Can Annuities Ever Make Sense for FIRE Investors?

The goal of retirement planning should not be to maximise the portfolio at the end of your retirement, but to spend confidently in the years when you're still young and most capable of enjoying it. Photo by Nathan Dumlao on Unsplash.

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Quick answer:

For most FIRE investors retiring in their 40s or early 50s, annuities are not the right tool — inflation erosion, low payout efficiency at young ages, and permanent illiquidity all work against you. The narrow exception is a small Deferred Income Annuity (DIA) purchased in your 60s with payments beginning at 80 or 85—relatively cheap longevity insurance that removes the fear driving systematic under-spending in retirement, without locking up a large portion of the portfolio.

What you'll get from this article:

✔ An easy to understand explanation of the annuity types worth considering for FIRE
✔ Why the FIRE community is largely right to be skeptical on the downsides of annuities
✔ The narrow circumstances where annuities genuinely change the maths
✔ What the research says—including Wade Pfau—and its limits for early retirees
✔ The Die With Zero connection: annuities as a spending enabler
✔ A clear decision framework: who should consider, who should skip

TL;DR — Can Annuities Make Sense for FIRE Investors? 🏦📋

🚫 For most FIRE investors retiring early: annuities are not the right tool at retirement
📉 Inflation destroys fixed income—$2,000/month loses 70% of real value over 40 years
💸 SPIA payout at 45 is just 3-4%—barely better than a SWR, with no liquidity or upside
🏦 Most annuities carry 3-7% upfront commission—always go fee-only if you proceed
✅ The exception: a small DIA in your 60s, payments starting in 80s—cheap longevity insurance
🧠 A DIA removes the fear that causes under-spending across decades of healthy retirement
📊 Pfau: stocks + annuities beat stocks + bonds—but mainly for 65+ retirees
⚖️ Sweet spot for annuities: solid but not enormous portfolio in 60s, main worry is outliving it
👴 Annuity payments just arrive—no active management needed as cognitive decline becomes a risk

Should FIRE Investors Consider Annuities?

Annuities have a bad reputation in the FIRE (Financial Independence, Retire Early) community—and mostly for good reason. Annuity products tend to be expensive, complex, and sold by people who have a direct financial interest in the sale. Most top ranking articles discussing annuities in Google are published by either annuity companies, brokers, or financial advisors who may earn a commission from the sale.

Finding a balanced view on this topic is tricky, and is a reason why the FIRE crowd’s instinctive skepticism is understandable. Personally, annuities weren't something I'd seriously considered before researching this article—I’m still seven years into the accumulation phase of the FI journey. But given my family’s history of longevity and the fact that I actively try to live in a way that extends healthspan, I'm more likely to benefit from being on the right side of the annuities’ mortality credits—more on this later.

This article explains the issues surrounding annuities, but also examines the circumstances under which they could add genuine value.

An annuity is a contract: you transfer a lump sum, the insurer commits to lifetime income. The complexity—and the pitfalls—come from what's built on top of that simple idea. Photo by Amina Atar on Unsplash.

What Annuities Actually Are — and the Only Types Worth Discussing

At its most basic, an annuity is a contract between you and an insurance company where you hand over a lump sum of money, and in return the insurer commits to paying you a regular income for a defined period—usually for the rest of your life. In principle the concept is simple; the complexity comes from dozens of variations the industry has built on top of this simple idea, most of which exists to generate fees and commissions rather than to serve the buyer’s interest.

The annuity landscape is varied and mostly irrelevant to FIRE (Financial Independence, Retire Early) investors; usually only three types matter. A Single Premium Immediate Annuity (SPIA) is the simplest: you hand an insurance company a lump sum and they start paying you a fixed monthly income immediately—for the rest of your life regardless of how long you live.

The key mechanism behind the pricing is mortality credits: the insurer is pooling longevity risk across thousands of policyholders, and those who die earlier than average are effectively cross-subsidizing the payments of those who live longer. The main implication is that the longer you expect to live the better the SPIA’s maths work for you.

