Are Annuities Worth It? What $100,000 Pays at 65, Tested

An annuity is a deal with an insurance company. You hand over a lump sum, and it pays you an income for the rest of your life, however long that turns out to be.

That's the one thing a pile of savings can't promise. Annuities also pay a lot more than they did a few years ago, because interest rates are higher. So are they worth it? We pulled today's quotes, the US life tables and almost a century of inflation, and checked.

What is an annuity?

There are a few kinds, and the name covers very different products. Here are the main ones.

• Immediate annuity (also called an income annuity, or a SPIA in the US). You pay once, and the income starts within a month or so. It lasts for life. This is the one this article tests.
• Deferred income annuity. The same idea, but the income starts years later, say at 80. It costs less because many buyers won't live to collect.
• Fixed annuity. Works like a savings bond from an insurer: a set interest rate for a set number of years.
• Variable and indexed annuities. Your money is invested, or tied to a stock index, with insurance features on top. These are the complicated, high-fee end. More on them below.

In the UK, the word usually means a pension annuity: you use some or all of your pension pot to buy a lifetime income. The idea is the same.

What an annuity pays at 65

Here's what $100,000 buys at 65 in the US. These are the best, average and lowest quotes from eight large insurers, rated A or better, from a broker's table dated 1 October 2026. Each one pays for life, and pays for at least five years even if you die sooner.

Women get less than men because they live longer on average, so the insurer expects to pay them for longer. A couple gets less again, because the payments run until both have died.

Notice the gap between insurers. For a man, the best quote pays 21% more than the lowest, for exactly the same promise. If you buy one, getting several quotes is the easiest money you'll ever make.

Waiting raises the income, because you're older when it starts. At 70, the best of the same eight insurers paid a man $767 a month, against $693 at 65.

UK rates are similar. UK insurers can't charge men and women differently, so there's one rate for both.

Every annuity on that chart pays more in year one than the 4% rule. That's the whole appeal. The rest of this article is about what you give up for it.

Why annuities pay more than they used to

An insurer invests your premium, mostly in bonds, and pays you out of the interest plus your own money back. So when bond yields rise, annuity payouts rise with them.

We can show how much that matters. Using the US life table, we worked out the fair monthly payment for a 65-year-old man at different interest rates. Fair means the insurer keeps nothing for costs or profit.

At 2020's rates, the fair income was $526 a month. At today's it's $773, or 47% more for the same money. Anyone who bought in 2021 locked in the lower rate for life. That's the timing risk in an annuity: you only get one price.

How long do you have to live to get your money back?

Start with the simplest test. How long until the payments add up to what you paid?

So most buyers do get their money back, before inflation. A 65-year-old US man has a 71% chance of reaching 78.

The other side is the long tail, and that's what an annuity is really for. 24% of 65-year-old men and 35% of women reach 90. For a couple, the chance that one of them reaches 90 is 51%. Savings have to be stretched to cover that chance. An annuity just keeps paying.

Half of 65-year-old men live past 83, and half of women past 86. Planning to run out of money at the average age means a coin flip on running out while you're still alive.

Is the price fair?

Economists measure this with something called money's worth. You add up every payment you can expect, weighted by the chance you're alive to collect it. Then you discount it back to today at a safe interest rate. Divide by the premium, and you get how many cents of value each dollar buys.

We ran it for a 65-year-old US man, using the life table and today's 5.65% 20-year Treasury yield. The average quote is worth 84 cents per dollar. The best quote is worth 90 cents. For a woman, the average is 86 cents.

That understates it for most buyers. The life table covers everyone, including people in poor health, and annuity buyers live longer than that. The classic study of this, by Brown, Mitchell and Poterba, found 80 cents to 87 cents per dollar for a random person, but 95 cents to 97 cents for a typical buyer.

So for a healthy person who shops around, the insurer's cut is small, a few cents in the dollar. For someone in poor health, a standard annuity is a bad deal. In the UK, smokers and people with health problems can get an enhanced annuity that pays more: a 65-year-old smoker in Hargreaves Lansdown's table got £8,715 a year instead of £8,172.

What inflation does to an annuity

Most annuities pay the same number of dollars every year. That's called a level annuity. It feels safe, but prices rise, so each payment buys a bit less than the last.

To see how much, we took today's average payout for a man, 7.8%, and ran it through every 30-year stretch of US inflation since 1928. That's 69 retirements, from 1928 to 1996.

• After 20 years, the typical payment bought 52% of what it did in year one.
• After 30 years, it bought 39%.
• The worst start was 1966. The 1970s inflation left that retiree's payment worth 21% of its first-year value by year 30.

