A Quick History Lesson
The concept of an annuity dates all the way back to ancient Rome. Roman citizens and soldiers would make a one-time payment into contracts called annua. Latin for annual payments, and in return receive a guaranteed income for life. The Roman jurist Domitius Ulpianus was one of the first annuity dealers in recorded history and is credited with creating the first life expectancy table.
In 1759 the concept arrived in America when annuity payments were offered to the widows and orphans of Presbyterian ministers in Pennsylvania.
The core idea, trading a lump sum for a guaranteed stream of income you cannot outlive, has proven useful enough to survive over two thousand years. Your CalSTRS pension operates on the exact same principle. So does Social Security. The concept is not the problem. What gets sold under that concept sometimes is.
The Psychology of Spending Down Savings
Most people spend their entire working lives being told to save. Then retirement comes and suddenly they are supposed to start spending that money down. For a lot of people that is genuinely terrifying, a psychological switch that cannot just be turned on.
People who have worked hard and saved diligently get to retirement and cannot bring themselves to touch it. They lived their whole lives around a paycheck and now they are supposed to take distributions from an account and see the balance go down? No, down is bad. It feels completely unnatural.
Academic researchers David Blanchett and Michael Finke found that retirees with guaranteed income sources spend roughly twice as much as retirees with an equal amount of non-guaranteed savings. They titled one of their papers Guaranteed Income: A License to Spend.
An annuity replicates a paycheck. It arrives on a schedule, it is a known amount, and your brain processes it the same way it processed your teaching salary for 30 years. You plan around it. You spend it. You actually enjoy your retirement.
The Bucket Strategy
We think about client portfolios in three buckets: safety, income, and growth.
The safety bucket is cash, checking, savings, money markets. Everyday money. Liquid and boring and completely predictable.
The income bucket is bonds, dividend paying stocks, real estate, and yes in some cases annuities. Social Security is an annuity. Your CalSTRS pension is an annuity. Guaranteed income you cannot outlive is not a foreign concept, it is already the foundation of your retirement.
The growth bucket is your long term money. Equities, ETFs, investments built to grow over time and outpace inflation.
Let's say you were the worst investor in the world and put all your money into the stock market right before the 2008 crash. Fast forward to today and at the time of this writing you have nearly 10x'd your money. The only reason is because you had time on your side. Well in retirement the one thing we no longer have is time.
If we have already structured your safety and income money to cover your basic needs a market crash becomes an inconvenience rather than a crisis. You do not need to touch the growth bucket. You have essentially built time back into your retirement.
We Insure Everything Except the Thing That Matters Most
Think about what you already insure. Your home. Your car. Your pets. Even your watch or your jewelry has a rider on it somewhere. We protect nearly everything we own against loss.
And yet the single largest asset most people build over a lifetime, their retirement savings, usually sits completely unprotected. If the market drops 30% the year before or the year after you retire, you absorb the entire hit. No policy pays out. No claim to file. It is simply gone, at exactly the moment you can least afford it.
This is where an annuity, used correctly, plays a different role than most people think. It is not primarily a growth vehicle. It is insurance against loss, for the one asset that never gets treated like it needs insuring. A portion of your portfolio structured this way means a bad correction becomes something you read about in the news, not something that changes your retirement.
Where Annuities Actually Make Sense
A deferred annuity allows you to put money in now and let it grow for a set period before turning on income. In some cases deferring for ten years can produce a guaranteed payout rate of 8 to 10 percent annually. To put that in context of the often touted 4 percent safe withdrawal rate, that is roughly twice the amount, and it comes with certainty rather than hope.
Roughly double the income rate, and with certainty rather than a withdrawal guideline that depends on market performance holding up over 30 years.
For a teacher who already has a CalSTRS pension covering baseline needs a well structured annuity in the income bucket can mean the difference between a retirement that is comfortable and one that has real flexibility and breathing room. This is closely tied to sequence of return risk — the earliest years of retirement are the ones where a bad market stretch does the most damage.
Where Annuities Go Wrong
Many annuities lock your money up for years with steep surrender penalties if you need to access it early. Some carry annual fees that quietly eat away at your returns year after year. And because annuities have historically paid high commissions there has never been a shortage of people motivated to sell you one regardless of whether it is right for your situation.
This is especially common inside 403(b) plans. See our full breakdown of 403(b) annuities and fees →
We avoid those products entirely. We only work with A rated carriers. We only use annuities to solve a specific problem in a client's plan. And we never put more money into an annuity than makes sense given everything else in the picture.
We are not anti-annuity. We are anti bad annuity recommendations. If you have an existing annuity and want an honest second opinion we are happy to take a look.