How Annuities Can Give You Permission to Spend
Running out of money is one of the biggest fears we face. Walking in any big city in the United States you see scores of people living on the street, reminding you that one financial misstep can land you there. The fear does not go away entirely even as your net worth grows. I had a boss who had amassed a decent nest egg worth over ten million and whenever the subject of money would come up, he would mention his concern about losing it all.
And this is not just anecdotal. Allianz surveyed Americans, which showed 64% feared running out of money more than they feared death. This included people who had good saving.
The anxiety around running out of money grows even more in retirement as you lose your ability to generate income through work. Money lost feels like something you cannot easily replenish. Economists followed households in their sixties, and found that in a typical year less than 20% touched their retirement accounts. Spending keeps falling every year after 65, even among the wealthiest households. We have been taught to save for rainy days, for retirement, all our adult lives. No one teaches you how to spend your money in retirement.
The anxiety of people to draw from their retirement accounts when they get older is understandable. The value of your retirement account is something you looked at all your life, and the value had an upward trajectory. In retirement, every withdrawal of principal shrinks your account. The anxiety compounds. You might forgo a trip you always wanted to take because you don't want to see your balance shrinking. Spending money feels like sawing off a branch you are sitting on.
David Blanchett and Michael Finke, who researched the subject, found a way to reframe the problem. Retirees who held their wealth as investments behaved very differently compared with people who held the same wealth as guaranteed lifetime income. People who had guaranteed income in the form of a pension, Social Security, or annuities spent about twice as much per dollar of their wealth. Removing the fear of outliving your money, in their reading, is the key that unblocked the anxiety of spending money, enabling this group to enjoy the benefits of their wealth in retirement.
A paycheck that never stops gives you permission to spend. A nest egg balance is a score you want to protect.
You can feel this in your own life. When you get your paycheck, you won't agonize about spending the money. You know another check lands next month and that removes the fear of running out of money. Even if you waste money on a frivolous purchase or make a mistake, you can fix it next month. We could see this in our parents' or grandparents' generations with fixed pensions. They felt richer and more comfortable spending money with smaller savings.
There is a financial product that is called an income annuity that can convert your savings into a monthly check for as long as you live. It eliminates the risk of outliving your money. Assuming this is not the money you are planning to leave behind for your children, converting a portion of your savings to an annuity in retirement could be an economically smart move. But very few people do this, which has puzzled economists. They call it the annuity puzzle.
The puzzle could partly be explained by how the investment community has framed an annuity as an investment. Jeffrey Brown showed that when a life annuity is described as monthly spending for life, 72% preferred it, while when the same product was described as an investment, 21% took it.
The modern idea of an annuity goes back to the 1740s, when two Edinburgh ministers, Alexander Webster and Robert Wallace, saw how clergy widows fell into poverty. They decided to do something about it. Ministers contributed to a pool of money and every widow drew an annuity until she died. They looked at the death records and calculated how much they needed to contribute to the fund. 21 years later, their projection was only off by one pound.
Like a good many good ideas in finance, the industry started creating complex annuity products to increase its profit. By 1905, two-thirds of American life insurance policies were written on tontine schemes, products built on the same survivor-pool idea. New York shut them down the following year. The modern versions are back and most of them are complex products, and purchasing most is not a smart financial move. People selling the complex kind can make 7 percent or more in commission on your money, up to 12 on the indexed ones. The plain version pays a fraction of that. In 2007, securities regulators audited 110 firms hosting free retirement dinners. All 110 were designed to sell complex financial products.
Complex annuity products, the ones with fancy terms pitched to you over a free steak dinner, are almost always a bad idea. If a financial product needs a dinner to explain it, it is a telltale sign your portfolio will be paying for that dinner.
The annuity that can produce income and address your anxiety is the simple boring one that does one thing.
Best annuity in America is one most people already own, and that is Social Security. Unfortunately, insurers no longer sell a true inflation-adjusted lifetime annuity. What is available and you can buy today are those that will increase by a fixed percentage every year and are not tracking prices.
I checked the prices as of August 2026 to give an idea of what an immediate annuity gets you if you hand an insurer a lump sum today. Someone who is 65 years old on average receives between about $625 and $675 a month if they purchase a $100K annuity. Women typically outlive men and that is why the annuity pays out a little more to men. You can buy a joint version as a couple that will give you a paycheck as long as one partner is alive. Those tend to pay a little less compared to individual policies.
