize.

I think that’s the distinction that matters. Acknowledging uncertainty versus trying to outsmart it.

And for most people, the most important thing they can do is get actual quotes from multiple carriers, understand what those numbers mean for their specific situation, and make a decision based on real income needs — not on what they hope rates will do in six months.

Which means talking to a licensed agent who can actually pull those numbers and explain what they’re looking at.

An independent one, ideally — someone who can show you quotes from multiple carriers side by side, not just the one product their company happens to sell.

Because the spread between carriers can be significant enough that it actually changes the decision.

On a meaningful premium, yes. The difference between the highest and lowest payout rates in the market at any given time can be substantial. That’s not a small thing to leave on the table because you didn’t shop around.

---

Doing your annuity homework? Start with our free comparison guide and the 7 questions to ask any advisor. Ready for real numbers? Talk to a licensed advisor in your state — we serve all 50 states.

Episode Show Notes

So I had a conversation with my aunt over the holidays — she’s sixty-eight, just retired last spring — and she kept asking me the same thing in different ways. She’d say ‘do I have enough?’ and then five minutes later she’d say ‘but what if I live to ninety?’ And I realized she wasn’t really asking about money. She was asking whether she’d run out.

That’s the question, right? That’s the one underneath all the other questions. It’s not ‘what’s my rate of return’ or ‘how do I pick an annuity.’ It’s just — will this last as long as I do.

And I think that’s why conversations about Tennessee annuity rates, or annuities in general, can feel so loaded. Because people aren’t shopping for a product. They’re trying to solve an existential problem.

Exactly. And the honest answer is there’s no magic number. No calculator spits out a perfect answer. But there are real variables you can get your arms around, and understanding those changes the whole conversation.

Okay so let’s actually get into those variables. Because I feel like most people — my aunt included — they have a vague sense of ‘I have this much saved, I’ll spend this much a year, I’ll be fine.’ And that’s it.

And that works until it doesn’t. The spreadsheet version of retirement planning can tell you when your account hits zero. What it can’t tell you is what happens when the market drops forty percent in year two of your retirement. Or when you have a major health event at seventy-four that you didn’t budget for.

Right, and that’s the sequence of events problem. I’ve heard you talk about this before — it’s not just the average return that matters, it’s when the bad years happen.

Sequence of returns risk. It’s one of the most underappreciated things in retirement planning. Two people can have the exact same long-run average return on their portfolio and end up in completely different places depending on whether the bad years came early or late. If you retire in a down market and you’re pulling money out at the same time, you’re selling low. And you never fully recover from that.

So that’s part of why people look at annuities — to create some income that doesn’t depend on what the market did last year.

That’s the structural argument, yeah. An annuity is an insurance contract — not an investment — and the income it produces doesn’t fluctuate with markets. So if you’ve got your essential monthly expenses covered by sources that aren’t market-dependent, you’re not forced to sell assets at the wrong time just to pay your electric bill.

Okay I want to push on that a little though. Because I’ve talked to people who say ‘I don’t need an annuity, I’ve got Social Security and a pension, that covers my basics.’ And for some people that’s true, right?

One hundred percent. If your Social Security plus a pension already covers your fixed expenses — housing, food, healthcare, utilities — then you might not need an annuity at all. The annuity conversation really starts when there’s a gap. When your fixed income sources don’t fully cover your fixed expenses.

So the framework is kind of — figure out your income floor, figure out your expense floor, and see if they match.

That’s a clean way to put it. Add up your Social Security, any pension, any existing annuity income. That’s your floor. Then add up your non-negotiable monthly expenses and multiply by twelve. If the income exceeds the expenses, great — your portfolio handles the rest. If there’s a gap, that’s where an annuity might fill it.

And then you work backward from the gap to figure out how much you’d need to put into an annuity to close it.

Right, and that’s where current Tennessee annuity rates actually matter in a practical sense. Because the payout you get per dollar you put in depends on your age, the type of contract, and the carrier. So the same gap might require a different lump sum depending on those factors.

Let’s talk about those factors because I think people hear ‘annuity rates’ and they assume it’s one number. Like a mortgage rate or a CD rate.

Yeah, it’s not. It’s more like — there are several dials, and they all interact. The first one is contract type. A single premium immediate annuity, which people call a SPIA, starts paying you almost right away after you fund it. A deferred annuity — like a multi-year guaranteed annuity, or MYGA — accumulates value first and then you can take income later.

