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.
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