Someone with a family history of living into their 90s, or actively pursuing longevity interventions, is statistically more likely to be on the receiving end of those mortality credits than the contributing end. A 65-year-old purchasing a SPIA today can typically access a payout of around 7-8% annually depending on gender and payout structure.

The trade-off is permanence and illiquidity: once you hand over your premium you cannot get the lump sum back, and if you die early the insurer keeps it—meaning a SPIA effectively eliminates that capital from your estate. For those who want to leave meaningful wealth to children or causes they care about, this is a significant consideration, covered in more detail below.

The second type is a Deferred Income Annuity (DIA), which works slightly differently. You purchase it today, but payments don’t start until a specified future date—say, 80 or 85. Since the insurer doesn’t start paying for many years and some purchasers die before the payments begin, the cost per dollar of future income is lower than for a SPIA.

For instance, if you purchased a DIA at age 65 targeting a modest $1,500/month at age 85, you'd need a premium of roughly $30,000-45,000. To put this in perspective, that same capital invested and withdrawn at 4% would generate just $100-150/month. Actual figures vary by carrier, gender, and state.

Finally, the third type we will cover in this article is a Qualified Longevity Annuity Contract (QLAC). It’s a specific version of the DIA that can be held inside a retirement account with favourable treatment for required minimum distributions. Outside the US the equivalent concept exists under various names depending on jurisdiction.

All three annuity types—SPIA, DIA, QLAC—share one feature that distinguishes them from the complex products worth ignoring: they are straightforward contracts for income, not investment products dressed up as insurance.

People buy annuities for a few different reasons. Some want to eliminate portfolio volatility from a portion of their income—knowing that a fixed payment will arrive regardless of what markets do provides genuine peace of mind during downturns. Others are concerned specifically about longevity: outliving a portfolio is a real risk, and a guaranteed income that continues indefinitely addresses it in a way a portfolio cannot. A third group—particularly relevant as cognitive decline becomes a consideration in later retirement—prefers income that requires no active management. An annuity payment simply arrives; a portfolio requires ongoing decisions that become harder to make well as we age.

It’s important to keep in mind that these contracts are only as good as the insurer backing them. In the US, state guaranty associations typically cover $250,000-500,000 per insurer depending on state—it’s meaningful, but not unconditional. Everyone needs to do their due diligence on what applies to their region or country: in Germany, for instance, Protektor handles life insurer failures and annuity benefits are fully guaranteed in normal insolvency scenarios; in the UK, the Financial Services Compensation Scheme covers annuity claims fully with no cap.

Whatever your jurisdiction, it's worth checking in detail what protection applies before committing. For a DIA purchased at 45 with payments beginning at 85, the 40-year counterparty risk is real regardless of the safety net. Spreading across multiple insurers where feasible is one way to reduce concentration risk.

Note: One product worth being aware of but outside this article's scope is the Multi-Year Guaranteed Annuities (MYGAs), which function more like bank CDs—you lock in a fixed rate for 3-10 years and get your principal back at the end. They are not lifetime income products and carry different trade-offs. For FIRE investors they may occasionally be useful for short-term capital preservation, but they don't address longevity risk.

The FIRE community's instinctive distrust of annuities reflects real problems with inflation erosion, payout efficiency at young ages, and how these products are sold. Photo by Yan Krukau on Pexels.

Why the FIRE Community Is Largely Right to Be Skeptical

For most folks wanting to retire early, though, the standard SPIA is genuinely not the right tool, and the FIRE community’s rejection of it is mostly sound.

The inflation problem is one of the most severe for FIRE folks. Most SPIAs pay fixed nominal income, e.g., $2,000/month in year one and $2,000/month in year thirty. The amount is locked in today’s 2026 dollars and not adjusted. But consider that after 40 years of 3% average inflation that $2,000 has a purchasing power of roughly $600 in today’s money.

Rent, food, healthcare, and most everyday expenses are highly sensitive to inflation—these are not stable nominal costs that a fixed SPIA usefully covers. For a traditional retiree with a 20-year horizon, this erosion is not ideal, but for a FIRE investor with a 40- to 50-year horizon, it is close to disqualifying for SPIAs as a primary income source.