Now compare it with the 4% rule, which takes 4% in year one and then raises the amount with inflation. The annuity starts far ahead. In 63 of the 69 retirements, inflation dragged it below the 4% rule's income within 30 years. The typical crossing came in year 20. The earliest was year 9, for someone who retired in 1973.

It never crossed for the four retirements starting 1928-31, when prices fell in the Great Depression, or for 1991 and 1992, which had mild inflation.

Year 20 is about age 84 for someone who buys at 65. Many buyers won't live that long, and they come out ahead. The ones who live into their 90s are the ones inflation hurts most, which is awkward, because they're the reason you'd buy an annuity at all.

Can you buy one that rises with inflation?

In the UK, yes. An RPI-linked annuity rises with prices every year. At 65 it started at £5,564 a year against £8,138 for a level one with the same guarantee, or 32% less. One that rises a fixed 3% a year started at £6,094.

If prices rise 3% a year, the RPI-linked income overtakes the level one in year 14, at about 78. It takes until about 90 for its total payments to catch up. So you're betting on a long life twice over.

In the US, most income annuities are level. If you want one that rises, ask for a yearly increase. Expect a lower starting income in return, just as the UK table shows.

Annuity vs the 4% rule

Our 4% rule article ran the rule through the same 69 US retirements, with 60% in stocks and 40% in bonds. Here's how the two compare on $100,000.

If you live 30 years, the annuity usually paid more in total, even after inflation. It did in 59 of 69 retirements. Its big early payments more than made up for the shrinking later ones.

But the 4% rule usually didn't spend the money. In 43 of 69 retirements, the pot after 30 years was bigger than at the start, after inflation. The typical one held 1.6 times the starting amount. With an annuity, that money went to the insurer.

So the trade is simple. An annuity buys more income and the certainty that it never stops. The 4% rule keeps control of the money, protects you from inflation and usually leaves something behind, but it can run out.

You don't have to choose one

Many people split it. Say you have $500,000 at 65. The 4% rule alone gives $20,000 in year one.

Put half into an annuity at the average rate for a man, and it pays $19,470 a year for life. Take 4% from the other half, and that's $10,000. Together: $29,470 in year one, and $250,000 still invested, still yours and still able to grow with inflation.

A common way to size it: add up the bills you can't skip, like housing, food and energy. Take away any state or government pension you'll get. An annuity can cover the gap, and the rest of your savings handles everything else.

The costs and risks to check

• It's usually for good. Once an immediate annuity starts, you can't cash it in. Keep enough savings outside it for emergencies.
• Fees on variable annuities. The SEC says the base fee is often around 1.25% a year, plus admin fees (typically about 0.15% a year), the funds' own fees and extra charges for any add-ons. Take money out early and you may pay a surrender charge. These costs add up fast, so read the prospectus.
• The insurer could fail. In the US, each state has a guaranty association that steps in. Most states cover at least $250,000 of annuity value per person per insurer, but the limit depends on where you live. In the UK, the FSCS protects 100% of annuity claims if the insurer fails.
• Your rate is fixed on the day you buy. If rates rise later, you don't benefit. Some people buy in stages over a few years to spread that risk.
• Tax rules vary by country. Annuity income is usually taxed in some way. Check how yours treats it before you buy.

So, are annuities worth it?

A plain lifetime annuity is worth it if you're healthy, worried about outliving your money, and don't need to leave this part of it to anyone. It pays more than your savings safely can, and it can't run out.

It's a poor fit if you're in bad health (unless you can get an enhanced rate), if you'll need the money back, or if leaving an inheritance matters more to you than income. And complicated products with high yearly fees are a different thing entirely. Most of the case for annuities is about the simple kind.

For many people the honest answer is "some, not all": an annuity for the bills that must be paid, and invested savings for everything else.

If you want to work out how much risk you can live with in retirement, Stage 3 of the free course covers risk tolerance and time horizons.

What this test can't tell you

• We used today's payout rate for every past year. Real annuity rates moved with interest rates, so a 1928 buyer would have been quoted something different. The test shows what inflation does to a level payment, not what past buyers actually got.
• The life table is for the whole US population. Annuity buyers live longer on average, so their chance of getting the money back is higher than shown, and the money's-worth figures are on the low side.
• The US quotes come from one broker's table, which it says is repriced from its own recent quote runs rather than live quotes. Get real quotes before you decide.
• The money's-worth test uses one interest rate (the 20-year Treasury yield) for every year ahead. Using the full yield curve would move it a little.
• Inflation is US inflation. Your own will differ, especially outside the US.