So if you’re sixty-five and you need income now, you’re probably looking at the immediate version.

Generally, yeah. If you’re fifty-eight and you want to set something up that starts paying at sixty-seven, you might look at a deferred structure. Different tools for different timelines.

What about age? You mentioned that matters.

It matters a lot for income annuities specifically. The older you are when you buy, the higher your payout rate tends to be — because statistically, the carrier is paying out over a shorter period. A seventy-two year old buying an immediate annuity is going to get a higher monthly payment per dollar than a sixty-two year old buying the same contract.

Which creates this interesting tension, right? Because part of you wants to buy early and lock something in, but waiting might actually get you a better payout.

That tension is real, and there’s no universal right answer. It depends on your health, your other income sources, your expenses right now. Someone in great health at sixty-two might benefit from waiting. Someone with health concerns might want income sooner.

Okay and then there’s the carrier piece. Because rates aren’t the same across every insurance company.

This is actually one of the most practical things people can do — compare rates across carriers. For the same contract structure, the same age, the same premium amount, different carriers can offer meaningfully different monthly payouts. Over a twenty-year payout period, that difference compounds into real money.

And that’s why you’d want to work with someone who can pull quotes from multiple carriers, not just one.

Exactly. A captive agent who only represents one company can only show you that company’s rates. An independent agent can shop the market. That’s a meaningful distinction.

There’s also the interest rate environment piece. I know rates have been moving around a lot in the last few years. How does that affect annuity payouts?

When prevailing interest rates are higher, carriers can generally offer more competitive payouts because they’re earning more on the premiums they hold. So the rate environment of the last couple of years has actually been relatively favorable for people shopping annuities compared to, say, the low-rate environment of the early twenty-teens.

Huh. So there’s a timing element to this that most people probably don’t think about.

There is, though I’d be careful about trying to time the annuity market the way people try to time the stock market. Your personal situation — your age, your income gap, your expenses — those factors usually matter more than trying to wait for a perfect rate environment.

Fair point. Let me bring up something I think gets overlooked, which is the Tennessee tax situation. Because I’ve had listeners ask about this — does it matter where you live?

It absolutely matters. Tennessee is actually in a pretty favorable position for retirees on the state tax side. There’s no state income tax on wages or salaries, and the Hall Income Tax — which used to apply to interest and dividends — that was fully repealed as of twenty twenty-one. So Tennessee retirees aren’t paying state income tax on their annuity payments or their IRA withdrawals.

Which is a real advantage compared to a lot of other states.

Significant advantage. Now, federal taxes still apply — that doesn’t go away. Annuity payments, traditional IRA withdrawals, Social Security above certain thresholds — all of that is still subject to federal income tax. But not having the state layer on top of it changes the net income picture.

And people should actually run those numbers before they retire, not after.

Before. Definitely before. Because your effective federal tax rate in retirement might be lower than you expect — or higher, depending on how your income sources combine. It affects how much you actually net from each dollar of annuity income.

Okay, I want to go back to something you said earlier about inflation, because I think this is where a lot of retirement plans quietly fall apart. People plan for what things cost today.

Oh, this is a big one. The Consumer Price Index has averaged something like three percent annually over long historical periods. And we’ve seen it spike much higher recently. Three percent doesn’t sound like much, but over twenty years, prices roughly double. So the fixed income that felt comfortable at sixty-five might feel pretty tight at eighty-five.

And a standard annuity payment doesn’t automatically go up with inflation.

Right, that’s the trade-off. A basic income annuity pays a fixed amount. Some contracts have cost-of-living adjustment riders — COLAs — that increase the payment over time. But those riders reduce your starting payment. You’re essentially trading a higher payment now for one that grows later.

So there’s no free lunch there.

Never is. You’re making a bet on how long you’ll live and how much inflation will matter over that period. A licensed agent can actually run the break-even math on that — at what point does the COLA version pay more in total than the flat version.

That’s actually a really useful way to think about it. I don’t think most people know you can even ask for that kind of comparison.

Most people don’t. And that’s part of why the agent conversation is valuable — not to be sold something, but to see the actual numbers side by side.

