Episode 55: Does an Income Annuity Just Give Your Money Back?

A common question about income annuities is, “Isn’t the annuity company just giving me my money back?” This objection stems from the idea that you’re exchanging a lump sum for smaller payments, so it can feel like you’re just getting what you’ve already paid for.

However, this perspective misses the bigger picture. An income annuity isn’t just about getting your money back—it’s about protecting your income and ensuring you never run out of money, no matter how long you live.

Understanding the Objection

To reframe this concern, consider a simple but powerful quote: “I’m less concerned about the return on my money than I am with the return of my money.” This idea flips the script on how we think about financial security in retirement.

During our working years, we focus on accumulating as much as possible through investments and interest. But in retirement, the game changes. It’s no longer about growing your money; it’s about ensuring that it lasts.

Why Retirement Is Different: The Shift from Growth to Security

During your working years, you can ride the ups and downs of the market because you have time to recover. But in retirement, your paycheck stops, and you enter the “decumulation” phase. This is when withdrawing money from your portfolio during market losses, which could lead to running out of money.

This risk, called the sequence of returns risk, is one of the biggest challenges in retirement. Here’s a quick look at how this works:

Scenario	Impact
Withdrawing in a down market	Reduces your portfolio faster and risks depletion.
Withdrawing in an up-market	Less impact, but still requires careful planning.

Income annuities protect you from this risk by providing guaranteed income for life, regardless of market conditions.

How Annuities Protect You from Interest Rate Risk

Another risk in retirement is interest rate risk or reinvestment risk. This happens when your safe money—such as savings in bonds, CDs, or dividend-paying stocks—reaches the end of its term, and you can’t find similar rates.

For example, if interest rates drop close to 0% again, your savings may not generate the income you need. Income annuities solve this problem because they lock in guaranteed rates that aren’t dependent on the market.

Longevity Risk: Planning for a Long Life

Longevity risk refers to the chance that you might outlive your savings. Think of it this way: when we’re younger, we buy life insurance to protect our families if we pass away early. Income annuities act like insurance for your later years, ensuring you and your family are financially secure if you live longer than expected.

Here’s what makes annuities different:

• • They are not investments, so they don’t rely on market performance.

• • They base payments on risk pooling, mortality credits, and the law of large numbers, spreading risk across all participants.

Why Withdrawal Rates Matter More Than You Think

Financial advisors often recommend a safe withdrawal rate to prevent you from depleting your portfolio. For a 65-year-old retiree, this rate is around 3.5%. That means for every $100,000 saved, you can safely withdraw $3,500 per year.

With an income annuity, payout rates are much higher. For example:

Savings	Safe Withdrawal (Portfolio)	Income Annuity Payout
$100,000	$3,500/year (3.5%)	$7,100/year (7.1%)
$500,000	$17,500/year	$35,500/year

This difference allows you to enjoy more income while ensuring your money lasts.

The Guaranteed Advantage: How Annuities Outperform Portfolios

Annuities stand apart because their payouts are guaranteed. Managed portfolios, on the other hand, depend on market performance and come with fees. To match an annuity’s payout, a portfolio might need to earn over 7.5% annually, without losses. That’s nearly impossible to achieve consistently.

Here’s why:

• • Portfolios lack contractual guarantees.

• • Market downturns can severely impact withdrawals.

• • Fees and volatility reduce overall returns.

What About Market-Based Portfolios?

Some argue that market investments can generate higher returns. While that’s possible, it’s not guaranteed. An annuity, however, provides income you can count on. If your goal is a steady income, the annuity ensures your money will last as long as you do, no matter what happens in the market.

Why “Giving Your Money Back” Is Exactly the Point

At its core, an income annuity ensures that you receive consistent payments that provide peace of mind. The objection that the annuity company “is just giving my money back” misses the point. What matters is:

• • You never run out of money.

• • You can spend more confidently, knowing your income is secure.

• • You free up additional savings to pursue market growth opportunities.

Annuities vs. Portfolios: Best and Worst Case Scenarios

Here’s how the two options compare:

Scenario	Portfolio	Income Annuity
Best Case	The market grows, but funds remain untouched.	Guaranteed income for life.
Worst Case	Funds run out; reliant on Social Security.	Payments continue, regardless of market.

Most retirees want to spend their savings, not leave behind unspent money. Annuities make that possible by delivering higher, predictable income.

Conclusion: The Real Value of Income Annuities

The purpose of an income annuity is to secure the return of your money, not just the return on it. This ensures you can enjoy retirement without worrying about running out of funds. If you’d like to explore how an annuity could provide you with more spendable income, make sure to use my calendar to schedule a time for us to speak.

An income annuity might just be the key to financial peace of mind in retirement.

Podcast Episode 55: Does an Income Annuity Just Give Your Money Back?

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