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.