Let me bring up a scenario, because I think these help. Picture a couple — both sixty-five, they’ve got two hundred thousand dollars they want to use for retirement income. They’ve got Social Security coming in, let’s say thirty-five hundred a month combined. Their essential expenses are about four thousand a month. So they’ve got a five-hundred-dollar gap.

Okay, so that’s six thousand dollars a year they need to fill from somewhere. And they’ve got two hundred thousand to work with.

Right. So does all of that go into an annuity?

Probably not all of it. You’d work backward from that six-thousand-dollar annual income need — figure out what lump sum, at current Tennessee annuity rates for a sixty-five year old couple, would produce that. Depending on the contract and the carrier, it might be somewhere in the range of eighty to a hundred and twenty thousand dollars. Rough ballpark — actual rates vary.

So the rest stays in a portfolio.

The rest stays accessible. It can grow, it can handle discretionary spending, travel, home repairs, medical surprises. That’s your flexibility layer. The annuity handles the floor so you’re not touching the portfolio just to keep the lights on.

And if that couple lives to ninety, the annuity keeps paying.

That’s the whole point of a lifetime income annuity. The carrier bears the longevity risk, not you. You can’t outlive the payment stream.

Which is exactly what my aunt was worried about. Not running out.

And that’s a real thing to be worried about. People are living longer. A sixty-five year old woman today has a meaningful probability of living into her late eighties or beyond. That’s twenty-plus years of income you need to plan for.

Okay, let’s talk about what people should actually bring to a conversation with an agent. Because I think a lot of people show up and they’re like, ‘I have some money, tell me what to do.’

Which puts the agent in an impossible position, honestly. The more you show up prepared, the more useful that conversation is. At minimum — know your Social Security estimate. You can get that at ssa.gov, it takes five minutes. Know your current retirement account balances. Have a rough monthly budget for essential expenses.

And your target retirement age, or if you’re already retired, your current situation.

Right. And if you already own any annuity contracts, bring those. Because they affect the picture — you don’t want to over-annuitize. Some people come in and they’ve already got a pension that covers their basics and they’re thinking about putting another hundred and fifty thousand into an annuity. And the question is — do you actually need more fixed income, or do you need flexibility?

That’s a good point. There’s such a thing as too much locked up in fixed income.

Absolutely. If you’ve got more fixed income than you need for expenses, the excess doesn’t help you — it just sits there. And you’ve given up liquidity to get it. Annuities have surrender periods, especially in the deferred space. You can’t just pull money back out without potential penalties.

Right, and that’s a thing people don’t always think about going in. They see the income number and they don’t think about the surrender schedule.

It’s one of the first things I’d ask about. How long is the surrender period? What are the charges if you need to access money early? Most contracts have a free withdrawal provision — usually ten percent per year — but beyond that, there are costs. That’s not a reason not to buy, but it’s a reason to be thoughtful about how much you commit.

So the allocation question — how much goes into an annuity — isn’t just about income. It’s also about how much liquidity you need to keep.

That’s exactly right. And that’s a personal question. Someone with no debt, stable health, and a pension already covering basics can afford to be less liquid than someone who’s got a mortgage, aging parents they might need to help, or health issues that could mean big expenses.

I want to circle back to the starting balance piece for a second, because I think people can be overly optimistic here. Like, counting money they don’t actually have yet.

Oh, this is a real trap. Don’t count expected inheritances. Don’t count assumed investment growth that hasn’t happened. Use today’s known values. I’ve seen people plan around an inheritance that either didn’t come, came much smaller than expected, or came fifteen years later than they thought.

Or the parent needed long-term care and the money went there instead.

Exactly. Plan with what you have. If something extra comes in later, that’s a bonus — you adjust. But don’t build your income floor on money you don’t control.

That feels like advice that applies to a lot of things in life, honestly.

It really does. And on the rate of return side — if part of your savings stays in a portfolio, you need some assumption about how it grows. But whatever number you use, remember it’s a scenario, not a promise. Running your plan under a conservative assumption and a more optimistic one tells you how sensitive your situation is.

Stress testing, basically.

Right. What happens if inflation runs higher than I expected? What happens if my portfolio returns are lower? What happens if I live to ninety-three? A good agent will run those scenarios with you.

And the annuity piece of the plan is actually what makes some of those stress tests less scary. Because the income floor doesn’t change.

