Monthly Archives: October 2026

Problems with Annuities

If you listen to personal finance podcasts in Fall of 2026, you know annuities are having their moment in the sun.

I believe that prior to considering an annuity, one must consider seven problems presented by that path.

When assessing annuities, it is valuable to consider them against their lowest cost, least restrictive, and most readily available alternative. That alternative, to my mind, is the index fund.

Below is simply one commentator’s (Sean Mullaney’s) opinion. It is not in any way investment, tax, or legal advice for you or anyone else.

Assets Become Income Very Efficiently

Index funds, whether in a taxable brokerage account, Roth retirement account, or traditional retirement account, become income very efficiently in retirement. Whenever a retiree needs a specific amount of money to fund living expenses, he or she can sell a specific amount of the fund. With index funds, there is rarely much of a “back-end” expense such as a load. Money from an index mutual fund redemption or money from an index fund ETF sale can get into a retiree’s checking account very quickly.

The process tends to be quick, simple, and easy. Retirees control the dates they get the money, the amount received each time, etc. Very efficient and very flexible. In today’s world, expenses of holding index funds are quite small. Lastly, the tax treatment of index funds tends to be favorable when compared to that of annuities, as discussed below.

Compare the all around efficiency of index funds with the friction caused by annuities. Finding and vetting a provider. Annuity fees. An inflexible distribution schedule. Surrender charges on exit.

If index funds become income in retirement efficiently, and annuities have inefficiencies, why partner with an insurance company to help fund retirement?

Why do we fear creating a “paycheck” with index funds when doing so in retirement tends to be taxed less than our W-2 paychecks?

Many Americans Already Have a Large Annuity

Imagine I work for Best Buy. I walk into your living room and notice the 97 inch television mounted on the wall.

The first words out of my mouth are “You know what this living room needs? Another 97 inch big screen TV!”

You would think I was crazy, wouldn’t you?

Those advocating for annuities for many American retirees miss a big issue: most Americans already have a very significant annuity: Social Security!

Affluent Americans can have annual Social Security benefits in excess of $40,000 or $50,000 a year per retiree. That is an annuity from a rather creditworthy creditor, the federal government.

If a married couple has over $80,000 a year coming in from Social Security, why do they need an additional annuity from an insurance company?

Spending Studies Justifying Annuities

Commentators defend annuities by arguing that studies show those with annuities spend more in retirement. For example, listen to Jean Chatzky at around the 12 minute mark of this podcast.

Have you or I validated those studies? I certainly have not, and you most likely have not.

But let’s go with them for a moment. Let’s assume the studies are valid just for the sake of argument.

If you are reading my blog, the odds are high that you are (A) a Boglehead, (B) a member of the FI community, or (C) someone who believes you manage your financial affairs better than the average American does. It is exceedingly odd for those who fall into those categories to guide their behavior based on how others behave. The whole point of being A, B, and/or C is you conduct your financial affairs differently than most people.

The studies are studies of hundreds or thousands of retirees who are not you. Why are you interested in the spending behavior of people who are not you?

Nolan Ryan didn’t decide how to pitch to hitters based on what minor league pitchers did. Why would anyone who perceives themselves to be different from the crowd make investment decisions based on the crowd’s tendencies?

Retirees flocking to annuities based on studies risk making an investment decision based not on their own circumstances but rather based on the behavior of others.

Taxes

The tax treatment of using index funds to fund retirement tends to be favorable. That’s true regardless of whether the index funds are in taxable accounts, Roth retirement accounts, or traditional retirement accounts.

By contrast, annuities create inflexible ordinary income in taxable accounts based on an exclusion ratio calculation. Especially when compared to capital gains income, annuity income from a taxable annuity is quite inefficient and inflexible.

Flexibility

Why should retirees spend in retirement based on an insurance company’s payout schedule?

Legendary New York sports talk radio host Joe Benigno preaches that in professional sports, “the greatest ability is availability.”

In personal finance, the greatest ability is flexability. Please pardon the misspelling 😉

In all seriousness, do we expect our annual spending in retirement to be a flat line? I anticipate in my retirement some years my wife and I will take a 15 day vacation in Wailea, and we might even fly Premium Economy to get there. Other years it will be a short drive up to Santa Barbara for a 5 night stay at a Fairfield Inn by Marriott paid for with Bonvoy points.

