Episode Show Notes

So I had a conversation with my aunt over the holidays — she just turned sixty-eight, lives outside of Knoxville, and she said, ‘Jessica, I’ve been trying to figure out annuities for six months and I still feel like I’m reading a different article every time and none of them talk to each other.’ And I thought — yeah, that’s actually the problem, isn’t it?

That’s exactly the problem. You look up Tennessee annuity rates, you get one page. You look up the tax rules, you get a completely different page that might not even be Tennessee-specific. You look up long-term care riders, you’re in a third place entirely. Nobody’s connecting the dots.

And meanwhile your aunt is sitting there with, I don’t know, a couple hundred thousand dollars she needs to do something smart with, and she’s piecing together a puzzle where half the pieces came from different boxes.

Right. So what I want to do today is actually walk through all of those pieces — rates, taxes, product types, long-term care, inflation, how much to even put in — and treat them like they belong in the same conversation. Because they do.

Let’s start with the most basic question, because I think a lot of people don’t even know what they’re looking at when they see a quoted annuity rate. Like, what does that number actually mean?

So when you see a rate quoted on a fixed annuity or a MYGA, that’s a declared interest rate — the carrier is telling you what your money will earn inside that contract over a set period. It’s not a projection, it’s not an estimate, it’s a contractual declaration.

Okay, but here’s where I push back a little. Because I’ve heard people say, ‘Oh, I got a great rate,’ and then later they’re surprised by something. What are they missing when they just look at the headline number?

Usually they’re missing the surrender schedule. The rate doesn’t exist in isolation — it comes attached to a contract that says, ‘If you need your money before this many years, you’re paying a penalty.’ And sometimes that penalty is steep in the early years.

So the rate looks great until you realize you’ve essentially committed your money for seven years and you forgot that your roof might need replacing.

Exactly. And that’s not a flaw in annuities, that’s just the structure — you’re getting a higher declared rate in exchange for agreeing to leave the money alone. The carrier needs that stability to back the contract. But you have to go in with eyes open about your liquidity needs.

Okay so let’s talk about MYGAs specifically because I feel like that’s the product that comes up the most when people are comparing to CDs. Multi-Year Guaranteed Annuity — what’s the actual pitch there?

So a MYGA is essentially the annuity world’s version of a CD, in the sense that you put in a lump sum, you get a declared rate, and it holds for a specific number of years — three years, five years, seven years, whatever the contract term is.

And the comparison to a CD is pretty natural, right? Both are kind of ‘set it and leave it’ products.

They are, but they’re fundamentally different in a few important ways. And this is where Tennessee savers sometimes get tripped up. A CD is a bank product — it’s FDIC insured up to the standard limits. A MYGA is an insurance contract — it’s backed by the carrier’s claims-paying ability and protected by Tennessee’s state guaranty association, which has its own coverage limits.

Which is not the same thing as FDIC.

Not the same thing at all. Different mechanism, different limits. So if someone’s moving a large sum — say, three hundred thousand dollars — they need to understand that distinction before they just assume the protections are equivalent.

And then there’s the tax treatment, which is actually where annuities can look more attractive than CDs depending on your situation.

Yeah, this is a real difference. Inside a non-qualified annuity — meaning money that’s not in an IRA or four-oh-one-k — the growth is tax-deferred. You don’t owe taxes on the interest until you take it out. A CD, you’re paying taxes on that interest every year whether you touch the money or not.

So if you’re in a higher tax bracket and you’re not going to need the money for several years, the annuity structure might let more of your money keep compounding.

That’s the argument. And it’s a legitimate one. But — and here’s where I’d push back on anyone who oversimplifies this — when you do take money out of a non-qualified annuity, the gains come out first and they’re taxed as ordinary income, not at capital gains rates.

Oh, that’s the part people forget.

That’s the part people almost always forget. So the tax deferral is real and it’s valuable, but you have to think about what tax bracket you’ll be in when you start drawing. It’s not a free lunch.

Speaking of taxes — let’s talk Tennessee specifically, because the state tax picture here is actually pretty favorable for retirees compared to a lot of states. But I feel like there’s still confusion about what changed and when.

There’s a lot of confusion, yeah. Tennessee used to have what was called the Hall Income Tax, which taxed investment income — dividends and interest — at the state level. That’s gone now. It was fully phased out.

So people who’ve been in Tennessee for a long time might still be thinking about rules that don’t apply anymore.