Inflation-adjusted SPIAs do exist but cost roughly 25-30% more in premium for the same starting payment—and if actual inflation runs higher than the fixed adjustment built into the contract, you still lose purchasing power over time.

The payout efficiency issue hits early retirees hard. A SPIA is most efficient—most income per dollar of premium—at older ages, because the insurance company expects to pay for fewer years and mortality credits are larger. A 65-year-old purchasing a SPIA may access that 7-8% payout rate; in contrast, a 45-year-old purchasing the same product accesses a substantially lower payout rate than a 65-year-old—because the insurer expects to pay for 40+ years rather than 20—making the product barely competitive with a standard safe withdrawal rate, with none of the investment upside and no way to access the capital if you need it.

Ben Felix has explicitly addressed this timing question and confirms that annuities early on don’t make sense, but at 65, 70, 75, you can consider annuities as part of your fixed income allocation (Rational Reminder, Ep. 59).

Commissions are the final problem. Many annuity products sold through financial advisors carry commissions of 3-8% of the premium paid upfront—SPIAs and DIAs tend toward the lower end (2-4%), while indexed annuities run 6-8%—a cost that immediately and permanently reduces the value of the product you receive. On a $200,000 SPIA, that represents $6,000-16,000 extracted before your first payment arrives. If you’re considering annuities, be sure to go the fee-only, commission-free annuities route.

The existence of the commission problem doesn't make all annuities bad, but it does mean that most annuities sold in practice are significantly worse than the product that makes theoretical sense. It also explains why the industry's self-promotional content is so relentlessly positive about products that have important drawbacks to consider.

So where does that leave us? If SPIAs are largely unsuitable for early retirees, is there any annuity strategy that actually makes sense for FIRE?

The One FIRE-Specific Strategy That Actually Makes Sense

Given everything we’ve covered so far, when does an annuity genuinely change the maths for a FIRE investor? The clearest and most defensible use case is not at the moment of FIRE, but later in retirement—specifically a small DIA purchased in the 60s for payments starting in the 80s.

Let’s present an example to make this specific. Imagine you retired early at 45 with a substantial portfolio and a carefully designed withdrawal strategy. You may have implemented a bond tent to handle your sequence-of-returns risk (SORR) in the early years of retirement. By 65, you’ve survived the most dangerous window, since SORR is primarily a front-loaded risk concentrated in the first 10 years of retirement. By then, your portfolio is intact, perhaps grown, but not so large that longevity risk is negligible.

You still might have 20-30 more years ahead, and the specific risk that remains is the possibility of living to 92 or 95 and depleting your portfolio in the final decade—especially if you worry about rising healthcare costs in your elderly age. With this context, a DIA purchased at 65 for around $40,000-75,000 with payments starting at 85 is relatively cheap insurance against that specific tail risk. It might generate $1,500-2,500/month from age 85 onwards—enough to cover basic expenses if the portfolio has been substantially drawn down by then.

Crucially, purchasing this DIA at 65 rather than 45 avoids accessing lower payout rates (and two decades of counterparty risk, if this applies in your jurisdiction). The DIA doesn't need to be large to be useful; its job may be to provide a floor and peace of mind against any catastrophic scenario (including you making mistakes with your portfolio in old age).

This strategy also has a coherent connection to Bill Perkins' Die With Zero approach. Perkins argues that most retirees die with far more money than they needed, having foregone experiences and spending during their healthiest years out of fear of running out.

The DIA addresses the specific fear that enables this under-spending that is so widespread in the FI community: the worry that aggressive withdrawals in your 40s, 50s, and 60s, will leave you destitute in your 80s. By insuring the tail risk cheaply—knowing that even if the portfolio depletes, a floor payment begins at 85—you create the “psychological permission” to spend more confidently in the years when you're still healthy and most capable of enjoying it.

The DIA doesn't have to lock up a huge amount of capital—it can be a small allocation that removes the fear driving systematic under-spending across a much larger portfolio. This is closely related to the one-more-year syndrome—where anxiety rather than genuine financial gaps drives constant retirement delay. Many FIRE investors retire with a conservative SWR of 3-3.5%, spend cautiously for decades, and die with portfolios two or three times larger than when they retired.

