In the personal finance internet, “annuity” is a slur. The FIRE community treats them as overpriced products sold by commission-hungry agents, and to be fair, variable and indexed annuities often deserve that reputation. But the broad rejection sweeps in something else: the single-premium immediate annuity, or SPIA, and its cousin, the deferred income annuity. On those, four decades of retirement research keep arriving at the same uncomfortable answer.
For most retirees, partial annuitization beats a 100% portfolio strategy on the metric that actually matters: not running out of money.
The 4% rule was never a guarantee, only an estimate
The famous 4% safe withdrawal rate comes from historical backtests. It worked in most 30-year windows in U.S. history, which is a useful but limited claim. It assumes your retirement looks like the average historical retirement, that you are emotionally capable of holding 60% equities through a 50% drawdown at age 72, and that you do not live to 100. None of those are reliable. Sequence-of-returns risk is the technical name for what destroys early retirees: a bad first decade of returns can blow up an otherwise sound plan even if average returns recover later. An annuity laundered through an insurance company’s pooled longevity risk does not have a sequence problem. Your check arrives whether the market is up or down, every month, until you die. That is structurally different from a portfolio.
Longevity risk is uninsurable any other way
You cannot self-insure against living too long. By definition, the scenarios where you most need money are the ones where you have already spent the most, are too old to return to work, and have the least cognitive capacity to manage a portfolio. A SPIA from a highly rated insurer pools that risk across thousands of people. The ones who die early subsidize the ones who live long. This sounds grim until you realize the alternative is hoarding capital you may never spend out of fear you will. Academic work by Milevsky, Pfau, Blanchett, and others consistently finds that allocating 25 to 50% of retirement assets to lifetime income improves outcomes across nearly every metric: success rate, average consumption, bequest variance. It is one of the few free lunches in finance.
The real objection is psychological, not financial
The FIRE objection is rarely mathematical. It is about control and legacy. People do not want to hand a lump sum to an insurance company, and they want flexibility to leave money to heirs. Both are real concerns. But control over a portfolio in your 80s is partly an illusion; cognitive decline catches almost everyone. And bequest motives are easier to satisfy with term life or a small dedicated portfolio than by exposing your entire retirement income to market risk. The product does not need to be 100% of the plan. The argument is that it should be more than 0%, which is where most FIRE advocates leave it.
Bottom line
Skip the variable annuity with a 200-page prospectus. But a plain SPIA covering your basic expenses is not predatory. It is the closest thing to a private pension you can still buy, and most retirees should consider one.
Leave a Reply