Exactly. Tennessee has no state income tax on wages, and with the Hall Tax gone, there’s no state-level tax on interest or dividend income either. So for annuity holders, the state tax picture is genuinely simpler than it used to be.

But federal taxes still apply.

Federal taxes absolutely still apply. When you take distributions from an annuity, those gains are taxed as ordinary income at the federal level. And if you take money out before fifty-nine and a half, you’re looking at a ten percent early withdrawal penalty on top of that.

So Tennessee being tax-friendly doesn’t mean ‘tax-free.’ It means the state isn’t adding another layer on top of what you already owe federally.

That’s a really clean way to put it. The state layer is gone. The federal layer is still very much there.

And then for people who have multiple income streams in retirement — Social Security, maybe a pension, annuity distributions — it gets more complicated because you have to think about how those interact.

Right, because Social Security itself can become partially taxable at the federal level depending on your combined income. So if you’re pulling from an annuity and that pushes your income above certain thresholds, suddenly more of your Social Security is taxable too. These things don’t live in separate boxes.

Which is why the ‘I’ll just figure out the taxes later’ approach tends to backfire.

It almost always backfires. The time to think about distribution strategy is before you sign the contract, not five years later when you’re trying to figure out why your tax bill is higher than you expected.

Okay, let’s shift to something that I think gets underplanned in a really serious way — long-term care. Because the cost of care in Tennessee is not cheap, and I don’t think people have a realistic picture of what they might be facing.

It’s one of the biggest financial risks in retirement and also one of the least planned for. People will spend hours comparing annuity rates and then just kind of wave their hand at long-term care and say, ‘Oh, I’ll figure that out.’

And then they need care, and the family is scrambling.

And the family is scrambling, and the assets that were supposed to last twenty years are gone in three. So the annuity connection here is that some contracts — not all, but some — include riders that address long-term care costs. The structure varies a lot by carrier and contract.

Can you walk through how that actually works? Because I think people hear ‘long-term care rider’ and they assume it’s like having a long-term care insurance policy attached to their annuity.

It’s not quite the same thing, and that distinction matters. A traditional long-term care insurance policy is a standalone product with its own premium structure. An annuity with a long-term care or confinement rider is using the annuity’s value — the money you already put in — to fund an accelerated or enhanced benefit if you need care.

So you’re not paying a separate premium, you’re essentially pre-funding care with the annuity itself.

In a general sense, yes. The specifics vary enormously by contract — how the benefit is triggered, what qualifies, how much the benefit multiplies the contract value, whether there’s an inflation adjustment on the care benefit. You really have to read the rider language carefully.

And timing matters here too, right? Because I’ve heard you can’t just decide at seventy-eight that you want to add a long-term care rider.

That’s a really important point. These riders are typically added at the time of purchase, and your health at the time of application can affect whether you qualify. Waiting until you’re already showing health issues — or worse, already needing care — is usually too late. The window to plan is when you’re healthy and you don’t think you need it yet.

Which is the uncomfortable truth about most insurance planning.

It’s the uncomfortable truth about all of it. You buy the umbrella before it rains.

I like that. Okay — inflation. This is the one that I think people intellectually understand but don’t emotionally feel until it’s too late. You retire at sixty-five with what feels like a comfortable income, and then you’re seventy-five and everything costs more.

And a fixed income stream that covered your expenses in year one might cover eighty percent of them in year ten and sixty-five percent in year twenty. That’s not a hypothetical — that’s just math if inflation runs at even a modest historical rate.

So how do people think about this when they’re evaluating annuity contracts? Because a fixed annuity, by definition, pays a fixed amount.

There are a few approaches. Some annuity contracts have built-in cost-of-living adjustments — the income payment steps up by a set percentage each year. The trade-off is that your starting payment is lower than it would be without that feature, because the carrier is pricing in the future increases.

So you’re kind of pre-paying for the inflation protection by accepting less income upfront.

Exactly. And whether that trade-off makes sense depends on your health, your other income sources, and how long you expect to live. If you live to ninety-five, that step-up feature looks great in hindsight. If you pass away at seventy-two, you gave up income you never got to use.

Which brings us to the life expectancy conversation, which is one of those topics that sounds morbid but is actually just practical planning.

It’s completely practical. And I’d actually argue it’s one of the most underused inputs in annuity decisions. People spend a lot of time comparing rates and almost no time thinking about duration. How long do you need this income to last?