From a pure life-enjoyment standpoint, that represents years of foregone experiences. Perkins' argument is relevant here: we should be even more afraid of missing out on life than of running out of money. And on the inheritance question—rather than leaving a large estate to children who may be in their 60s or 70s by the time they receive it, Perkins argues for transferring wealth earlier, when it actually makes a difference to recipients.

A counterpoint I often hear: why not self-insure longevity risk by building a larger portfolio and using a lower withdrawal rate? For investors with sufficient assets, withdrawing at 3% may be enough of a buffer. But Bill Perkins makes again the argument against self-insurance as a default: pooling longevity risk across thousands of policyholders is almost always more efficient than trying to hedge it alone. Those who die early subsidise those who live longer. It’s expensive to self-insure.

Finally, there is also a practical scenario that the FIRE community rarely discusses: cognitive decline. While a portfolio requires ongoing decisions—rebalancing, withdrawal timing, tax optimization, an annuity payment simply arrives in your bank account each month. For people with family histories of dementia or Alzheimer’s, a guaranteed income floor that requires no active management becomes increasingly valuable as a safeguard against the risk of making catastrophic portfolio decisions in later years.

Wade Pfau's research makes a compelling case for annuities as a bond alternative on the retirement efficient frontier—but it’s aimed primarily for traditional retirees at 65+. Photo by Jakub Żerdzicki on Unsplash.

The Academic Case: Wade Pfau, Ben Felix, and the Efficient Frontier

Wade Pfau is the most rigorous academic advocate for annuities in retirement income planning. His research argues that when you’re trying to meet a spending goal over an unknown length of time, the efficient frontier for retirement is stocks and annuities with lifetime income protections—not stocks and bonds.

The logic is that bonds provide stability but generate modest returns and no longevity protection. A SPIA does everything a bond does in terms of providing predictable income—but does so more efficiently, because mortality credits mean the insurer can pay out more per dollar invested than you'd receive from holding bonds directly. Again, those who die early effectively subsidise those who live longer.

In a practical portfolio, Pfau's framework suggests replacing the bond allocation with a SPIA or partial SPIA: for instance, instead of a classic 60% equities / 40% bonds portfolio, you could hold 60-70% equities / 20-30% SPIA / 10% bonds. The SPIA generates a higher income floor than the bonds it replaces, and the freed-up capital can remain in equities for long-run growth. His research shows this produces both higher income and higher expected residual wealth than an equivalent stocks-and-bonds portfolio.

The caveat is that Pfau’s framework was primarily developed for traditional retirees at 65+, and he acknowledges early retirement makes the case harder. His collaborator David Blanchett—whose famous “retirement spending smile” we cover in another article—and others have noted what we presented earlier: for very long horizons, the inflation erosion and lower payout efficiency of SPIAs reduce their advantage.

Moshe Milevsky—another highly cited researcher and co-author of Pensionize Your Nest Egg—has built software to model the optimal annuity allocation relative to a stock-bond portfolio. His research supports the idea that some annuitization is mathematically optimal for most retirees, but also shows that the benefit is sensitive to age, health status, interest rates, and inflation assumptions. At younger ages and with high inflation expectations, the optimal annuity allocation approaches zero.

One insight worth considering from this research: rather than one large annuity commitment, consider staggering purchases over time—some at 70, a little more at 75, with a final DIA allocation at 80 or 85. It's conceptually similar to dollar-cost averaging into the market: you're spreading the commitment across time rather than making one large irreversible decision at a single point. This approach averages across interest rate environments, reduces the psychological barrier of writing one large check, and could align the income stream with the years when it's most needed.

A Decision Framework: Who Should Consider, Who Should Skip

Annuities are worth considering for a FIRE investor in the following circumstance: you’ve passed the primary SORR window, your portfolio is intact but not enormous relative to your spending, you have genuine longevity risk (family history and/or active health interventions), and you want to insure the tail risk of living past 90 without that fear inhibiting spending in your healthy years.