Some years in retirement have payments for kids’ weddings, new roofs, and new cars. Other years are less costly and retirees go to a single Dodgers game and a Gary Gulman show.

Why shouldn’t our income be flexible in retirement when our expenses are likely to fluctuate?

Single Party Creditor Risk

Index funds have an advantage over annuities.

Index funds do not require signing up to assume single party creditor risk in retirement.

Buying an annuity makes a retiree the creditor of an insurance company. This paper by Thomas E. Lambert and Christopher B. Tobe explores the downsides of this arrangement.

We hear the term “guaranteed income” when talking about annuities. Is it really guaranteed? There is no Pension Benefit Guaranty Corporation when it comes to annuities. Annuities are subject to a patch work of 50 state regulators. Do we think insurance companies run to the states requiring the most in terms of protecting annuitants? Probably not.

You might say “retirees using index funds may be subject to their own single party creditor risk by using broad domestic bond index funds.” Yes, it is true the majority of holdings in domestic bond index funds tends to be debt issued by a single party. However, that single party is not an insurance company. Rather, it is the United States government.

Regardless of one’s views of the United States government, two things are true. First, the government can print its own money. Second, the government can impose taxes. These are two powers making bond default highly unlikely. At a minimum, the United States government can fund its debt repayments in ways insurance companies can only dream of.

Remember Jack Bogle?

The older I get (Pushin’ 50 as of the publication of this blog post), the more I admire Jack Bogle for inventing the retail index fund in the 1970s. Bogle pushed back hard on the industry that made him wealthy.

Jack Bogle was right and they were wrong!

Jack’s idea helped pave the way for millions to successfully retire. Pairing index funds with stable Social Security income set up the perfect “1-2 punch” for millions of Americans to retire.

Why is now the time to abandon or at least limit that approach?

Boiled down, to the extent a retiree chooses an annuity over the lowest-cost, least restrictive, readily available alternative, the index fund, they are choosing an insurance company for retirement over the wisdom Jack Bogle.

That does not strike me as a great trade off.

Conclusion

This post demonstrates why I am so fond of index funds and why I question the use of annuities in funding retirement.

Due to the wisdom of Jack Bogle, we live in the golden age of holding low cost, well diversified investments in retirement. Index funds give us the one free lunch in investing, diversification.

I believe we should think twice (or more) before sacrificing a part of that free lunch in order to work with an insurance company for retirement income planning.

Will some retirees enjoy financial success with annuities? Of course. This post is not gloom-and-doom. Rather, it states my views about annuities and how they compare to index funds in America as of 2026.

Of course, this post is simply my opinion. It is in no way investment, tax, or legal advice for you or anyone else.

FI Tax Guy can be your financial planner! Find out more by visiting mullaneyfinancial.com

Follow me on LinkedIn: @SeanWMullaney

This post is for entertainment and educational purposes only. It does not constitute accounting, financial, investment, legal, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, investment, legal, and tax matters. Please also refer to the Disclaimer & Warning section found here.

The Mini Arc of Lifetime Tax Planning

One objective of tax planning is to limit income taxes paid during one’s lifetime. 

To my mind, it is exceedingly difficult to present an entire adult lifetime tax arc in a single projection or spreadsheet. This is for many reasons, including the fact that we don’t know the date of death.

What I think has more analytical validity is looking at a married couple looking to spend the exact same amounts at age 55, age 65, and age 75. From there we can learn lessons about retirement tax planning. 

The example I will use is Mike and Julie, married filing jointly. 

At age 55, they are both W-2 workers funding their living expenses from salary.

At age 65, they are both retired. Mike and Julie fund their living expenses with sales of taxable brokerage account assets and taxable brokerage account dividends.

At age 75, Mike and Julie fund their living expenses with Social Security, traditional IRA distributions, and taxable brokerage account dividends. 

In all three years, Mike and Julie wish to spend $200,000 annually expressed in 2026 dollars. In all three years, they donate $6,000 of the $200,000 to charity. 

We’d expect that Mike and Julie generate income in all three years to fund living expenses and thus pay similar income taxes to fund similar levels of spending.