For those who worry about inflation and purchasing power as they get older, you can buy policies where your paycheck increases by 2% every year. For the same 65-year-old, $100K in the 2% version pays in the mid-$500s a month. A $500K policy in the plain level version could produce a monthly paycheck over $3,000 for the rest of your life. A check that shows up every month and you never outlive your money. This could give you the permission to spend that you were always looking for.
The numbers provided here are estimates I gathered from publicly available estimators. If you are serious about annuities, you have to do your own due diligence. And you should never convert your entire savings to an annuity. Convert enough to cover the essential expenses Social Security does not already cover. That takes away the reason for the anxiety of running out of money in retirement.
There are several scenarios in which an annuity might not be right for you. If your Social Security check can cover your essential expenses, you might not need more guaranteed income. If your health is poor, or you do not have enough savings to put aside to cover money emergencies, you could be better off creating a fixed income portfolio. 30-year treasuries pay over 5% as of August 2026. A $100K invested in a 30-year treasury produces about $440 a month. You can sell it anytime, but at the market price of the day, which can be less than you paid.
But if you feel you have anxiety spending money you worked so hard to save in retirement, the fix might not be more money. The transition from saving to spending is mentally difficult. An annuity could remove the mental block and convert money back to a paycheck, giving you the permission to spend.
Sources
Allianz Life 2025 Annual Retirement Study: 64 percent of Americans worry more about running out of money than about death. https://www.allianzlife.com/about/newsroom/2025-press-releases/americans-are-more-worried-about-running-out-of-money-than-death
Poterba, Venti and Wise, 2011: fewer than one in five households in their sixties with retirement accounts made any withdrawal in a typical year. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1737223
Hurd and Rohwedder, RAND, 2022: real spending after 65 declines around 2 percent a year, across wealth levels including the highest quartile. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4302042
Blanchett and Finke, Guaranteed Income: A License to Spend, 2021: retirees spend about twice as much per dollar of wealth held as guaranteed lifetime income versus the same wealth in investments. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3875802
Brown, Kling, Mullainathan and Wrobel, 2008: 72 percent preferred a life annuity described as monthly spending for life; 21 percent when the identical product was described as an investment. https://www.nber.org/papers/w13748
Yaari, 1965, Review of Economic Studies: converting savings to lifetime income is the economically sound move for a retiree without a strong bequest motive. https://academic.oup.com/restud/article-abstract/32/2/137/1555438
Benartzi, Previtero and Thaler, 2011, Journal of Economic Perspectives: the annuitization puzzle, the term for why so few retirees annuitize. https://www.aeaweb.org/articles?id=10.1257/jep.25.4.143
Dow, Early actuarial work in eighteenth-century Scotland, Transactions of the Faculty of Actuaries, 1971: the Scottish Ministers' Widows Fund, its death-record arithmetic, and the accuracy of its projections. https://www.cambridge.org/core/journals/transactions-of-the-faculty-of-actuaries/article/abs/early-actuarial-work-in-eighteenthcentury-scotland/DAADA20924AEC92199898B2BF6E29332
Ransom and Sutch, Tontine Insurance and the Armstrong Investigation, Journal of Economic History, 1987: roughly two-thirds of American life insurance in force rode tontine-style policies by 1905; New York's reforms followed in 1906. https://www.jstor.org/stable/2121942
US Department of Labor, Retirement Security Rule analysis, 2024: annuity commissions can reach seven percent or more. https://www.dol.gov/sites/dolgov/files/ebsa/temporary-postings/retirement-security-rule-definition-of-an-investment-advice-fiduciary.pdf
US Department of Labor, fiduciary rule analysis, 2016: fixed indexed annuity commissions averaging about 6 percent and ranging to 12. https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/regulating-advice-markets-definition-of-fiduciary-2016.pdf
SEC, FINRA and NASAA free lunch seminar examination, 2007: all 110 examined firms' free retirement seminars were sales presentations. https://www.sec.gov/news/press/2007/2007-179.htm
Shoven and Slavov, Does It Pay to Delay Social Security?, NBER working paper 18210: delaying Social Security is the best-priced inflation-linked lifetime income available. https://www.nber.org/papers/w18210
ImmediateAnnuities.com, inflation protection strategies: no known insurer still offers a CPI-adjusted annuity. https://www.immediateannuities.com/immediate-annuities/inflation-protection-strategies.html
Fidelity Guaranteed Income Estimator, quoted August 17, 2026: the pricing figures in this essay and its chart ($100,000, single life, 10 years guaranteed, California). https://digital.fidelity.com/prgw/digital/gie/
Federal Reserve Economic Data, 30-year Treasury constant maturity: the yield over 5 percent cited for August 2026. https://fred.stlouisfed.org/series/DGS30