And the answer is different for everyone. Picture a couple — both sixty-five, they’ve got a hundred thousand dollars to put into an annuity. The question of ‘how long do we need this to last’ is really two questions, because one of them might live to ninety and one might live to seventy-eight.

Right, and joint-life annuity options exist precisely for that reason — the income continues as long as either person is alive. But the payout rate on a joint-life contract is lower than a single-life contract because the carrier is covering a longer potential payout period.

So a couple who both take single-life contracts might get higher individual payments, but if one of them lives to ninety-two, the survivor could be in trouble.

That’s a real scenario that plays out. And it’s not that one choice is always right — it’s that the choice has to match the actual risk profile of the household. Family health history, other assets, whether there’s a pension that covers the survivor — all of that feeds in.

I want to come back to something you said earlier about the surrender schedule, because I think there’s a related question that a lot of people have, which is: what if I need some of my money before the contract term ends? Is it all locked up?

Not necessarily all of it. Most fixed annuity contracts have a free withdrawal provision — typically ten percent of the contract value per year that you can take out without triggering a surrender charge. So you’re not completely locked out of your money.

But if you need more than that ten percent, you’re paying a penalty.

If you need more than that, yes — the surrender charge kicks in, and in the early years of a contract that can be meaningful. Seven percent, eight percent, sometimes higher in year one. It steps down over time, but it’s real money if you’re not careful about how much you commit.

Which is why the allocation question — how much of your savings should actually go into an annuity — is so important. You can’t just dump everything in and then wonder why you can’t access it.

This is probably the question I hear most often, and I’ll be honest — there’s no universal answer. But there’s a framework that makes sense. You want to think about your guaranteed income needs first. What does it cost to cover your essential expenses every month? Social Security, any pension, that’s your base.

And then the annuity fills the gap.

The annuity can fill the gap between what you need and what your other guaranteed sources provide. So if your essential expenses are four thousand a month and Social Security covers twenty-five hundred, you might look at annuitizing enough to cover that fifteen-hundred-dollar gap — and keep the rest of your savings liquid for discretionary spending, emergencies, and growth.

So you’re not trying to annuitize everything. You’re trying to annuitize the part that corresponds to needs you can’t afford to have go unmet.

That’s a really clean way to think about it. And it also means the allocation question changes depending on your other income. Someone with a solid pension and Social Security might put very little into an annuity. Someone with no pension and a modest Social Security benefit might put quite a bit more in.

What about the people who want to leave money to their kids or grandkids? Because I feel like that’s a tension — you’re putting money into an annuity for income, but does that mean it’s gone when you die?

Not necessarily, and this is where contract features really matter. A lot of annuity contracts have death benefit provisions — if you pass away before you’ve received back what you put in, or before a certain period, a beneficiary receives something. The specifics vary a lot.

But a straight life-only annuity — payments stop when you die, period.

A straight life-only annuity, yes — highest payout, no residual benefit. And some people are completely fine with that trade-off. They want maximum income while they’re alive and they have other assets earmarked for heirs. Others want a period-certain feature or a return-of-premium provision, which reduces the monthly payment but protects the estate.

Every feature you add to an annuity costs you something in terms of the payout. That’s just the reality.

That’s exactly the reality. It’s not a criticism — it’s just how insurance pricing works. You’re transferring risk to the carrier, and every additional risk you transfer costs something. The question is which risks are worth paying to transfer.

Okay, let’s talk about what actually moves rates — because I think people sometimes try to time the market on annuity rates the way they might try to time the stock market, and I’m not sure that’s a great approach.

It’s tempting, and I understand why. Annuity rates do move with the interest rate environment — specifically with longer-term bond yields, because that’s largely what carriers are investing your premium in. When rates are higher, carriers can offer higher declared rates. When rates fall, declared rates tend to follow.

So in a rising rate environment, should people wait?

Here’s the problem with waiting — you’re trying to predict where rates go next, and that’s genuinely hard. Economists get it wrong constantly. Meanwhile, you’ve got money sitting somewhere earning less than it could be, and you’re delaying the income you need. The better question is usually: does today’s rate meet my income need? If yes, that’s a pretty strong argument for acting.

Rather than holding out for a rate that might never come, or might come and then go away before you act.

Right. And there’s also carrier competition in the mix — different carriers price their products differently based on their own portfolio and business strategy. So the ‘market rate’ isn’t one number. Two carriers might offer meaningfully different rates on the same contract term, which is why shopping across carriers matters.