That’s the structural benefit. When you know your essentials are covered no matter what, you can afford to let the rest of your portfolio ride through a bad market year without panicking. You’re not selling at the bottom because you need grocery money.

I feel like that psychological piece is underrated. People talk about the math, but the behavioral side — not making bad decisions when markets are scary — that matters too.

It might be the most important part. The best financial plan is the one you can actually stick to. And if your plan requires you to stay calm while your portfolio drops thirty percent and you have no other income coming in — that’s a hard plan to stick to.

Whereas if you know the annuity payment is hitting your account on the first of every month regardless, you’ve got a little more breathing room.

A lot more, in my experience. People sleep better. That’s not a small thing.

Okay, so to kind of pull this together — the framework isn’t ‘put X percent into an annuity.’ It’s ‘figure out your income gap, figure out what it costs to fill it, and then decide how much liquidity you need to keep outside of that.’

That’s the right sequence. And the Tennessee-specific piece is that you’re doing all of this without a state income tax layer, which actually improves your net income math compared to a lot of other states. Federal taxes still matter, but the state piece is off the table.

Which is genuinely a nice thing about retiring here.

It is. And rates right now — I can’t quote specific numbers because they change frequently and vary by carrier and contract — but the environment has been reasonably favorable for people shopping annuities. Which is a reason to at least have the conversation and see what the actual quotes look like for your situation.

And that conversation starts with a licensed agent who can pull current Tennessee annuity rates from multiple carriers — not just one.

That’s the move. Come prepared with your numbers, ask for comparisons across carriers, ask about the surrender schedule, ask about inflation riders and what they cost you in terms of starting income. Those are the questions that separate a good planning conversation from just being sold something.

And if you show up with your Social Security estimate, your balances, and a rough monthly budget — you’re already ahead of most people who walk in the door.

Way ahead. The agent can actually model scenarios for you instead of spending the whole meeting just gathering basic information.

My aunt, by the way, ended up having that conversation. She didn’t buy anything immediately — she just wanted to understand her options. And she said afterward that she felt like she actually understood her situation for the first time.

That’s honestly the best outcome of a first meeting. Not a purchase — clarity. Because you can’t make a good decision if you don’t understand what you’re deciding.

And the question she started with — will my money last as long as I do — she at least knows now what levers she can pull to answer it.

Which is exactly where you want to be before you commit to anything.

---

Doing your annuity homework? Start with our free comparison guide and the 7 questions to ask any advisor. Ready for real numbers? Talk to a licensed advisor in your state — we serve all 50 states.

Episode Show Notes

So I had a conversation with my aunt a few weeks ago — she’s sixty-eight, just sold a rental property, and she’s sitting on about a hundred and twenty thousand dollars. And she called me and said, ‘Jessica, everyone keeps telling me to look at a MYGA, but I don’t even know what that stands for.’ And honestly, I didn’t have a clean answer for her in the moment.

That’s such a common starting point. MYGA stands for Multi-Year Guaranteed Annuity. And the core idea is actually pretty simple — you hand over a lump sum to an insurance company, they credit you a declared interest rate for a set number of years, and at the end of that term, you decide what to do next.

Okay, so it’s like a CD in that sense — you lock in a rate, you wait.

That’s the intuition most people start with, and it’s not wrong. But there are some meaningful differences we should get into, because the CD comparison trips people up in both directions — sometimes people think MYGAs are scarier than they are, sometimes they think they’re simpler than they are.

Right, and I think the rate is the thing that grabs people’s attention first. Like, my aunt saw a number on a website and that was the whole conversation — ‘I can get this rate, should I do it?’ But that’s not really the right question, is it?

It’s part of the question. The rate absolutely matters — it determines how much your money grows over the contract period. But if that’s the only thing you’re looking at, you’re missing a lot. And we’ll get into what else matters. First though, let’s talk about why rates are where they are right now, because that context is actually useful.

Yeah, because I remember a few years back people were barely talking about MYGAs. And now it feels like everyone is.

Because the rate environment changed dramatically. Insurance carriers invest the premiums they collect — primarily in bonds and other fixed-income instruments. So when prevailing interest rates go up, carriers can offer higher credited rates on new contracts. When rates were near zero, MYGAs were kind of a tough sell. Now they’re much more competitive.

And that’s why ten-year MYGAs in particular have gotten so much attention lately?