A small Deferred Income Annuity (DIA) purchased in the 60s for payments beginning at 80 or 85 is the most defensible FIRE-specific application. You are not replacing your portfolio as an income source; you are cheaply removing the fear that would otherwise cause you to under-spend across two decades of active retirement. It’s insurance against what Bill Perkins highlights as the biggest risk of all—under-living out of financial fear.

In contrast, annuities are not worth considering under many circumstances: you’re early in the accumulation phase of FI (this is a retirement-phase decision, not an accumulation one); you have substantial guaranteed income already from a state pension or other source that covers essential expenses; or your portfolio is large enough that longevity risk isn't a real concern at your withdrawal rate.

For instance, a $3M portfolio at 45 withdrawing at 3% has so much margin that longevity insurance adds minimal value. But an early retiree reaching 65 with a $900K may be a different story. The sweet spot is someone who has made it to their 60s with a solid but not enormous portfolio, and whose main remaining worry is outliving it.

For most FIRE investors during the accumulation phase and the first 15-20 years of early retirement, the FIRE community's skepticism about annuities is largely correct. The inflation problem, the low payout efficiency at young ages, the potential counterparty risk over long periods, and the commission problem all make a strong case against them. For a smaller subset, though—those who've successfully navigated SORR, reached their 60s with a moderate portfolio, and face a real risk of outliving their assets—a small DIA purchased as longevity insurance is the best FIRE-specific application with a defensible case.

Finally, US investors should also be aware that annuities must be disclosed when applying for Medicaid nursing home benefits and can affect eligibility—worth checking with a specialist if long-term care planning is part of your picture.

If you enjoyed this article, here are some next steps:

👉 For the full withdrawal strategy framework: complete guide to safe withdrawal rates
👉 Read our guide to the bond tent strategy—the structural defence against sequence-of-returns risk in early retirement
👉 Want to understand the spending side of retirement? See our article to the retirement spending smile—why your expenses will likely be lower than you planned
👉 Use our FI Calculatorto see how your savings rate affects your FI date (email unlock) 👉Subscribe for weekly insights—one-click unsubscribe

🌿 Thanks for reading The Good Life Journey. I share weekly insights on personal finance, financial independence (FIRE), and long-term investing — with work, health, and philosophy explored through the FI lens.

Disclaimer: I am not a financial adviser, and this content is for informational and educational purposes only. Please consult a qualified financial adviser for personalized advice tailored to your situation.

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About the author:

Written by David, a former academic scientist with a PhD and over a decade of experience in data analysis, modeling, and market-based financial systems, including work related to carbon markets. I apply a research-driven, evidence-based approach to personal finance and FIRE, focusing on long-term investing, retirement planning, and financial decision-making under uncertainty. 

This site documents my own journey toward financial independence, with related topics like work, health, and philosophy explored through a financial independence lens, as they influence saving, investing, and retirement planning decisions.

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Frequently Asked Questions (FAQs)

• Are annuities a good idea for early retirement?

  For most people retiring in their 40s or early 50s, standard annuities are not the right tool. The inflation problem alone is severe — a fixed $2,000/month payment loses roughly 70% of its purchasing power over 40 years at 3% inflation. Add the low payout efficiency at young ages (3-4% vs 7-8% at 65) and permanent illiquidity, and the case against SPIAs during early retirement is strong. The one defensible exception is a small Deferred Income Annuity purchased in the 60s with payments beginning at 80 or 85 — cheap longevity insurance without locking up a large portion of the portfolio.

• What is the difference between a SPIA and a DIA annuity?

  A Single Premium Immediate Annuity (SPIA) starts paying income immediately after purchase — typically within 30 days. A Deferred Income Annuity (DIA) is purchased today but payments begin at a future date you choose, often 10-20 years later. Because the insurer expects to pay for fewer years and some purchasers die before payments begin, a DIA generates significantly more monthly income per dollar of premium than a SPIA. For FIRE investors, the DIA is generally the more defensible product — specifically purchased in the 60s for payments beginning at 80 or 85 as pure longevity insurance.

• What does Wade Pfau say about annuities?