Which is an argument for working with someone who has access to multiple carriers rather than just walking into one company and taking whatever they offer.

Strongly agree. A licensed agent who can compare across carriers is going to give you a much more complete picture than going direct to any single company. That’s not a knock on any carrier — it’s just that no single carrier is going to tell you, ‘By the way, our competitor has a better rate for your situation right now.’

Shocking, I know. Okay, I want to circle back to something we touched on earlier, which is the difference between a fixed annuity and a MYGA, because I think people sometimes use those terms interchangeably and they’re not quite the same thing.

Yeah, this trips people up. A MYGA is a type of fixed annuity — so all MYGAs are fixed annuities, but not all fixed annuities are MYGAs. The MYGA is specifically designed around a multi-year declared rate that holds for the full term. Some other fixed annuity structures might have a first-year bonus rate that then resets, or a rate that’s declared annually.

Oh, that’s important. So you might think you’re locking in a rate and actually you’re only locking in year one.

That happens. And it’s not necessarily bad — the renewal rates might be competitive. But you need to know what you’re buying. Is this rate fixed for five years, or is this rate fixed for one year and then subject to renewal? Those are very different products.

I feel like that’s the kind of thing that’s buried in page twelve of the contract.

It’s definitely not on the brochure cover. Which is why reading the contract — or having someone read it with you — is not optional. I know that sounds tedious, but the surrender schedule, the rate guarantee period, the renewal provisions — these are the things that determine whether the product actually does what you think it’s going to do.

You know, I think the bigger theme here is that annuities are not complicated in concept — you give money to an insurance company, they give you income or growth in return — but they are complicated in execution. The details really matter.

That’s exactly right. The concept is simple. The contract is not. And Tennessee residents specifically need to make sure they’re getting advice from someone who understands the state’s regulatory environment, the guaranty association limits, the current carrier landscape in this market.

Because a generic national overview doesn’t always translate. What’s true in one state isn’t always true in Tennessee.

The tax rules are different. The guaranty association limits are specific to Tennessee. The carriers that are most active in this market vary. It’s not that the fundamentals change, but the specifics absolutely do.

Alright, let me ask you the question that I think a lot of listeners are sitting with right now, which is: where do I even start? If I’m a Tennessee retiree or near-retiree and I’ve just absorbed all of this, what’s the first move?

Honestly? Start with your income gap. Before you look at any product, figure out what your essential monthly expenses are going to be in retirement and what your guaranteed income sources — Social Security, pension if you have one — actually cover. That gap is the number that drives everything else.

Because if you don’t know the gap, you don’t know how much you need the annuity to do.

Exactly. And once you have that number, you can start having a real conversation with a licensed agent about what type of contract, what term, what features make sense. Without that number, you’re just shopping on rate, and rate alone is not a strategy.

Rate alone is not a strategy — I want to put that on a bumper sticker.

Ha. It would be the most niche bumper sticker in Tennessee. But it’s true. The rate is one input. Your income need, your timeline, your health, your tax situation, your liquidity needs, your legacy goals — all of that shapes which rate you should even be looking at.

And none of that is something you can figure out from a single article or a single conversation. It takes some work.

It takes work, but it’s not overwhelming work if you do it in pieces. Start with the income gap. Then understand the product types — fixed, MYGA, income annuity. Then look at the tax picture. Then think about long-term care. Then think about inflation. You don’t have to solve all of it in one sitting.

Which is kind of what we’ve been doing today — taking each piece seriously instead of trying to give a one-size-fits-all answer.

And the honest answer is that there isn’t a one-size-fits-all answer. The right annuity for your aunt in Knoxville is probably different from the right annuity for a couple in Memphis who have a pension, or a single retiree in Nashville who’s worried primarily about long-term care. The product has to fit the person.

And the only way to get that fit right is to talk to someone who can actually look at your specific numbers — not just read a guide, as useful as guides are.

Guides get you informed. A licensed agent gets you to a decision. Both matter, but they’re not substitutes for each other.

I think that’s actually the most important thing we’ve said today. Being informed going into that conversation makes the conversation so much more useful. You know what questions to ask. You know when something doesn’t sound right. You know what to push back on.

And you know what you don’t know, which is honestly underrated. Knowing the right questions is half the battle.

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This episode is based on Tennessee Annuity Rates Guide: Taxes, MYGAs, Long-Term Care & More.

Related reading: MYGA rates in Tennessee · Tennessee retirement taxes for annuity holders · long-term care planning with annuities in Tennessee