Annuities: What Certainty Actually Costs

By Alamzeb Khan · Updated August 2026 · 6 min read · Annuity Payout Calculator →

The trade, stated honestly

You hand over a lump sum. You get an income that cannot run out, however long you live.

That is genuinely valuable, and it is the one thing you cannot manufacture for yourself. No amount of clever investing removes the risk of living longer than your money.

But it has a price, and the price is rarely put plainly. Here it is.

Price one: how long before it is even your own money back

$500,000 at a 6% payout rate gives $30,000 a year, or $2,500 a month.

Divide $500,000 by $30,000 and you get 16.7 years.

For the first sixteen and a half years, the insurer is handing you back the money you gave them. Only after that are they genuinely paying out.

That is not a criticism - it is how the product works, and someone who lives to ninety comes out well ahead. But it means the decision turns on your health and family history far more than on the payout rate.

Price two: inflation, which nobody mentions

A fixed annuity pays the same cheque for life. The number never changes. What it buys does, every single year.

At 3%, more than half the buying power is gone. At 5%, 70% of it.

Someone retiring at 65 could easily be drawing this at 90. The cheque that comfortably covered the bills at the start may not cover half of them by the end - and the number on it will look exactly the same, which is what makes it so easy to miss.

This is the strongest argument for not annuitising everything.

What keeping the money yourself looks like

Keep the $500,000 and draw the same $30,000 a year, earning 5%:

It lasts about 19.9 years. Then it is gone.

So on those numbers, keeping the money beats the annuity for nearly twenty years and then loses badly. If you live to 85 the annuity was the better call. If you die at 78 it was not.

That comparison is the whole decision, and nobody can settle it in advance. What the annuity removes is the possibility of the money finishing before you do.

The survivor question

If you have a spouse, this is not only your decision.

A survivor option keeps paying a share - commonly half - after you die. It always lowers the income while you are alive, because the insurer expects to pay for longer.

Taking the bigger cheque by skipping the survivor option is a decision about someone else’s money, made by you, that they will live with after you are gone. It deserves a conversation rather than a box tick.

Who this genuinely suits

The honest answer depends on which fear is yours.

If you are afraid of running out of money before you die, an annuity removes that fear completely, and nothing else does. That is worth real money.

If you are afraid of dying early and handing a large sum to an insurer, it makes that worse.

Both fears are reasonable. Neither is wrong. The mistake is buying an annuity for the wrong one.

The version most people should consider

Rarely all or nothing.

Work out the bills that must be paid whatever happens - housing, food, utilities, insurance. Annuitise just enough to cover that floor, alongside any Social Security or pension. Keep the rest invested and reachable.

That buys the thing worth having - a base income that cannot fail - without giving up control of everything or exposing your whole retirement to inflation.

Before signing

1. Work out the break-even in years. Compare it honestly against your own health.
2. Look at the buying power at the end, not just the starting cheque.
3. Decide the survivor option with your spouse, not alone.
4. Ask whether an inflation-linked version exists and what it costs.
5. Consider annuitising part rather than all.

Run your own figures in the annuity payout calculator - it leads with break-even and shows what inflation does to a fixed cheque over the years you would draw it.

Common questions about annuity payout