What a lifetime annuity really buys — and what it costs.

The pitch arrives shortly after the buyout does: convert part of your lump sum into a lifetime annuity, and never worry about markets again. The pitch isn't false — guaranteed income really does protect against the specific way retirements fail. But the price is real, it's paid in a currency the brochure doesn't emphasize, and one common modeling mistake makes annuities look far better than they are.

The modeling mistake: phantom inflation protection

Most annuities pay nominal dollars — the same check every month, forever. At 2.5% inflation, a fixed payment loses roughly half its purchasing power over 28 years. If you model annuity income as if it keeps pace with inflation (which is exactly what happens when you type it into a generic "other income" box in most planning tools), you are silently crediting the product with a cost-of-living rider you didn't buy. That single error can turn an annuity that costs you estate value into one that appears to create wealth from nothing. Any honest comparison must decay the payments in real terms — or use a genuinely inflation-adjusted quote, which will pay dramatically less per premium dollar.

What the honest trade looks like

Model it correctly and a consistent picture emerges. Consider an illustrative couple in their mid-50s with a multi-million-dollar portfolio, spending in the mid-$100,000s, weighing a roughly $1 million premium for about $55,000 a year of after-tax lifetime income. Simulated across thousands of market futures, the annuity version of the plan raises the success rate — say from around 98% to nearly 100% — while lowering the median ending balance by roughly the premium amount. The 10th-percentile outcome (the bad-markets floor) rises; the median and upside fall.

Neither side of that trade is irrational. If the uninsured plan already succeeds in 59 of 60 simulated futures, the annuity is a comfort purchase — which is a legitimate thing to purchase, as anyone who has lived through a 40% drawdown while retired can attest. Just buy it with clear eyes about what it costs.

Cheaper sellers of the same safety

Before signing, price the alternatives that buy similar success-rate points for less. A spending guardrail — trimming discretionary spending by a quarter in the year after a major market decline — attacks sequence-of-returns risk directly and costs nothing. Delaying Social Security to 70 purchases inflation-adjusted, government-backed lifetime income at actuarially fair rates, which no commercial annuity offers. And annuitization isn't binary: half the premium buys roughly half the floor and costs roughly half the estate value, which is often the right dose for people who want a floor rather than the maximum floor.

Two details that change the math

First, taxes: annuity income is ordinary income, though if purchased with taxable (non-qualified) money, part of each payment is an untaxed return of your own principal for many years under the exclusion ratio. Compare after-tax income to after-tax income, or the analysis is meaningless. Second, the estate: annuity principal leaves your balance sheet on day one. If leaving assets to children or charity matters to you, that belongs in the ledger explicitly — it is usually the single largest line item in the true cost of the product.