Exactly. Longer terms have generally come with more competitive rates because the carrier is getting a longer commitment from you. They can plan their bond portfolio around that. So a ten-year MYGA has been one of the more popular options — but that doesn’t mean it’s right for everyone, and the term length is a big deal.

Let’s actually walk through how a ten-year MYGA works mechanically, because I think people hear ‘ten-year contract’ and they assume it means their money is completely locked up for a decade.

And that’s not quite accurate. So here’s the basic structure. You put in a single premium — there’s usually a minimum, which varies a lot by product, anywhere from ten thousand dollars up to a hundred thousand or more depending on the carrier. The interest compounds tax-deferred, which is a big deal we’ll come back to. And yes, there is a surrender charge schedule if you need to get out early.

Okay, surrender charges — that’s the part that scares people. Walk me through what that actually looks like.

So on a ten-year contract, a pretty typical schedule might start at nine percent in year one and then step down each year — eight percent, seven percent, and so on — until it hits zero by the end of the term. So if you’re in year two and you need to pull everything out, the carrier takes a chunk.

But not all of it, right? There’s usually some amount you can access without a penalty?

Yes, and this is important. Most MYGAs have what’s called a penalty-free withdrawal provision. A lot of contracts let you pull out the interest earned each year, or sometimes a percentage of the account value — often ten percent — without triggering a surrender charge. But here’s where it gets nuanced: some carriers include that automatically, and others offer it as an optional rider that slightly reduces your credited rate.

So you might be comparing two contracts with the same headline rate, but one of them is actually giving you a little less flexibility than you think.

Exactly. And this is why I always say the rate is the starting point, not the ending point. Two contracts can both say ‘ten-year term’ and have very different surrender schedules, very different penalty-free provisions. You have to read the contract.

There’s also something in a lot of these contracts called a market value adjustment. I’ll be honest, that one took me a while to understand.

Yeah, an MVA is one of those things that’s buried in the fine print and then surprises people. Basically, if you surrender the contract early, some carriers will apply an adjustment — up or down — based on how interest rates have moved since you bought the contract. So if rates have gone up since you purchased, the MVA might actually reduce what you get back. If rates have gone down, it could work in your favor.

So it’s not always negative, but it’s a variable you need to know about.

Right. And not every MYGA has an MVA — some don’t. But you absolutely want to ask before you sign. ‘Does this contract have a market value adjustment?’ should be on your checklist.

Okay, let’s go back to the tax piece, because you mentioned tax-deferred compounding and I think that’s actually one of the most underappreciated parts of how MYGAs work.

It really is. So here’s the comparison that makes it concrete. If you put money in a bank CD, the interest you earn is taxable every single year — even if you don’t touch it, even if you let it sit and compound. You’re getting a tax bill on growth you haven’t actually used yet.

Which is annoying.

It is. With a MYGA, you don’t owe income tax on the growth until you actually take a withdrawal. So the interest is compounding on a larger base because you’re not losing a slice to taxes each year. Over a ten-year period, that difference can be meaningful depending on your tax bracket.

And for Tennessee residents specifically, there’s actually a pretty favorable state tax picture here.

Tennessee is actually in a good spot on this. There’s no state income tax on wages or salaries, and the Hall Income Tax — which used to apply to interest and dividends — was fully repealed as of January first, twenty twenty-one. So Tennessee residents generally don’t owe state income tax on MYGA withdrawals.

Federal tax still applies though.

Yes, absolutely. The growth portion of any distribution is subject to federal income tax. And if your MYGA is sitting inside a traditional IRA or another pre-tax account, the whole withdrawal is typically taxable at the federal level — not just the growth. That’s a conversation for a tax professional, not a general rule you want to apply without looking at your specific situation.

Right. And speaking of situations — let’s talk about the CD comparison more directly, because I think a lot of Tennessee savers are genuinely weighing those two options right now.

It’s probably the most common comparison we see. And they’re not as different as some people think, but the differences that exist really matter. Both give you a fixed rate for a set term. Both have penalties if you exit early. The tax treatment is the big one we just covered.

What about the safety question? Because I know FDIC insurance comes up a lot when people are comparing.

Yeah, this is where I want to be careful not to oversimplify. CDs at FDIC-member banks are insured up to two hundred and fifty thousand dollars per depositor per institution. MYGAs are not FDIC-insured — they’re backed by the financial strength of the insurance company that issued the contract.

