Annuity vs. DIY Withdrawal: Which Gives You More Retirement Income?
Insurance companies want you to buy annuities. Financial advisors want you to invest. Who is right? The answer depends on one thing: how long you live.
The annuity industry manages over $3 trillion in assets and spends heavily to convince retirees that guaranteed income is worth the cost. Meanwhile, fee-only financial advisors argue that a diversified portfolio with systematic withdrawals produces more income and leaves a legacy. Both sides have legitimate points, and the right answer depends on your specific situation — not on who is selling what.
The Fair Comparison
Take $500,000 at age 65. Option A: buy a fixed annuity paying approximately $2,900 per month for life. Option B: invest in a 60/40 stock-bond portfolio and withdraw 4% annually ($1,667/month), increasing with inflation each year. The annuity pays 74% more income immediately. But the portfolio preserves the $500,000 principal (growing over time), while the annuity balance goes to the insurance company when you die.
If you live to 85: the annuity paid $696,000 total. The portfolio, assuming 6% average returns with 4% withdrawals, paid $480,000 and still has approximately $650,000 remaining. Total value from the portfolio: $1,130,000. The portfolio wins by $434,000 — but only if you actually earned 6% and did not panic-sell during market downturns.
If you live to 95: the annuity paid $1,044,000. The portfolio paid $720,000 but the balance may be depleted depending on sequence of returns risk. The annuity wins on income certainty, though the portfolio likely still has value if markets performed near historical averages.
The Real Risk: Sequence of Returns
The 4% rule works on average, but "average" means some retirees run out of money while others die with millions. A market crash in years 1-5 of retirement — when you are withdrawing from a shrinking balance — can permanently impair a portfolio in ways that a later recovery cannot fully repair. This sequence-of-returns risk is the strongest argument for annuities: they eliminate the possibility of running out regardless of what markets do. You cannot put a dollar value on the sleep-at-night factor for people who would otherwise spend every market correction terrified.
The Hybrid Approach Most Advisors Recommend
Annuitize enough to cover essential expenses (housing, food, healthcare, utilities) — perhaps $1,500-2,000 per month combined with Social Security. Invest the remainder for growth, discretionary spending, and legacy. This way, your basic needs are covered regardless of market conditions, and your portfolio can be invested more aggressively since you are not depending on it for survival. Model different scenarios with our annuity calculator and compare to portfolio withdrawals using the FIRE calculator.