  Pfau argues that the efficient frontier for retirement is stocks plus annuities with lifetime income protections — not stocks and bonds. His research shows that replacing part of a bond allocation with a SPIA produces both higher income and higher expected residual wealth than a comparable stocks-and-bonds portfolio. However, his framework was primarily developed for traditional retirees at 65+. He acknowledges that for very long horizons — typical of FIRE investors — inflation erosion and lower payout efficiency at younger ages reduce the annuity advantage significantly.

• What is a longevity annuity and how does it work?

  A longevity annuity — also called a Deferred Income Annuity or QLAC — is purchased today but doesn't begin paying until a specified advanced age, typically 80 or 85. It's the purest form of longevity insurance: protection against the specific risk of depleting your portfolio in your 80s and 90s. Because many purchasers die before payments begin, the cost per dollar of future income is much lower than an immediate annuity. A $30,000-45,000 premium at age 65 could generate approximately $1,500/month starting at 85 — compared to just $100-150/month if that same capital were withdrawn at 4% from a portfolio.

• Why does Ben Felix say annuities don't make sense when you're young?

  Felix has explicitly stated that annuities don't make sense at 50, but become worth considering at 65, 70, or 75 as part of a fixed income allocation. The reason is payout efficiency: a 65-year-old accessing 7-8% annual payout rates benefits significantly from mortality credits — those who die early subsidise those who live longer. At 45, the payout rate is substantially lower because the insurer expects to pay for 40+ years, making the product barely competitive with a standard safe withdrawal rate, with none of the investment upside and no liquidity.

• What is the annuity commission problem?

  Most annuities sold through financial advisors carry upfront commissions of 3-8% of the premium. On a $200,000 SPIA, that represents $6,000-16,000 extracted before your first payment arrives — a permanent and irreversible drag on the product's value. SPIAs and DIAs tend toward the lower end (2-4%), while indexed annuities carry 6-8%. The commission problem explains why the industry's self-promotional content is so relentlessly positive about products with real drawbacks.

• Can I retire early and still buy an annuity later?

  Yes — and this is arguably the most sensible FIRE-specific strategy. Rather than purchasing an annuity at the moment of FIRE, consider waiting until your 60s to purchase a small DIA with payments beginning at 80 or 85. By then, payout rates are more efficient, counterparty risk covers a shorter period, and you have much better information about your health, portfolio performance, and longevity expectations. This approach preserves optionality during the first 15-20 years of retirement while providing longevity insurance for the tail risk.

• What happens to annuity payments if the insurance company fails?

  Protection varies by jurisdiction. In the US, state guaranty associations typically cover $250,000-500,000 per insurer depending on state. In the UK, the Financial Services Compensation Scheme covers annuity claims fully with no cap. In Germany, Protektor handles life insurer failures with full protection in normal insolvency scenarios. For a DIA purchased at 45 with payments beginning at 85, the 40-year counterparty risk is real regardless of the safety net — spreading across multiple insurers where feasible reduces concentration risk.

• How does a DIA help with the Die With Zero philosophy?

  Bill Perkins argues that most retirees die with portfolios two or three times larger than when they retired — having spent too cautiously out of fear of running out. A small DIA that starts paying at 85 addresses the specific fear driving this systematic under-spending: the worry that aggressive withdrawals in your 60s and 70s will leave you destitute in your 80s. By insuring the tail risk cheaply, it creates psychological permission to spend more confidently in your healthiest years. The DIA doesn't lock up large capital — it removes the fear that prevents you from enjoying the capital you have.

• What is the best annuity strategy for FIRE investors who want longevity protection?

  The most defensible FIRE-specific application is a small Deferred Income Annuity purchased in the 60s — after navigating the primary sequence-of-returns risk window — with payments beginning at 80 or 85. A premium of $30,000-75,000 at age 65 can generate meaningful monthly income from 85 onwards, at a fraction of what the same capital would produce under a 4% withdrawal strategy. Rather than a single large commitment, consider staggering purchases over time: some at 70, more at 75, a final allocation at 80 — averaging across interest rate environments and reducing the psychological barrier of one large irreversible decision.

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