But that is not what happens, as revealed in this summary table:

ItemAge 55Age 65Age 75
Total Federal Income Tax Paid$43,897$996$26,392
Total Net Investment Income Tax Paid$646$0$0
Total Estimated IRMAA in Two Years$0$0$0
Total Taxes$44,543$996$26,392
Effective Tax Rate15.68%0.64%11.55%
Marginal Income Tax Rate (Next Dollar of Ordinary Income)24%16.8%24.64%

I have posted the entire spreadsheet, including tax calculations, as a PDF available here. 

A Few Observations On Taxes During The Age 55 to Age 75 Mini Arc

One could write a book with commentary on these results. I’ll skip the book and instead share a few observations. 

Workers Are Taxed More Than Retirees

Notice how much the tax laws favor retirees over workers. This is for a variety of reasons. It’s not any one single rule.

Rules that tend to favor retirees over workers include:

  • Senior deduction (for those 65 and older)
  • Additional standard deduction (for those 65 and older)
  • Basis recovery on capital gain transactions
  • 0% long-term capital gains bracket
  • Qualified charitable distributions (QCDs) available starting at age 70 ½
  • Exclusion of 15 percent to 100 percent of Social Security income

It’s odd that some commentators tell us to fear taxes in retirement when for most Americans, retirement is their largest tax cut.

Traditional IRAs Are Not Bad in Retirement

At age 75, Mike and Julie live, in part, on $139,000 of traditional IRA distributions. Many fear a taxable distribution from a traditional IRA of that size.

It turns out the tax burden is rather light. Here is how that $139,000 distribution is taxed.

AmountFederal Income Tax RateFederal Income Tax
$6,0000% (QCD)$0
$70,36512%$8,448
$8,88522%$1,955
$53,75024.64%$13,244
Totals $139,000Average 17.01%$23,647

Mike and Julie deducted traditional 401(k) contributions at a 24% rate during their working careers. With their only mitigation planning being a $6,000 QCD, they wind up with an effective rate of 17% on their traditional IRA distributions.

Why is a large balance in a traditional IRA something to be feared?

Assuming that the $139,000 distribution is their required minimum distribution (RMD), their IRAs are worth approximately $3.4 million. 

That a traditional IRA worth $3.4 million is taxed so lightly is news to most retirees driven to fear of RMDs by personal finance commentary.

I will note that Mike and Julie have a slight inefficiency here. Due to a favorable tax law change, the new senior deduction, Mike and Julie have a 0.64% inefficiency on approximately $54K of the $139K of the traditional IRA distribution. This inefficiency is simply one small tree in the forest of winning against the IRS by deducting 401(k) contributions at work and having the money come back into taxable income in a very tax efficient manner. 

Roth Conversions Can Be Beneficial But are Hardly Necessary

Could Mike and Julie benefit from some Roth conversions at age 65? Sure. But they would pay a 16.8% tax on the first dollar of the Roth conversion to avoid taxes on later RMDs that could be, under current tax rules, 24.64%.

You saw that the RMD is relatively lightly taxed. Could the Roth conversion make sense on a spreadsheet? Yes. Is it necessary? Hardly.

Also, consider this: how is Mike and Julie’s money best spent at age 65? On saving 75 year old, 85 year old, and 95 year old Mike and Julie’s taxes? Or on living in the moment and enjoying some life while both are still alive and there is health and energy to enjoy new experiences?

Is tomorrow guaranteed? Hardly. It’s odd that American personal finance often tells retirees in their 60s to prioritize spending money to avoid IRS Garbage Time Touchdowns later in life instead of prioritizing enjoying what is likely to be the best part of retirement, the early part of retirement. 

Conclusion

When it comes to tax planning, it’s not about projections. It’s about pattern recognition. 

What are the patterns when it comes to taxes in retirement?

Taxes in retirement tend to light. I’ve previously discussed political reasons why that might be (Hint: politicians are likely to keep acting in the politicians’ own best interests). 

Tax planning should never be driven by fear. Rather, it should be driven by recognizing the patterns. The patterns indicate retirees tend to be favored when it comes to their income taxes in retirement. 

FI Tax Guy can be your financial planner! Find out more by visiting mullaneyfinancial.com

Follow me on LinkedIn: @SeanWMullaney

This post is for entertainment and educational purposes only. It does not constitute accounting, financial, investment, legal, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, investment, legal, and tax matters. Please also refer to the Disclaimer & Warning section found here.