So the insurance company itself is the guarantee.

Exactly — the promise is only as strong as the company making it. That’s why carrier financial strength matters so much, and why it’s worth understanding before you ever compare rates.

So walk me through that — how do you actually evaluate whether a carrier is financially solid?

The main tool most people use is A.M. Best ratings. A.M. Best is an independent rating agency that evaluates insurance companies on their ability to meet their obligations. The scale goes from A-plus-plus, which is Superior, down through A-plus, A, A-minus, B-plus-plus — which they call Good — and then lower from there.

And higher-rated carriers tend to offer lower rates?

Often, yes. And that’s a real trade-off that people have to think about. A carrier with a lower rating might be offering a more attractive rate. Whether that trade-off makes sense is genuinely a personal decision — it depends on how much you have in the contract, what other assets you have, your overall situation. It’s not something where there’s a universal right answer.

That’s actually a good point to push back on a little, Caleb, because I think sometimes people hear ‘lower-rated carrier’ and they immediately think it’s a bad idea. But a B-plus-plus carrier isn’t a fly-by-night operation.

Fair. A.M. Best’s B-plus-plus is still ‘Good’ — it’s not a red flag in isolation. The question is whether the rate premium you’re getting compensates for whatever additional uncertainty exists. And that’s exactly the kind of conversation to have with a licensed agent who can look at the full picture.

Let me throw a scenario at you, because I think this makes it more concrete. Picture a couple — both sixty-five, they’ve got a hundred thousand dollars sitting in a savings account earning basically nothing, and they’re trying to decide between a five-year MYGA and a ten-year MYGA. How do you even start that conversation?

The first question I’d ask is: what’s this money for? Is it money they might need in five years for something specific — travel, a home repair, helping a kid with a down payment? Or is it truly money they don’t expect to touch for a decade?

Because the rate difference between five and ten years might be tempting, but if they need liquidity in year six—

Then the ten-year surrender schedule is still active. Exactly. And that’s where people get into trouble — they see the higher rate on the longer term and don’t fully internalize what ‘year seven, eight percent surrender charge’ actually means in dollars.

On a hundred thousand dollars, eight percent is eight thousand dollars. That’s real money.

It is. And that’s before any MVA adjustment if the contract has one. So the term length decision is really a liquidity decision first, and a rate decision second.

I also want to make sure we talk about what happens at the end of the term, because I think people sometimes forget that the contract doesn’t just end — there’s a decision point.

Right, and this is something people overlook when they’re buying. Most carriers give you a window at maturity — often thirty days — where you can withdraw the full value without any surrender charge, roll it into a new contract, or explore other options. If you do nothing during that window, the contract typically auto-renews at whatever rate the carrier declares at that time.

Which might be great or might be terrible depending on where rates are.

Exactly. So you want to put that maturity date in your calendar years in advance. Don’t let it sneak up on you.

I actually know someone this happened to — a neighbor of mine, sixty-two when he bought a five-year fixed annuity. He just kind of forgot about it, the window came and went, and it renewed at a rate that was noticeably lower than what he could have gotten by shopping around at that point.

That’s a really common story. The contract does exactly what it’s supposed to do — it renews. But the person didn’t engage with the decision. And that’s not the carrier doing anything wrong; it’s just what happens when you’re not paying attention.

Okay, let’s talk about some of the other things that can affect whether a specific MYGA is actually available to you. Because I think people sometimes go through this whole research process and then find out the product doesn’t apply to their situation.

Yeah, there are a few practical filters. State availability is one — not every MYGA is approved for sale in every state. Tennessee residents need to confirm that any product they’re looking at is actually approved here. That’s not a given.

And age limits?

Carriers set maximum issue ages, often somewhere around eighty-five or ninety. And those can vary depending on whether the money is in a qualified account — like an IRA or a four-oh-one-k — or a non-qualified account. So someone who’s eighty-two might find that certain products aren’t available to them, or that the qualified versus non-qualified distinction changes what they can access.

And the minimum premium thing — that’s tripped people up too.

Definitely. Some products start at ten thousand dollars, which is pretty accessible. Others require a hundred thousand or more. So if you’re comparing rates across carriers and one of them has a minimum that’s higher than what you have available, that rate is kind of irrelevant to you.

What about riders? I feel like that’s a whole conversation that sometimes gets glossed over.

Riders are add-ons to the base contract. The most common ones on MYGAs are things like enhanced death benefits. And they do come at a cost — usually a small reduction in your credited rate. So you’re trading a little bit of growth for an additional feature.

And whether that’s worth it totally depends on the person.

Completely. There’s no general answer. Someone who has estate planning concerns and wants to make sure a specific amount passes to a beneficiary might find an enhanced death benefit rider really valuable. Someone else might look at the rate reduction and say, ‘I’d rather have the higher rate and handle that separately.’ It’s not a product decision; it’s a personal situation decision.

Okay, let’s try to bring this together practically. If someone in Tennessee is sitting down right now and saying, ‘I want to compare MYGA rates’ — what does that process actually look like? Because I don’t think it’s as simple as Googling a number.

It’s really not. And the first thing to understand is that rates change frequently — sometimes week to week. So a rate you saw last month might not be available today, and a rate that wasn’t available last month might be on the table now.

So you need current quotes, not cached information.

Right. And you want quotes from multiple carriers, not just one. The spread between what different carriers are offering for the same term can be surprisingly wide. Shopping around isn’t just a good idea — it’s kind of the whole game.

But then once you have those quotes, you’re back to the conversation we’ve been having — the rate is just the starting point.

Exactly. You look at the surrender schedule, you look at the penalty-free withdrawal provisions, you check whether there’s an MVA, you look at the carrier’s A.M. Best rating, you confirm it’s approved in Tennessee, you check the minimum premium and the maximum issue age. It’s a checklist, not a single number.

And honestly, that’s a lot for someone to do on their own. Especially if they’re not used to reading insurance contracts.

Which is why working with a licensed annuity agent is genuinely useful — not as a sales pitch, but as a practical matter. A good agent can pull live quotes from multiple carriers, walk you through the contract details side by side, and help you figure out whether a MYGA actually fits your situation or whether something else makes more sense.

And they should be asking you questions, not just showing you the highest rate.

That’s the tell. If an agent is just leading with ‘here’s the best rate,’ that’s a yellow flag. The right questions are about your timeline, your liquidity needs, whether this money is qualified or non-qualified, what your income situation looks like in retirement. The product comes after that conversation, not before.

Going back to my aunt for a second — she’s sixty-eight, she’s got that hundred and twenty thousand from the rental property sale. What are the questions she should be walking into that conversation with?

I’d want her to know: does she have other liquid savings she can access if something comes up? Because if this hundred and twenty thousand is her only cushion, a ten-year surrender schedule is a real constraint. What’s her income picture — does she have Social Security, a pension, anything else coming in? And what’s the tax situation on this money — is it already been taxed, or is it in a pre-tax account?

Because if it’s non-qualified money — already been taxed — the tax-deferral benefit of the MYGA is actually pretty attractive for her.

Especially in Tennessee where she’s not paying state income tax on the growth either. The federal piece still applies when she takes distributions, but she’s not getting hit twice.

That’s actually a meaningful advantage that I don’t think she’d fully appreciated when we talked.

It’s one of those things that doesn’t sound exciting until you do the math. And the math over ten years of compounding without an annual tax drag — it adds up.

One last thing I want to flag, because I think it’s easy to forget in all of this — MYGAs are insurance contracts, not investments. That distinction matters.

It really does. And I think it matters beyond just regulatory language. The way you evaluate an insurance contract is different from the way you evaluate a stock or a mutual fund. You’re not chasing returns; you’re making a decision about how a portion of your assets behaves over a specific period. That’s a different kind of question.

And it fits into a broader financial picture — it’s not the whole picture.

Right. Most people who use MYGAs well are using them for a specific portion of their assets — money they don’t need immediate access to, where they want predictable growth and tax deferral. It’s not a replacement for everything else; it’s a tool for a specific job.

And knowing what that job is before you buy is kind of the whole point of everything we’ve talked about today.

That’s it. Know the term, know the surrender schedule, know the carrier, know your own timeline. The rate is the headline — but the contract is the story.

---

Doing your annuity homework? Start with our free comparison guide and the 7 questions to ask any advisor. Ready for real numbers? Talk to a licensed advisor in your state — we serve all 50 states.